9/24/2012 3:49 PM ET|
Ready to cut the financial cord?
Baby boomers appear to be having a problem taking their adult children off the payroll. Experts weigh in on how to ease them into financial independence.
Teaching your children to be financially independent is no easy feat. A lot of baby boomers have had to learn this the hard way. More than half of boomers say they have allowed their adult children to move back home, rent-free, according to a recent survey (.pdf file) by Ameriprise Financial. What's more, the vast majority (93%) say they have provided some form of support to their adult children, such as helping them pay for college tuition or a car.
"I think having your kids financially dependent on you is one of the biggest issues I see today with investors, and baby boomers in particular," says Laura Scharr-Bykowsky, a certified financial planner with Ascend Financial Planning in Columbia, S.C. "They are sacrificing so much of their retirement for their children. They don't want to say no to their kids. And they want to be their kids' friends."
"Part of our job, as parents, is to teach our children fiscal responsibility," says Kimberly Foss, a personal finance expert and the founder of Empyrion Wealth Management in Roseville, Calif. "You have to teach them the basics of finance." To do that, Foss suggests starting with a website like Mint.com, where you can teach your kids to track their spending. "It takes all the guesswork out of budgeting," Foss says. The site enables you to manage your budget with easy-to-use personal finance tools and calculators. There are also kid-friendly websites, like the new presidential financial literacy page for kids, Money as You Grow.
Once your kids have figured out budgeting (assuming they have finished college and are living on their own), experts suggest you slowly wean them off your expense account. Granted, a number of parents stop paying for their children's expenses once they've finished college, especially since many parents struggle with their own expenses and retirement prospects. But if parents can afford to help their children financially at the start, experts say, it'll be better in the long run.
"When students graduate from college and enter the real world, they're hit with a load of expenses -- rent, deposits, utilities, student loan, medical insurance, car insurance, cellphone. Those are an awful lot when you've been completely dependent on Mom and Dad alone, and then you go to, 'Oh my gosh, I've got all these bills,'" Foss says. That's why she recommends easing your children into their financial responsibilities rather than overwhelming them with all of their expenses right away.
Foss suggests that parents take one to two years to get their children on their own two feet financially, starting by removing support for smaller expenses first. For example, you could tell them that for the first six months, you'll pay for their cellphone plan, but after that, it's up to them. Then do the same for their car insurance, but Foss advises allowing them 12 months before they take over payments. Finally, you may want to tackle the largest financial strain for your children, which will likely be student loans. Foss recommends that you help them pay the loans for the first 18 months.
"This way, you're easing them into the real world, and it makes it a much easier transition. Plus, it makes them feel successful and makes them want to stay on their budget," Foss says. "Better to do that than have them move back in with you at 25 and stay with you until they're 40." However, not every parent will be able to afford to do it this way.
You'll also want to get your children into the habit of saving money. Encourage them to save 20% of their paycheck each month, Foss says. "Take the lesson that we teach people in real life, which is a 50-30-20 program: setting aside 50% for needs, 30% for wants and 20% of your budget for savings," Foss says.
Another key concept worth explaining to your children is the idea of trade-offs. "You don't want them to think money is this unlimited, free-flowing thing," Scharr-Bykowsky says. This could be as simple as teaching your child to trade dinners out for meals at home.
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You also want to help your child establish credit, so he or she will be able to do things like rent an apartment. Scharr-Bykowsky says a good way to do this is taking out a small loan for a car. "Even if they can afford to pay in cash for a car, I'd have them take out a small loan and pay it off quickly," she says. "Just the history of having that loan and paying it off helps your credit score."
"The greatest gift you can give your kids is their own financial independence," Scharr-Bykowsky says. So share stories with your children about your own financial mistakes, so they don't make the same ones. Good financial habits aren't automatic -- they must be instilled.
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Sounds lovely, Mr. Bortz, but the families you know must be very well off. The majority of us out here are not. We struggle to pay our own bills. Paying little Johnnie's or Suzie's bills isn't an option for many of us.
I'll be honest, thinking like this promotes the entitlement mentality we see in so many young people today. Poster Mr. Anthrope said it best: "Young people today need to understand a few things. A phone is a necessity, but a top-of-the-line cell phone is not. Transportation is a necessity, but a new car is not. Housing is a necessity, but an expensive apartment or a new house are not. Food is a necessity, but dining out is not. If you learn to live on a little early in life, you may be able to live better as you get older, but nothing is guaranteed, and nobody owes you anything."
Too many young adults think that just because something exists and they want it, they were meant to have it. The best thing we can do for our children is to teach them the realities of life... the difference between "I need" and "I want."
It may be a good idea to have our children pay their own way through college, cell phones and all expenses including 'room and board' (if they are commuting). Yeah, it may be hard and they may not be able to 'party'. In fact, they may have to work 10-30 hours a week while going to college, but if they work real hard, they may be able to finish college in 3 1/2 years. I would venture to guess that the parents who don't have the 'soccer mom and little league daddy' mentality craddling their child's every step along the way, do far more good than harm.
Thanks to my parents, I finished college in 3 1/2 years, am now reasonably 'well-off' and it was all earned the 'ole fashion way' called 'hard work'. Ve vork first, then party later.....that is what I was taught. At my age, it is now time to party :-)
Budgeting 30% for "wants" when you're just starting out seems ridiculous. If they have that much excess money to spend, why are the parents still paying the cell phone, car insurance or student loans? I doubt most young adults have 30% of their income available for "wants" plus 20% for savings.
Oh, and stop calling them "children" !
something i am equally grateful for is that my husband's parents were exactly the same way, my husband had to do it all on his own (undergrad and masters degree) and now he's the hardest worker i know and responsible almost to a fault. thank you to my in laws for raising him right!!!
I think teaching children to be financially responsible starts WAY before their teenage years. I have two boys. Years ago probably about age 10 5th/6th grade I got them savings accounts. It started because I was tired of watching them spend birthday money on candy and garbage. So when they would get money from birthdays, working or wherever it went in their accounts. I linked my account with theirs so I could transfer money back and forth with ease online. They each got their own bank statements so they could watch their money. It held me accountable with their money and also built trust between us. When we would go to the store and they would want to purchase that impulse buy I would say "sure you can buy that but it's coming out of your account". It was amazing how fast those items went back on that little peg!! If they bought it I did make them pay for it. It saved me probably $1000's over the years and frankly them too. As they got older and into high school I got them ATM cards. Every month they got a set amount of money for lunches. They had to learn how to manage that money. I didn't care what they spent it on but they didn't get ANY more money until next payday. Which is once a month mind you!! Yes there were safety nets. The first month they ran out of money quickly. I would give them just enough to get by until payday but they got told don't ask again because the answer would be no. The next month they ran out again but didn't ask. When I noticed they were out of money I would ask them.. Their response "you told me not to ask"... Ah Sweet success!! Then I gave them more money. After that they soared like eagles. They learned how to budget their own money. Would eat on 1.99 and save the rest of that day's budget for other stuff they wanted to do like movies etc.. My oldest just turned 18 and got his first job. He was so excited, and this melted my heart, he was excited because he would now be able to pay for his own car insurance and cell phone that I had been paying... It didn’t stop there he just enrolled in college and when we talked about what money was available through student loans he looked at his options took only what was needed and stepped right up to paying that loan himself. I didn’t know at the time the life lessons that I was teaching but now years later they know how to manage money and I have taken great joy in watching them learn and grow into wonderful responsible young men...
Talk to any lecturer on the collage symposium circuit, most of the students are from foreign countries. The students and their families have risked everything to get them an education in America and if the student fails the repercussions for the student and the family are very severe. They are motivated to succeed. Why would an American student want to spend 12 yrs working hard barely scraping by, incur the debt, and miss 12 yrs of fun and to get a PHD when they are ready have everything they think they could ever want. Sitting on their parents couch, watching movies on their parents DVD Bluray player, their choice of Xbox, PS3, or WII on their parents big screen TV, surfing the Internet, keeping their face book page updated letting all their friends keep up with their wonderful daily lives and expressing their oh so important opinions. Driving their car, using their new I-phone provided by their parents to hang out with friends and party. It’s a great life style what else is needed. When the young adults begin having children and start trying to take on the responsibilities of having and providing for a family they are unable and untrained to so. The kids get in the way; grandparents will watch the kid(s) so they can go party and make more kids. A job that is a real life style killer, but that is taken care of by the nanny state. The government will pay to have the child, medically provide for the child, feed the family and child, and house the family. No job required to continue to live the life style their accustomed to and desire. I am amazed at how family and friends game all the different government systems, and continue to drain the parents of everything they worked for, and the grandparents feel they have to help because of the grandchildren and it’s not the kids fault. There is no need or desire to succeed as an American you are entitled, it is expected, it is what you have been taught and shown by your family and government for your entire life.
We should start by teaching Washington how to become financially independent. If we don't do something about our 16 Trillion dollar debt our children are doomed to a lower standard of life than we have now. Obama and Bush and these dopey wars and bank bailouts have doomed our country to financial servitude, yet people will vote for Obama again even when he is running against someone who appears to have a better business/financial background. What real life business experience does Obama have as a community organizer - none.
"Once your kids have figured out budgeting (assuming they have finished college and are living on their own), experts suggest you slowly wean them off your expense account. Granted, a number of parents stop paying for their children's expenses once they've finished college, especially since many parents struggle with their own expenses and retirement prospects. But if parents can afford to help their children financially at the start, experts say, it'll be better in the long run."
Really?? Really?? Come on!?!?! 'Assuming they have finish college..." You had better start teaching your kids about money at a very early age - and much, much more than the basics!! When they turn 18 years old, they should know how to budget money!
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