What your college freshman should know about money

August 22, 2014

By Dan Rafter | Money Rates Columnist

The National Foundation for Credit Counseling's 2014 Financial Literacy Survey suggests that many American adults know little about the basics of personal finance. If you're a parent of an incoming college freshmen -- an adult who is likely just beginning his or her financial journey -- these findings should worry you.

"Parents put a lot of time and money into preparing their child to leave home, but often neglect the basic life skills associated with personal finance," says Gail Cunningham, spokesperson for the NFCC.

Because financial education is often lacking in schools, it's typically up to parents to teach soon-to-be freshmen how to manage their finances. They need to teach them how to track their purchases, practice responsible debt habits and create a budget that keeps them from spending their monthly meal money in just three days.

"It can be a free-for-all for kids just starting college," says Kimberly Foss, founder and president of Roseville, California.-based Empyrion Wealth Management. "It's like sending a kid into a candy store with unlimited funds."

Sobering numbers

The NFCC survey found that most adults say they learned their personal finance habits from their parents. Unfortunately, parents are not always the best teachers. More than four in 10 respondents to the survey gave themselves a grade of either C, D or F for their mastery of personal finance.

Cunningham says it should not be surprising then that so many young people enter their freshmen year of college with little knowledge of how to manage their money.

There is good news though: Parents can help by giving their incoming college freshmen a crash course on smart financial behavior.

Foss says that the most important step parents can take is to teach their future college students how to create a simple budget. Freshmen can then learn how to track the money they have coming in each month against the money they are spending on pizza, movies, food plans and other expenses. Parents should check in with their sons and daughters once a month to track how closely their children are sticking to the budget.

And if their sons and daughters have already spent all of their month's entertainment dollars by the 15th? Then these freshmen have to realize that there won't be any extra money coming for movies or shopping trips until the new month starts.

"They have to be accountable," Foss says. "If they're not accountable, then there's no point to them even having a budget."

Some parents might choose to follow Foss' jar method. When Foss' older daughter went to college, Foss says she told her to withdraw her spending money at the start of the week. Foss' daughter then put half of this into a jar dedicated to the week's core expenses, the items she absolutely had to spend money on, items like food and gas.

The rest of the money went into a jar for discretionary spending, the money she would spend on entertainment. This helped Foss' daughter avoid spending all of her food or gas money on trips to the mall.

It's also important to teach college students how to become savers, Foss says. Parents should teach those college students who have jobs to set aside a portion of every paycheck -- even if it's just $20 -- into a savings account.

This habit can have a positive impact on the rest of the student's life, Foss says.

"The idea is to create lifelong savers," she says. "If you can save during the starving times of being a college student, you should be able to save even more once you are out in the real world with a real job."

Lessons on credit cards and checking accounts

Foss says that parents should also help their new college students open a checking account. They then need to teach their children how to write a check and how to balance a checkbook.

These are more simple of the financial skills that can stick with students for their entire lives, Foss says.

Many parents worry that their children will apply for scads of credit cards once they arrive on a college campus. And once they get these cards, parents fear, they'll run up huge amounts of credit card debt.

Thomas Racca, manager of personal finance at Navy Federal Credit Union in Merrifield, Virginia., says that parents can help their children avoid such a financial disaster by teaching their freshmen how to handle credit cards effectively.

This includes teaching these students the importance of only charging what they can afford to pay back in full at the end of the month, Racca says.

Parents can start their freshmen with a secured credit card with a small spending limit, say $250. As freshmen learn how to use this credit -- and learn the importance of paying their credit-card balance off each month -- they will begin building a credit history. A strong credit history can help them after they graduate from college, Racca says.

"A lot of parents worry about giving their children credit cards. But learning how to use credit is an important lesson for young people," Racca says. "The good news is that the days of college students signing up for credit cards just to get free T-shirts are largely a thing of the past."

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Landed your first job? Make these money moves now

August 8, 2014

| Money Rates Columnist

While students are gearing up to head back to campus this month, many from the Class of 2014 are taking on a new challenge: their first full-time jobs.

If you've landed your first job, congratulations! In addition to your new title, new workplace and new lifestyle, your job also gives you a golden opportunity to start your adult life on firm financial ground. Here's a checklist of five smart money moves to put into practice now if you want to make the most of your income.

Smart move No. 1: Get a firm grip on your wallet

"One of the biggest financial mistakes people make when starting a new job is overspending, especially if it is their first (job)," says David Bakke, contributor to the personal finance site MoneyCrashers.com. "It can be very tempting to spend money on items you probably don't need when you have a significant paycheck coming in for the first time."

Avoid the impulse to run out and buy a new flat-screen TV, tablet or smart phone. In addition, new workers should be careful not to fall into the trap of immediately buying a new car or even a house simply because their income now makes them eligible for a loan. A better option is to wait until you have accumulated some savings before making a major purchase or going on a spending spree.

It's also much easier to live within your means if you implement smart money move No. 2.

Smart move No. 2: Break out your calculator

They're not sexy or necessarily much fun, but a budget is your best friend when it comes to being financially successful. Matthew Boersen, a certified financial planner with Straight Path Wealth Management in Grand Rapids, Michigan, says he prefers a method of money management that relies on ratios.

"There are numerous budgeting plans out there, but one of my favorites is the 50/20/30 method due to its simplicity and flexibility," says Boersen. "Fifty percent of take-home pay should go to fixed expenses like rent, mortgage and utilities -- with the exception of cable TV. Then 20 percent goes toward planning and saving for your future -- things like 401(k) contributions, emergency account build-up and saving for a down payment for a home. Lastly, 30 percent goes toward discretionary spending like cable TV, car payments, dinners out and entertainment."

While you don't have to use Boersen's system, you should have a monthly plan -- in writing -- that outlines how much money you expect to make and how you plan to spend it each month.

Smart move No. 3: Look ahead ... way ahead

Regardless of which method you choose, your budget should include saving for retirement.

"Enroll in your employer's 401(k) or comparable retirement plan and take full advantage of any match they offer," says Boersen.

Don't assume it's fine to wait before beginning your retirement savings. Compound interest rewards those who start early.

According to the MoneyRates.com retirement calculator, if you begin investing $200 a month at age 25, you'll have $398,298 at age 65, assuming a 6 percent annual rate of return. If you wait until age 35 to start saving that same amount of money, you only end up with roughly half that amount, $200,903, when you hit retirement age. By waiting until age 45, that amount dwindles even further to $92,408. Also note that inflation is likely to significantly diminish the purchasing power of these amounts by the time you reach retirement.

If your employer doesn't offer a 401(k), don't stress. You have other options.

"Start a Roth or traditional IRA," advises Bakke. "You should be able to set up automatic contributions through your bank."

Smart move No. 4: Prepare for the inevitable

Along with retirement, your other savings priority at this point should be to create an emergency fund.

"This account should not be used for anything except bona fide emergencies, and a vacation with friends or a bigger TV for the Superbowl does not count," says Boersen.

Even if you can't afford much to start, having a line item in your budget for an emergency fund is essential. It's only a matter of time before an unforeseen expense requiring some immediate cash pops up.

"Even if it's only $100 per month, you'll be off to a good start," says Bakke. "Your ultimate goal should be roughly six months worth of living expenses."

Smart move No. 5: Insure what matters

Finally, you can minimize your need for emergency cash by having the right types of insurance coverage.

For example, you may want to consider comprehensive coverage on your vehicle if you don't have cash on hand to buy a new one in the event of an accident. Homeowners or renters insurance is a must too. While you can remain on your parents' health insurance plan until you are 26, after that, you will need your own coverage. Finally, if you're married or have children, invest in some inexpensive term life insurance to protect them in the event the unspeakable occurs.

If you don't think you can possibly afford all that insurance, don't overlook your employer as a source for coverage. Many workplaces have voluntary benefits that allow you buy reduced-rate life, disability and other insurance products, sometimes for only a few dollars per month. In addition, some large employers have worked out affinity agreements with insurers that provide discounts on auto and homeowners policies.

Your new job offers you a tremendous opportunity to start your adult financial life on the right foot. Even if you've racked up credit card and student loan debt in college, you can use your job as a fresh chance to pay off your debt and start building savings. From there, you can enjoy knowing you're financially prepared to face whatever your new life brings.

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Help! My spouse won't stop spending

July 24, 2014

By Dan Rafter | Money Rates Columnist

You're a saver. Your spouse is a spender -- maybe even a big-time spender. Is your marriage doomed?

Not necessarily.

Financial experts say that communication is the key to crafting a successful marriage -- even when one spouse would rather sock away money and the other prefers to spend it until it's gone. The worst case? When the spending spouse and the saver don't talk about their financial issues until a giant credit-card bill forces them to address the problem.

"It's all about communication," says Leslie Tayne, founder of Tayne Law Group, PC, a law firm based in the New York City area that specializes in debt assistance. "Too often, spouses hide their spending because they don't want to deal with the repercussions. The other spouse is taken by surprise when they receive this huge credit-card bill. That's not the way to handle the situation. This can put great stress on a marriage."

The better approach? Spouses need to talk out their financial problems before they can resolve them. And those spouses who are spending so much that they're building an insurmountable pile of debt? They need to identify why they are spending so much and take steps to stop their dangerous financial behavior.

The power of communication

Tayne suggests that married couples meet once a week for an hour or so to discuss finances. This holds true even if spouses generally agree on how money should be spent. In cases where one spouse wants to spend more than a partner is comfortable with, these meetings become even more important. If both spouses are honest during the discussions, there at least won't be any surprises on future credit-card bills.

But what of those spouses who hide their spending until it's too late? Brenda Hendrickson, author of the book "How to be a Frugal Millionaire," says that it's important for married couples to determine why one spouse is spending so much.

Maybe a spouse is lonely or bored, and spending money at the mall is an outlet. Maybe the overspender has too much free time and not enough to do with it. Or maybe the spending is a result of a deeper psychological issue.

"There is always some reason behind all the spending," Hendrickson says. "It's important to get at that reason. Otherwise, it's not easy to stop the spending."

Maybe the couple lives too close the mall. This might make it too easy for one spouse, especially if that spouse has plenty of free time, to spend too much.

Resolving these issues comes back to communication. Spouses must be willing to talk about their financial habits and challenges. If they aren't, the overspending will only continue, Hendrickson said.

Some spouses might not even understand that their free-spending ways are causing financial pain. This happens when one spouse handles all the money issues and doesn't share the numbers. Again, this is something that can be resolved if couples agree to hold regular talks on financial matters.

"Money issues can damage a marriage," Hendrickson says. "Financial stress is one of the leading causes of divorce. If couples don't address it, they can put their marriages in jeopardy."

Tackling a spouse's overspending

Once a spouse's free-spending ways are exposed, what can couples do? Tayne suggests a common-sense resolution: The spouse who doesn't overspend should handle the weekly grocery or regular clothes shopping.

"If you have someone who can't get through a Target without spending hundreds of dollars, that person shouldn't be in charge of the shopping," Tayne says. "Instead, put the person who can run down a list and only buy those items on the list in charge."

Hendrickson suggests that overspenders put the credit cards away and try to rely only on cash for purchases. Too many spenders don't think of credit cards as real money, Hendrickson said. They don't think about the consequences of running up their credit-card balances until their monthly statements arrive in the mail.

Hendrickson recommends that spenders use debit cards instead of credit cards. This way, they can only spend money that they already have.

"You'd be surprised at how many people never think of credit cards as cash," Hendrickson says.

Couples need to study their credit-card bills and bank statements too, Hendrickson says. This way, they can determine what kinds of purchases are prompting their partners' overspending. Maybe a credit-card bill is filled with fast-food lunches that add up to hundreds of dollars a month. That might be the sign of more serious food issues that should be discussed.

The ideal approach

Elle Kaplan, founding partner and chief executive officer of LexION Capital Management in New York City, says that ideally partners will discuss their finances long before they get married. That way, there won't be any unpleasant financial surprises after the honeymoon is over.

These money talks will also give future spouses the practice they need to discuss serious financial issues after they are married, Kaplan said.

"Spenders often marry savers," Kaplan says. "That's OK. It doesn't mean that a marriage can't last. But there will be problems if savers and spenders don't talk over their finances and set some ground rules."

A wise approach is for couples to create a realistic household budget. A budget, as Hendrickson says, doesn't have to be rigid and inflexible. But one that allows for entertainment and shopping spending -- to a point -- can give couples a blueprint they can follow to financial harmony.

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6 signs you're behind the financial times

July 16, 2014

| Money Rates Columnist

There's a lot to be said for tried and true financial practices. However, many of the money habits of your youth may have outlived their usefulness by now.

If any of the following statements ring true for you, it may be time to seek easier, more convenient or more profitable ways to manage your money. Here are six signs you're behind the financial times -- and why you might want to catch up.

1. You still prefer checks

So you write still checks at the grocery store? You're certainly not alone, but that doesn't mean it's wise.

"Certain people still love to write checks," says Keith Klein, CFP and owner of Turning Pointe Wealth Management, a Phoenix-based firm serving clients nationwide.

Rather than fumbling for a pen in the checkout lane, why not swipe your debit card instead? Money pulled from a debit card comes from the same place as the funds for your check, but using your card offers a few distinct advantages. Most banks and merchants offer free debit card transactions -- saving you the cost of checks -- and choosing this payment method allows your transaction to show up more quickly in your electronic records. Even better, you probably have built-in fraud protection on your transactions if your debit card sports a Visa or MasterCard logo.

2. You ignore online bill payment services

Bill pay services are a beautiful thing. They make it simple to pay for everything from the mortgage to an eBay auction item.

"Online bill payments can be done automatically or one at a time," says Tim Shanahan, explaining why they can be used for virtually anything.

Shanahan, president and chief investment officer for Compass Capital Corporation, an investment firm in the greater Boston area, suggests you look beyond your financial institution to non-banking payment options as well.

"PayPal is virtually riskless and instant," Shanahan says. "It makes so much sense if you have the account and your counterparty has at least an email address."

3. You are scared to bank outside of the branch

You're making your life harder than it needs to be if you refuse to bank outside of the presence of your favorite teller.

"Some people refuse to use an ATM," says Klein. "Maybe it's a fear of getting robbed or the fear of not being face-to-face with a teller."

It's hard to find updated data regarding the number of robberies that occur at ATMs each year, but a 2002 report from the Department of Justice pegs robberies at one per 3.5 million transactions. So the biggest thing you realistically have to fear at the ATM is the outrageous transaction fee you may be charged.

Besides, there are plenty of other ways to bank without using a branch or the ATM. You can even deposit checks at many institutions by snapping a photo -- a method Klein says makes sense since it is basically what banks do to process physical checks today.

4. You maintain a bottomless pile of paper statements

Keeping accurate records is essential for sound money management, but that doesn't mean your financial statements need a room of their own. Rather than storing physical statements, scan and store them in the cloud. Even better, ditch the paper statements completely and have them sent electronically.

If you use a financial firm to manage your accounts, check to see if they'll do the legwork for you.

"We aggregate everything, whether (our clients) do their investments with us or not," says Klein. "Then when they need a mortgage or loan, we can fill out an application in five minutes."

5. You pay someone to do your taxes

Another old-school financial practice Klein says many people can ditch is paying someone to do their taxes.

"Accounting software can let many people get their tax return done for free," he says.

Of course, those with complex tax situations may want to hire a pro to navigate the tax system for them. But if you only have a W-2 and an annual income less than $58,000, you should check out the Free File options on the IRS website.

6. You haven't shopped for better rates since ... um ...

Whether we're talking about your mortgage or your savings account, interest rates can change radically over the course of a few short years. A mortgage may take some work to refinance, but there's no reason to leave your money in a savings account that pays 0.01 percent annually in interest.

"With Internet log-ins available on virtually all bank accounts, it's easy to move funds either in real time or on a scheduled basis from checking to interest-bearing money market accounts," says Shanahan.

However, to make the most of your money, you'll have to get over your need to visit a branch, Shanahan says.

"Most of the highest rates are paid by Internet-only banks that do not have to support the cost of a branch system," he says.

Being old school may work if you're Converse shoes or the Rolling Stones, but your finances are different. Dumping the outdated money management practices of your youth can help you discover easier and more profitable ways to handle your funds.

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Daughters are a bargain? Not necessarily, say parents

July 9, 2014

| Money Rates Columnist

A study released last month by Yodlee Interactive and Harris Poll found that adult women are 32 percent less likely to need financial support from their parents than adult men are. Shortly after the release, a spate of headlines touting the financial virtues of daughters appeared across the Web.

However, because the study only looked at adult sons and daughters, it did little to answer the question of which sex is less expensive to parent in the long run. A 2010 study from Lovemoney.com found that, between the ages of 5 and 18, boys are actually cheaper to raise than girls, primarily due to the more costly hobbies and activities girls tend to adopt (at least in England, where the study was conducted).

In terms of hard data, the debate over the relative costs of sons and daughters seems muddled at best. But if you turned to parents who have children of both sexes for answers, would a clearer answer emerge?

“This is not a difficult answer”   

Given how many costs can arise when raising a child, gauging the overall expense of a son or daughter – even on an approximate level – requires some financial attention-to-detail.

Bradford Pine, a wealth adviser and president of the Bradford Pine Wealth Group in Garden City, New York, makes his living scrutinizing financial details. He also happens to have a son and a daughter who are both in their teens.

When asked which of his children has been more expensive to raise to this point, Pine doesn’t hesitate.

“This is not a difficult answer,” says Pine. “It was my daughter. By a boatload.”

Pine reels off a list of expenses when asked what drove his daughter’s cost higher than his son’s.

“Designer clothes, nails, hair, cosmetics, birthday parties, concert tickets for teenage heartthrobs, prom dresses, weddings,” he says. “(Sons and daughters) both have college, but you usually pay for the wedding with a daughter. My daughter’s not married yet, but I foresee (that expense).

Pine says he thinks this pattern holds up in lots of families – in between recalling the extra expenses his daughter required.

“I don’t know if all kids are that way, but I think it’s common knowledge (that girls are more expensive),” Pine says. “Oh, and American Girl dolls. It just goes on and on.”

“It’s like having another grown woman to pay for”

Kristin Marino has a 14-year-old daughter and a son who is a year away from completing college. Marino, an editor for a website on higher education, says that the extracurricular activities her daughter took on as a teenager sealed her fate as the more expensive of her two children.

“They both have expensive extracurriculars, but dancing really put us over the top for her,” writes Marino in an email interview. “Each style of dance requires its own shoes – four to five pairs per season – and to be en pointe for ballet requires $80 shoes every six months.”

But her daughter’s costs didn’t stop there, says Marino.

“Clothes are more expensive for girls and they need more of them,” Marino says. “Once girls hit puberty they require lots of upkeep, including hair, skin (dermatologist plus skin care), makeup – even their underwear is expensive (a different bra depending on the sport, activity or sort of outfit she’s wearing, just as one example). It’s like having another grown woman to pay for once they hit 8th grade or so.”

And her son?

“My son is good with a couple of pairs of shorts, a few T-shirts, face wash and a package of underwear from Walmart,” says Marino.

Still, should the results of the Yodlee/Harris poll give parents of soon-to-be-adult sons pause? Will they soon see their sons make up for their frugal childhoods by leaning on their parents for financial support as adults?

Pine isn’t especially worried about his son – or his daughter, for that matter.

“They’re both on good settings,” Pine says. “They’re both very smart and motivated. But we’ll see.”

The greater truth

Regardless of which sex your children are, it’s likely they will cost you a staggering amount over the years. The USDA estimates that it will cost parents $241,080 to raise a child born in 2012 through age 18.

That figure doesn’t include college. According to The College Board, the average annual cost for that now is $17,860 (for a public school) or $39,518 (for a private school).

Pine, whose daughter is now in college, says that 529 plans – tax-advantaged accounts that are designed for educational savings – are something that all parents should begin using as soon as they can.

“Use them systematically and don’t stop,” Pine says of these savings accounts. “Do it every month and it’s no big deal. Her school is $48,000 per year. Don’t procrastinate. It’s the best advice I can give you.”

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