MONEY Savings

5 Ways to Keep a Crisis From Crushing You

Falling anvil with inadequate parachute
A majority of Americans are unprepared for a financial emergency. Michael Crichton + Leigh MacMill; Prop Styling by Jason MacIsaac

What would you do if you suffered an emergency that's bigger than your safety net? These strategies can cushion the blow.

You’ve no doubt diligently socked away a chunk of cash for a rainy day. But chances are it isn’t enough to keep you from worrying about being swept under by a passing financial storm. In a MONEY survey of 1,000 Americans conducted earlier this year, 60% of respondents said they didn’t feel they had enough emergency savings.

They’re probably right to be ­concerned: A new survey by Bankrate.com found that the majority of Americans making $75,000-plus have less than six months of emergency savings on hand. Meanwhile, experts typically recommend having at least that much and often as much as 12 months’ worth—lofty goals even for those who are otherwise well-off.

While you’re in the process of bulking up your kitty, lessen your anxiety by figuring out how you’d quickly lay your hands on cash if the roof fell in, literally and figuratively. “The goal is to reduce long-term damage to your finances,” says Scottsdale financial planner Brian Frederick. Putting the bills on a credit card can be a reasonable option for those able to pay off their debt in a jiffy, but carrying a balance for longer gets pricey when you’re talking about a 15% interest rate. Instead, keep these five better options in the back of your mind:

1. Crack a CD

In hopes of discouraging customers from fleeing when rates rise, banks have been hiking penalties for tapping a CD before its maturity date—six months’ interest is now common on a one-year certificate, and six to 12 months’ is typical on a five-year. Even so, “the interest is so small these days that a six-month penalty is almost meaningless,” says Oradell, N.J., financial planner Eric Mancini. On a $100,000, five-year CD at 2%, you’d give up just $100.

2. Sell Some Securities

Ditching money-losing stocks is clearly a better move than borrowing, says Frederick, given that you can use losses to offset up to $3,000 of capital gains for this year and carry any overage into future years. Everything in your portfolio on the up and up? While you’ll pay a 15% capital gains tax on the profits from any security you’ve held for more than a year, it might make sense to pare back on winners if your allocation has gotten out of whack.

3. Take Out a 401(k) Loan

Most plans allow you to borrow half your vested amount, up to $50,000, with generous terms: no setup fees and a 4% to 5% interest rate, paid to yourself. Moreover, as long as you keep making contributions, you probably won’t sacrifice much growth. A five-year, $20,000 loan against a $250,000 401(k) would reduce your balance by just $9,000 after 20 years, assuming you continued to save $500 a month during the loan term. But should loan payments require you to pull back on contributions, your nest egg will take a hit (see the graphic). Another risk: If you leave your job for any reason before repaying, you must cough up the entire balance within 60 days, or else you’ll owe income taxes and a 10% penalty on the funds. “You can end up feeling stuck in your job,” says Edina, Minn., ­financial planner Kathleen Longo.

the 20k loan

4. Tap the House

Whether or not you have a home-equity line of credit already, you’ll benefit from today’s low rates. The average on a new line is about 5%, but if your credit is nearly perfect, you can get closer to 3%, with no setup fee, Bank­rate.com reports. Plus, interest payments are usually tax-deductible. The caveats: It may take a few weeks to open a new line. Also, HELOCs are var­iable rate, so your payments may rise if the Fed hikes interest rates. Finally, some banks charge a fee if you close the line early; look for one that doesn’t.

5. Borrow from a Stranger

Those who don’t have adequate home equity can still beat rates on credit cards and personal bank loans by nabbing a loan from a peer-lending site like LendingClub or Prosper. Rates on those sites can be less than 7%, plus an origination fee of 1% to 3%. Peer loans are a good option for those with sterling credit histories, says Steve Nicastro, investing editor at NerdWallet. Check what rate you’d get using the sites’ tools. Look good for you? After you fill out an online form, the sites will take a few days to verify your info, then send your loan out to prospective lenders. Most loans are funded within a week.

More on building a stronger safety net:

MONEY Financial Planning

What My 3-Hour Lunch Says About Good Financial Advice

Women at a lunch meeting
Colorblind—Getty Images

Financial planning isn't about investing for retirement or saving for college; it's about turning your vision into reality.

It was Suzanne’s birthday. I really wanted her to have the next best thing to a day off. So I, the adviser, and Suzanne, my client, scheduled our meeting at Guglhupf, a lovely local restaurant.

In 2005, when I formed my company, I was sitting at one of Guglhupf’s upstairs tables when I came up with the tagline of my firm: “Driven by a Vision.” Now, years later, spending a sunny afternoon on Guglhuph’s patio with Suzanne, I had a powerful moment of living that ideal.

Suzanne is a visionary, an entrepreneur. She first came to me as a client because she wanted to be sure that the various ventures she had underway didn’t encumber too much of her wealth — that her assets wouldn’t all be at risk and that she would have enough set aside for her family’s future needs and her own retirement.

At its core, financial planning is helping people realize their vision. And for my entrepreneurial clients, I’m helping them navigate some very complicated waters at a time that’s emotionally charged due to hope, desire, exhaustion, and frankly, being stretched too thin.

These conversations can’t happen inside financial planning software, and they don’t happen on the pages of a financial plan. They aren’t about “Do I have enough money to fund my financial goals?” These conversations are about figuring out how to make those goals come to life.

And this is without my being a business consultant. I don’t know the trades of the businesses my clients start. What I do know is that there are risks associated with what they’re doing, and that likely their venture’s cash flow isn’t going to be as healthy as the projections project. I expect that there’ll be a need for another capital infusion. All of these things are going to impact their other financial planning goals: paying for their child’s education, for example, and being financially independent one day. They know all this too.

However, I believe that when a person has a strong vision for a world they want to impact — their community, their life’s energy making that impact — that inner urge trumps saving for retirement. It doesn’t trump it to the point of being reckless and blinded by today’s enthusiasm, but we recognize that they’re standing at the center point of the see saw, one foot on either arm, finding that balance between today and the long-term tomorrow.

I’ve never snuffed out their flame by saying, “You can’t do that.” I think that’s because I know what it’s like to be driven by a vision. It is my role to identify the risks I see, offer suggestions of how to look at it from another angle, ask them to name a Plan B, and beat the drum of the importance of managing cash flow. Then, I support them in their new venture, in whatever way reasonable.

At this meeting with Suzanne, there was an extra-special payoff. While I do try to stay out of the specifics of my clients’ businesses, over the course of our three-hour lunch we brainstormed about how she might finance one of her new ventures. I realized I knew some people who might be interested in funding it, and I promised to put Suzanne in contact with them. I later did, and they ended up providing money to Suzanne for this project.

So this meeting epitomized my work: My clients are driven by a vision, and I am driven to help them achieve that vision. And if we can enjoy a decadent dessert together, that’s even better.

MONEY Financial Planning

The One Time Raiding Your Kid’s College Savings Makes Sense

Broken money jar
Normally, breaking into your college savings accounts is a no-no. Jeffrey Coolidge—Getty Images

It's never a great idea, but in an emergency tapping funds earmarked for education beats sabotaging your retirement plans.

Lauren Greutman felt sick.

She and her husband Mark were about $40,000 in debt, and were having trouble paying their monthly bills. As recent homebuyers, the Syracuse, N.Y. couple were already underwater on their mortgage and getting by on one income as Lauren focused on being a stay-at-home mom.

“We were in a really bad financial position, and just didn’t have the money to make ends meet,” remembers Greutman, now 33 and a mom of four.

There was one pot of money just sitting there: their son’s college savings, about $6,500 at the time. That is when they had to make a tough decision.

“We had to pull money out of the account,” she says. “We thought long and hard about it and felt almost dishonest. But it was either leave it in there, or pay the mortgage and be able to eat.”

It is a quandary faced by parents in dire financial straits: Should you treat your kids’ college savings—often housed in so-called 529 plans—as a sacred lockbox, or as a ready source of funds that may be tapped when necessary.

Precise figures are not available, since those making 529-plan withdrawals do not have to tell administrators whether or not the funds are being used for qualified higher education expenses, according to the College Savings Plans Network. That is a matter between the account owner and the Internal Revenue Service.

TIAA-CREF, which administrates many 529 plans for states, estimates that between 10% to 20% of plan withdrawals are non-qualified and not being used for their intended purpose of covering educational expenses.

It is never a first option to draw college money down early, of course. Private four-year colleges cost an average of $30,094 in tuition and fees for 2013/14, according to the College Board. Since that number will presumably rise much more by the time your toddler graduates from high school, parents need to be stocking those financial cupboards rather than emptying them out.

Joe Hurley, founder of Savingforcollege.com, has a message for stressed-out parents: Don’t beat yourselves up about it.

“The plans were designed to give account owners flexible access to their funds,” Hurley says. “I imagine parents would feel some guilt. But I don’t think they should. After all, it is their money.”

Why the Alternative Might Be Worse

Keep in mind that there are often significant financial penalties involved. With non-qualified distributions from a 529 plan, in most cases you are looking at a 10% penalty on the earnings. Withdrawn earnings will also be treated as income on your tax return, and if you took a state tax deduction on the original investment, withdrawn contributions often count as income as well.

Not ideal, of course. But if your other option for emergency funds is to raid your own retirement accounts, tapping college savings is a last-ditch avenue to consider. That’s not only because you do not want to blow up your own nest egg, but because it could make relative sense tax-wise. And as the saying goes, you can borrow money for college, but not for retirement.

“If you think about it, a parent who has a choice between tapping the 529 and tapping a retirement account might be better off tapping the 529,” says James Kinney, a planner with Financial Pathway Advisors in Bridgewater, N.J.

If the account is comprised of 30% earnings, then only 30% would be subject to tax and penalty, Kinney explains. And that compares favorably to a premature distribution from a 401(k) or IRA, where 100% of the distribution will be subject to taxes plus a penalty.

Lauren Greutman’s story has a happy ending. She and her husband made a pledge to restock their son’s college savings as soon as they were financially able. It is a pledge they kept: Now eight-years-old, their son has a healthy $12,000 growing in his account.

She even runs a site about budgeting and frugal living at iamthatlady.com. Still, the wrenching decision to tap college savings certainly was not easy—especially since other family members had contributed to that account.

“We tried to take emotion out of it, even though we felt so bad,” Greutman says. “Since we didn’t have money for groceries at that point, we knew our family would understand.”

Related: 4 Reasons You Shouldn’t Be Saving for College Just Yet

MONEY Estate Planning

Want Less Stress? Get Your Estate Plan In Order

Preparing the right paperwork will help ensure that your wishes are followed and may save your heirs a bundle of money.

After helping a girlfriend through the messy, tangled finances left in the wake of a parent’s death, John Kerecz had a message for his own mom and dad: Get your paperwork in order.

A few years later, Kerecz’s father passed away unexpectedly. The 52-year-old environmental engineer from Harrisburg, Pennsylvania went to the house and looked where his father and mother used to keep their important documents, but nothing was there. It was pure luck that he went to the computer to look up a phone number and saw a folder on the desktop labeled “DEATH.”

“Sure enough, everything was there in that folder,” Kerecz says.

Armed with a copy of the will, lists of the financial accounts and insurance policies and other paperwork, Kerecz was quickly able to settle his father’s estate and use the funds to take care of his ailing mother, making him extremely grateful.

The difference between having your files organized or not is about more than just stress; leave behind a mess and it can delay inheritors’ access to funds and cost a bundle in legal fees.

“It could be six months or longer if you don’t have the paperwork in order, and … your family is in the dark, not knowing things, jumping through hoops. It’s not a fun existence,” says Howard Krooks, president of the National Academy of Elder Law Attorneys.

Taking care of the necessary documents is a hallmark of good parenting, he adds, rather bluntly: “More than any kind of monetary legacy, if you really love them, you’d do this.”

HOW TO GET IT DONE

Compile a list of the financial information your heirs will need upon your death: wills, trust information, investment accounts, legal contacts, etc. You can keep this information in an electronic file – in one master document or several attachments – to serve as a road map to find all the physical paperwork.

Or, you can do what some of elder law attorney David Cutner’s clients do, and just pull out a cardboard box and start piling up the papers.

You have to do more than just gather the information, though, cautions Cutner, co-founder of the Lamson & Cutner Elder Law firm in New York. You have to tell your loved ones you have done it and tell them where to find it. You can either hand over the file immediately or keep it in a safe place (away from the prying eyes of caregivers and potential scammers).

A safe deposit box, by the way, is not a good place to keep these papers, says Cutner, because it’s too hard to access when needed.

THE WILL

Top of the list is a copy of your will, hopefully the most recent version, plus contact details for the attorney who drew it up and any executor named. Also important are trust documents, if they exist, estate experts say.

While power of attorney and living will documents are crucial should you become incapacitated, they will not be useful after your death, says Krooks—your heirs will then be using a death certificate to obtain access to accounts.

The real power in assembling all these items is that it forces you to go through the process of specifying your wishes. Without them, your family would have to put your estate into probate, which is when the state determines the distribution of your assets. This can take up to a year and eat up about 5% of the estate, says John Sweeney, an executive vice president responsible for Fidelity’s planning and advisory services business.

FINANCIAL ACCOUNTS

Your heirs will need to know all of your account information, down to your utility bills and your tax returns. You can either create a list or include copies of statements in the file, or just directions to where to find them. Also useful is a list of relatives to contact.

Knowing passwords for online accounts is not as important as naming another person on key accounts ahead of time, says Sweeney. This way, if the family needs to make mortgage payments or pay any medical bills, they do not have to wait until the estate is settled.

“Children are often dipping into their own assets to pay for taxes and mortgages when the last surviving parent has passed away,” says Sweeney.

In that same vein, make sure to sign another person up for a key to any safe deposit boxes or home safes, says Krooks. Include clear directions on how to access any other valuables that may be stashed elsewhere, so that it’s not mistakenly thrown out.

SURVIVOR BENEFITS

Pensions and insurance plans have many different payout rules, so you need to leave behind detailed information about policies. Insurance information should extend beyond life insurance to car, home and boat insurance, says Sweeney. It is also critical to include your Social Security benefit information, he adds.

The job of assembling all of this information can be massive, but most people appreciate it in the end.

“At first they curse us out because it’s so much to gather and put in one place. But by the time they come into the office, they’re really glad they did this exercise,” Krooks says.

MONEY Financial Planning

People Ignore 80% of What Their Adviser Tells Them. Here’s Why.

man putting fingers in his ears
moodboard—Getty Images

A financial planner explains why so many clients ignore good advice. Hint: It's not the clients' fault.

I’ve heard it estimated that out of all the financial and estate planning recommendations that advisers make, their clients ignore more than 80% of them. If there’s even a shred of truth in this stat, it represents a monumental failure of the financial advice industry.

Unfortunately, I think there’s a lot of truth to this number.

To explain why, let me tell you a story about a financial planning client I worked with a few years back. In one of our first meetings, she and I were reviewing her three most recent tax returns. As I discussed them with her, it became clear that the accountant who had prepared those returns — an accountant who had been recommended to her by her father — had filled them out fraudulently. A bag of old clothes that she had donated to charity became, on her Schedule A, a $10,500 cash gift. She also deducted work expenses for which she had already been reimbursed.

The client, a young single woman, wasn’t aware of these problems, as far as I could tell. So I gave her my best advice: Turn yourself in — and turn in the accountant, too. Tell the IRS about this before they come after you. “You’ve got to do this,” I said.

That was the last I ever saw of that client. I tried getting in touch with her, but she never communicated with me or my firm again.

Upon reflection, have a pretty good idea why.

Her accountant had been doing her father’s returns for even longer than he’d been doing hers. By telling her to turn in her accountant, I was also telling her to turn in her dad — the person who recommended the accountant and who, perhaps, had fraudulent statements on his own returns. I had crossed a line. And she, I assume, had decided to pretend that we had never had that conversation.

So why did she ignore my advice — or any of the advice I never got to give her? For the same reason that so many clients ignore so much of their advisers’ advice.

To say that clients are just not good at follow-through is a cop-out. I think the real problem is that advisers fail to apply the key discipline I learned early in my training as a financial planner: Know Your Client.

For Certified Financial Planner professionals, of which I am one, a key part of the Standards of Professional Conduct is to “Gather client data and establish goals.” It’s primarily in that step, when we gather client data, that we have the opportunity to get to know our clients. The standard-setting CFP Board offers some further guidance in that area:

The financial planning practitioner and the client shall mutually define the client’s personal and financial goals, needs and priorities that are relevant….”

Please note that the CFP Board specifically mentions both a client’s personal and financial goals. While I’m confident that planners are well-equipped for the collection of tangible, financial information, I’m less sure that advisers are effectively gathering intangible personal information about our clients.

So how do you gather and apply data about your client’s personal life, goals and values? The CFP Board offers further guidance:

…the practitioner will need to explore the client’s values, attitudes, expectations, and time horizons…”

OK now, this has gone a little too far, right? I mean, how exactly am I supposed to explore a client’s values, attitudes and expectations?

Most advisers relegate this warm and fuzzy talk of exploration, values and attitudes to a niche within financial planning called “life planning.” These advisers picture an entirely different breed of Zen planners meditating on a yoga mat with clients, and discount the practice entirely. According to the CFP Board, however, knowing our clients on a deeper level is just plain good, by-the-book financial planning.

So back to my client: Maybe if I’d gotten to know her on a deeper level, I could have helped her with her tax returns — and the rest of her finances. But I’ll never know. I may have been pleased with myself for uncovering her problem, but my recommendation didn’t bring her relief. It went the other way.

Since then, I’ve learned that planners, myself included, can have a more meaningful impact on the lives of our clients by recognizing that personal finance is more personal than it is finance.

And I believe that better understanding our clients’ intangible hopes, dreams, values and goals is also the key to higher implementation rates. So how do we do that?

That’s another story.

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Financial planner, speaker, and author Tim Maurer, is a wealth adviser at Buckingham Asset Management and the director of personal finance for the BAM Alliance. A certified financial planner practitioner working with individuals, families and organizations, he also educates at private events and via TV, radio, print, and online media. “Personal finance is more personal than it is finance” is the central theme that drives his writing and speaking.

MONEY Estate Planning

When Children Should Butt Out of Their Parents’ Finances

sliced dollar bill on cutting board
ersinkisacik—Getty Images

A financial planner explains how some adult children take too much of an interest in mom and dad's estate planning.

How many of us financial planners have had the privilege — or aggravation — of having a client’s adult children participate in a discussion of the parent’s finances?

There are good reasons for an adult child to be involved. A client may be aging or be recently widowed, and well-intentioned children may feel a responsibility to help mom or dad with money matters. And many of us financial planners encourage clients to include family members in important financial discussions, such as long-term care and estate planning.

But bringing the kids into a discussion isn’t always a good idea.

For example, let me tell you about a conversation I had with a client and his daughter. During an initially pleasant dinner meeting, it was revealed that dad had given money to the daughter and her husband to help buy some real estate.

The client then demonstrated a concern for fairness that I have seen with most parents: He turned the conversation to possibly reapportioning his estate among his children, taking this gift into account.

It’s in situations like this when family conflicts and tensions — the “mom always liked you best” grievances — usually become apparent. And this dinner was no exception. My client’s daughter didn’t have children. Like many adult children who are childless, whether or not by choice, they often see gifts go to grandchildren or to other siblings who are struggling to raise their families. Such was the case here. The daughter made it clear that she saw no need to equalize the estate because of the real estate purchase.

Meanwhile, I sensed my client’s uneasiness over the conversation.

Each family has its own own financial history — its own “financial DNA.” Every planner knows that very few things affect relationships in the way that money does. Some families don’t discuss money, but should. Some families fight over money and have severed relationships because of it. And some family members use their money to manipulate and control others. All of this history comes to the table when children and parents sit down together.

How many times have we planners heard something like “It’s dad’s money, and we don’t care if we ever get a dime”? Of course adult children are going to say these things — and most truly are sincere.

But sometimes what the child really means is “I don’t want mom’s money — unless, of course, it’s going to someone else.” That includes, in the child’s mind, Brother Tom (he’s such a loser) and Sister Sue (she just spends every dime she gets her hands on).

In reality, however, Brother Tom could be a hard-working guy who sells tires and who stops by to mow mom’s lawn each week during the summer. Sister Sue could be a single mother with two kids struggling to make ends meet after a bad divorce. That may be mom or dad’s point of view as they see their children through different eyes.

I think we should encourage our clients to make financial decisions through those eyes for as long as they are capable — with no “at-the-table” emotional influence.

Most children truly care about the happiness and well-being of their parents over any inheritance they may — or may not — receive. But, even in the loveliest of family relationships, I have sometimes gotten uncomfortable questions about future inheritances or “suggested” gifting strategies that mom or dad might want to “take advantage” of.

My gentle but straightforward response to the next generation is, “It’s not your money yet.” We can never know enough of a family’s personal history — their financial DNA — but knowing that we don’t know should cause us to question when to include the adult children of our clients in financial and estate planning discussions.

—————————————–

Sandy is the founder and CEO of Confiance, based in Cleveland, Ohio. She is a certified financial planner and an accredited domestic partnership advisor specializing in planning for traditional as well as non-traditional relationships. Pamela also currently serves on the national board of the Financial Planning Association.

MONEY Financial Planning

What Would You Do With $100,000?

Stack of Money
iStock

Deciding how to spend a large inheritance isn't as easy as you might think. Heirs who have received big bequests, along with financial planners, share lessons learned.

What would you do if you suddenly got $100,000, no strings attached?

It’s a hypothetical question for most of us. But for Peter Brooks, it was reality a few years ago.

After the untimely death of an old friend from pancreatic cancer, a lawyer called Brooks and told him there was a check waiting for $107,000, taxes paid.

With $30 trillion set to change hands from one generation to the next over the next 30 years, many others will find themselves in a similar position, according to Accenture .

While some may receive a few trinkets and others millions of dollars, the median inheritance will be between $50,000 and $100,000, according to a survey by Interest.com.

Handling new and unexpected wealth may sound wonderful, but can be a financial challenge. We asked financial experts to assess the decisions of three different beneficiaries:

WELCOME BOOST

For Brooks, a 55-year-old marketing consultant from the San Francisco area, the money significantly improved his quality of life.

At first, he deposited the check into a managed portfolio that his bank recommended. This was just before the market crash in 2008. Frustrated when the portfolio didn’t budge, Brooks rolled the money into a certificate of deposit, which turned out to be fortuitous.

“When the market crashed, I thought, wow, I must have a guardian angel,” he says.

Brooks decided that real estate was the biggest risk he could stomach, and he found an old Victorian house to buy for himself in nearby Vallejo for $97,000.

Indeed, buying a house is one of the most common financial moves people make with new money, according to Susan Bradley, a financial planner and founder of the Sudden Money Institute, based in Palm Beach Gardens, Fla., who specializes in helping people manage newfound wealth.

“If your inheritance increases your sense of home and safety, that’s a really lovely thing to do with it,” Bradley says.

Her caveat is that this works only if you’re able to handle the upkeep on the house, which Brooks has been able to do just fine.

A SPLURGE (OR TWO)

By contrast, John Kerecz, a 52-year-old environmental engineer in Harrisburg, Pa., went on a spending spree after he inherited about $160,000, plus a broken-down house, when his father died two years ago.

Because his father had his paperwork in order, Kerecz was able to quickly access the cash. He hired a lawyer based on the recommendation of a family friend, got the death certificate, and had a payout from the insurance company within a couple of weeks.

Then he embarked on a series of trips to Europe, Nashville, and New Orleans with his mother, who was in declining health, and eventually spent about $100,000.

What remained went toward a new home for Kerecz and his mother, who now suffers from dementia. He is trying to sell his parents’ original home and intends to invest the proceeds from that sale.

“I feel bad that I kind of blew it, but I wanted my mother to enjoy life while she could,” he says.

It may seem irresponsible, but using an inheritance to make memories has intrinsic value, says Bradley.

“Sometimes you can meet that purpose without spending $100,000,” notes Bradley, who says she would have coached him to take a little more time to figure out how to build those memories with just $60,000.

IN OVER YOUR HEAD

Many inheritors get in even further over their heads, especially if the money comes when they are young.

Richard Rogers, a financial consultant with Stephens Private Client group in Little Rock, Ark., had a client who inherited a significant sum at 25 and insisted on buying an $80,000 car.

“I tried to tell him that if you compound this money for a few years, you can buy a lot nicer car. But you can’t tell somebody what to do,” Rogers says.

CarmenBelcher could have used that advice, too, when, at 22, she inherited $300,000 out of the blue from her estranged father.

The money came quickly because her name was on his bank accounts and she was listed as the beneficiary of his veteran’s benefits.

Belcher responsibly paid off her college loans, then moved from Missouri to New York for a graduate program in journalism. She used what was left to support herself.

Now, eight years later, the money is gone.

She blames that partly on not being savvy about spending in New York, and partly on the money not being invested optimally by a bank adviser in Missouri who first helped her.

“It’s unfortunate, when people haven’t thought through it and, before you know it, [the money is] gone,” says Bill Benjamin, chief executive officer of U.S. Bancorp Investment.

The ideal thing to do is to draw up a financial plan before you start dipping into an inheritance, he says.

While Belcher thinks she is better off than before — she is building a career as a fashion editor in New York — overall, the experience was negative.

“I couldn’t appreciate the amount of money,” she says. “If this would have happened at an older age, I would have had more knowledge.”

MONEY Kids & Money

8 Ways to Teach Your Kids to Be Financially Independent

Kid learning to use abacus
When it comes to money management, your child can't do this alone. Laurence Dutton—Getty Images

Want your children to develop good money habits for life? Then teach them well from the start. Use these tips from parents and top personal finance experts as your lesson plan.

To help your kids master essential money skills—and some day break free from you—devote time to financial home schooling. Parents are the biggest influence on their children’s financial habits, more so than work experience or financial literacy courses, according to the National Endowment for Financial Education. For ideas on how to do this, see how personal finance and parenting bloggers and authors teach their kids.

1. Tie a “No” Today to a “Yes” Tomorrow

“My wife and I have three children, ages 6, 4, and 2. While they are still a little young for in-depth money lessons, we make a point to involve them in family finances and try to make talking about financial responsibility and independence a part of our daily life. This usually happens in a thousand little, ordinary ways. An instance that comes to mind is when my four-year-old son asked if we could go to a local pizza and games restaurant that he loves. I said no, but went on to explain to him that it costs a lot of money for our family to enjoy an evening there. I reminded him of our vacation in a few months and said we were saving up so that we can have a lot of fun on our trip. It was a good way to teach him about the important principle of delayed gratification and the lesson that sometimes you have to say ‘no’ to things you want now, to enjoy better things in the future.” —John Schmoll, Jr., Frugal Rules

2. Let Them Make Spending Mistakes

“From the time our children were three or four years old, we’ve given them opportunities to earn money by doing chores and projects. When we’re out shopping, they can bring their own money and spend it however they’d like (within reason!). Not only do they learn money management skills, but this helps prevent the ‘gimme’ attitude. If a child sees something they want and asks if we can buy it, I always respond, ‘Do you have enough money for it?’ It also gives them the chance to make money mistakes. They’ve learned valuable lessons when they’ve purchased cheap items that broke almost immediately, and we’ve had great discussions on how to make wise purchases. We’d much rather they made $3 mistakes when they are little to hopefully prevent some $3,000 and $30,000 mistakes down the road.” — Crystal Paine, MoneySavingMom, author of Say Goodbye to Survival Mode?

3. Show Them That Work is Rewarding

“’I get an M&M mama?’ my talkative toddler asks. I reply, ‘Yes, if you complete the job.’ Even at 2 1/2 years old, I’m attempting to lay financial foundations in my son’s life. At this age, he doesn’t care a thing in the world about real money, but when I break out the M&Ms he knows I mean business. That’s because chocolate is a special treat reserved for a reward. At this stage, candy talks, and I can teach my son about finances with food. He is learning that when he uses the potty, picks up after himself, or helps me with a chore, he is paid for his work in delicious, color-coated chocolate candies. He’s beginning to understand that hard work is rewarded. That’s a trait my parents instilled in me, and I desire to pass along. Cash and chore charts will eventually replace sweets, but until then, candy paychecks are perfectly fine by him. Coins just don’t taste as good.” — Kim Anderson, Thrifty Little Mom

4. Break Out the 24-Hour Rule

“I’m blown away that my teenage daughter still remembers going to the flea market together years ago and learning a cool buying lesson from her mom. (As all us moms know, this is a rare and exotic occurrence!) Though I liked a pair of earrings, I waited a day to think it over, knowing that they would likely still be there if I changed my mind. Sure enough, after a day of thinking about it, I realized they weren’t all that special and that I’d rather wait to get something that I loved. To this day, whenever my daughter and I are out shopping and can’t make a decision, we invoke the ’24 Hour Rule.’” —Beth Kobliner, author of the forthcoming book Make Your Kid a Money Genius (Even If You’re Not) and a member of the President’s Advisory Council on Financial Capability for Young Americans.

5. Connect Saving, Spending, and Giving From the Outset

“My wife and I have a four-year-old son, and we’re just now beginning to teach him the true value of money and how it is a tool to be used for different purposes. We’re doing that through the use of three money jars. When he earns money through little jobs we have given him, depending on the day he will put the money in one of three jars. One day for giving, one for saving, and one for spending. On the last day of the week he can choose which jar to put his money in. He can never buy anything unless he has the money available in the spending jar. He also sees importance of saving for the future, and the joy of giving to others. It’s truly a joy to see when the ideas of giving and saving start to register, and it’s so fun to see the smile on his little face when he’s giving to our church, or to a friend through his giving jar. — Peter Anderson, Bible Money Matters

“Our kids are still very young, but at ages 3, 5, and 6 we’re doing our best to teach them the importance of spending, saving, and giving. Last summer, we made piggy banks as a family, and each child has three in their bedroom. One for saving, one for spending, and one for donating. Anytime they make money at a lemonade stand or receive birthday money, they split it up equally among their three jars. It’s not a huge act, but it does start the process at a young age that it’s okay to spend some of your money, as long as you’re giving back to others and saving as well.” — Anna Luther, My Life and Kids

6. Show Them the Price—and the Path

“We have young kids, but we’ve started occasionally working with our five-year-old daughter, Kate. One day while shopping with us she discovered My Little Ponies and asked if she could have one. We explained that we were planning on using our money for other things right now (a phrase we prefer to ‘we can’t afford it’). We shared with her that we would love to help her earn the money to buy it herself. We told her to write down the price and start saving money for it. Over the next couple of weeks we gave her little odd jobs to do around the house to earn the money, quarters and dimes at a time. She worked hard until she’d saved enough. Then we went to the store, and she got to buy her pony. She was so proud. It was a great lesson in money math, delayed gratification, and the power of saving.” — Philip Taylor, PT Money

7. Talk About Debt, Too

“My two boys aren’t quite old enough for serious money lessons yet, but one thing I’m excited to teach them early on is the importance of smartly managing debt. If they want to buy something on their own, like a toy, they’ll have three choices: 1) Buy it now, 2) Save to buy it later, or 3) Borrow money from us. If they choose to borrow, they’ll have payment terms and interest just like a regular loan. My hope is that they can learn the consequences of debt, both good and bad, before it has any real-world implications for them and without the lectures and scare tactics. Then they’ll have the skills and experience to make smarter choices once they’re out on their own.” — Matt Becker, Mom and Dad Money

8. Make Them Work for Wants

“A key factor in reaching financial independence is what you spend. Some spending is needed and necessary. But it’s the ‘wants’ that can get people in trouble. Therefore, when our kids ask for a non-essential item, we reply with a two-step plan: 1. First, wait a week. If you still want it, we’ll get it then (most times the ‘want’ goes away by the end of the first day); 2. If you still want it after the week passes, you have to work around the house to earn half of the purchase price—even if you have enough in savings to pay for it. The second step forces them to think if the amount of work required to purchase the item is worth it to them. If they follow through with the required work, then we know that they’re serious about the purchase, rather than just expressing a fleeting, short-term desire.Several times the “acquiring of money to pay for the thing” becomes almost exciting as the actual purchase.” — Kevin McKinley, On Your Money

More on helping your kids become financially independent:

 

 

MONEY Financial Planning

The Tough Talk Worth Having With Your Parents This Weekend

Conversation with grandparent
Silvia Jansen—Getty Images

Midyear is a great time for adult children to have a discussion with their parents about finances.

Do you find yourself in the Sandwich Generation, squeezed by dependent children on one side and caring for your parents, financially and otherwise, on the other? Now, at the middle of the calendar year, is a good time to have some difficult conversations with your parents.

One reason why a midyear conversation is ideal comes from author Stephen Covey. In his book The 7 Habits of Highly Effective People, Covey likens people’s banking activity to their personal relationships. Making deposits of goodwill will offset withdrawals — tough conversations, for example — and keep the relationship net positive. Many families have yet to recover from overdrawn relationships!

As a midyear mark, the beginning of July falls on the heels of Mother’s Day and Father’s Day — occasions for significant (and often expected) deposits into parents’ lives. The beginning of summer keeps the positive momentum by ushering in a mindset of fun and relaxation.

Among financial planners, the middle of the year is also a traditional time to review clients’ finances. Planners discuss with clients their net worth, asset allocation, and estimated taxes, among other financial areas, to ensure progress toward the client’s goals.

These factors make July an ideal time for people in the Sandwich Generation to talk about finances with their parents. This sensitive conversation requires effort and sound strategies. You can make the conversation relevant, for example, by linking it to a triggering event experienced by the parent, such as a pronounced illness or unexpected job loss close to retirement.

In a midyear review, financial planners can give their clients some guidance with how to conduct this conversation. Some of the questions that financial planners ask of clients in the financial planning process are relevant for clients to ask of their parents: How do you envision your life ten years from now? What fears do you have in reaching the quality of life you envision?

Working with a financial planner also exposes people to tools and techniques for understanding their parents’ financial situation. To build the foundation for gauging your parents’ financial needs, you can request from them, or create with them, the same materials that planners assemble with their clients: A net worth statement, for example, a spending plan, long-term care insurance coverage, and estate planning documents.

The client’s family values and the financial impact of any parental financial dependency are key areas of focus for planners and Sandwich Generation clients. For example, the aging parent of a client may envision being cared for at home instead of a nursing home. Honoring the parent’s desire becomes a family value of shared responsibility of time and money, particularly if there are gaps in long-term care insurance coverage. A client has to figure out how much of the gap he or she can handle, along with whether any other family members will help meet this goal.

Having the mid-year talk also plants the seeds for follow-up conversations during Thanksgiving, Christmas, or other year-end holidays. Starting the conversation early takes the edge off the discussion and channels the energy toward building and protecting family legacies during a time of celebration and reflection.

The Sandwich Generation literally cannot afford to delay these conversations. This group suffered proportionally worse than other generations during the most recent economic crisis. The financial pressures from high student debt, coupled with a decade of low returns and negative home equity, continue to squeeze the financial wind out of these households. Caring for parents and children adds further financial strains to household budgets with little or no capacity for additional expenses.

Sandwich Generation, let the talks begin!

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Lazetta Rainey Braxton is a certified financial planner and CEO of Financial Fountains. She assists individuals, families, and institutions with achieving financial well-being and contributing to the common good through financial planning and investment management services. She serves as president of the Association of African American Financial Advisors. Braxton holds an MBA in finance and entrepreneurship from the Wake Forest University Babcock Graduate School of Management and a BS in finance and international business from the University of Virginia.

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