Q&A: Helping your family deal with the recession
When it comes to making money-conscious decisions for your kids, the picture might not always be black and white: Should I start saving for college now? How can I plan for their future when mine is so unsure? What do I tell them about the recession? Michael McAuliffe, president of Family Credit Management, has recommendations for how to get your family through this tough time. McAuliffe, a former branch manager for a national credit counseling agency, oversees all operations at FCM, which offers pre-purchase and foreclosure avoidance and provides credit counseling and debt management plans. 1. For parents who are tight on funds, what is your recommendation for how they can start to save for their kids' college tuition? The first thing that needs to be done is to make sure your spending is under control. (We have a great booklet called "100 Small Ways to Save BIG!" which most families can use to find areas to save from their monthly spending.) Then you need to look at your age and how prepared you are for retirement. The old saying is that you can't borrow for retirement. If you are not saving for retirement, start now. If you can start to put some money away you may want to look at the College Illinois program which is a pre-payed tuition plan. I did this for my two girls and am glad I did. At this point I like to tell people about the economic theory of Opportunity Cost, which basically means every dollar spent cannot be put towards anything else. Spending $5 per day on coffee is $1,800 per year that cannot be put towards your stated goals like saving for college. The real decision is, what are your actual priorities? It's important to not just talk the talk, but walk the walk. 2. When is a good time to start a Roth IRA for my kids? Is this something you recommend? This question is beyond my expertise, so I asked our company CPA who responded with: "A few general details, The child must have taxable compensation (i.e. W2 income not just interest/dividends) and the contribution cannot exceed that compensation amount for the year. Given that limitation, whether or not the parents should gift their money to fund their child's Roth IRA depends on the parents' overall financial plan, goals, cash flow, etc." 3. Should we be talking to our kids about our financial difficulties? And if so, how do we broach the subject? Yes, but make sure you don't tell your children anything you do not want the neighborhood to know. Kids are hearing the bad economic news on TV and can tell when there is stress in the household. Make conversations age appropriate and try to alleviate any fears they may have. Allow them to ask questions and try to give honest answers. Let them know they are loved and the family has contingency plans to deal with and problems that may arise and there nothing for them to worry about. If changes are going to be taking place, let them know most people in the country are making changes to their spending and finances and your family is no different. Some changes may be made and everyone in the family needs to understand. It should be made a family project to figure out ways money can be saved, i.e. cancelling cable TV. 4. What is your best recommendation or method for teaching kids about money, savings, credit especially with things the way they are? First make sure they understand where money comes from and how hard it is to obtain, but easy to spend. Make sure they are aware of the benefits of compound interest on savings accounts but the dangers of interest when it comes to taking on debt. Also make sure you are being a good example with how you are handling your money. No credit card debt, no home equity loans, and NEVER a Pay Day Loan. Only buy what you can afford and teach your kids that they cannot have everything. This will help them to understand realistically how things work. It is an important lesson in life. If they have income or get an allowance, open a savings account for them and encourage them to put away for long term goals (for kids, this may be during the summer). 5. I was going to get my teenager a credit card, but now I'm not so sure. Is a credit card a good lesson in managing credit or a disaster waiting to happen? You never want to co-sign a loan for anyone...ever. This is for many many reasons. You may want to add your child as an authorized user on your credit card. This can help them establish credit (as long as you are not over limit or delinquent on any payments now or in the future in which case it would hurt their credit.) Also, you need to have complete trust in them as they will have the ability to charge this account up and their spending could get out of control.