What the Expert Says …
It’s clear from the comments posted that teens and parents feel vulnerable because our nation’s economy is in a fragile state. The huge task of the new administration will be to repair our nation’s financial condition and restore our faith in this country’s ability to function successfully over the long term.
Families need to develop a game plan.
A common thread spelled out by the parents is efficiency and conservation – doing more with less. This trait is essential during times of low economic confidence. College costs are clearly one of the chief concerns for parents with teens. Unfortunately, many of the institutions our children will be applying to have maintained their pricing power through these tough times.
This means costs will continue to increase at almost twice the rate of consumer inflation. All parents have to be realistic about ways to attain desired funding levels, given the current condition of college investment accounts (such as 529 accounts), which have been reduced significantly from a year ago. Given the challenging savings environment, this is a good time to reconsider the value projections of these accounts and figure out the amount of money you can add to these accounts on a regular basis.
Balancing Your Home Budget
One of the things all families should do is look carefully at their budgets and if necessary, replan everything. It’s important that you not add pressure to an already fragile financial situation. One of the biggest culprits to family finances is not working off a balanced budget.
The major portion of each family’s budget includes housing (30%), transportation (18%) and food (15%).
Monthly housing expenses (PITI: principle, interest, taxes, insurance) should not exceed 28% of your gross monthly income, and PITI payments plus long-term debt service (car payments, college loans, installment programs) should not exceed 36% of your gross family income.
A good practice is to have two separate operating accounts. Direct deposit the regular monthly expenses (PITI costs, mortgage/rent, vehicle costs, utilities, household costs, etc.) into an operating account. Move the remainder of the deposit into a lifestyle account – divide the total by the number of days until the next deposit – that is the money available for discretionary spend.
How To Save
If what you earn does not equal what you spend, it’s time to make some changes. The ability to “pay a little now and a lot more later” leads many to a path of consuming beyond their means.
However, it is truly amazing that just changing a few complacent habits can result in hundreds or, in some cases, thousands of dollars of annual savings.
For example, if you have old credit card debt, yet maintain a good credit rating, there is a possibility that you are paying too high an interest on your outstanding credit card balance. Look for lower-rate credit card agreements. Better yet, if you have a good loan-to-value ratio on your primary residence, explore the possibility of getting a home equity line and use the equity credit (where the interest is potentially tax-deductible) to pay off the credit cards. The ongoing economic stabilization efforts encourage banks to make quality loans –if you are in good standing, obtaining a new home equity line or revising an existing line might be a viable solution to handle credit card debt that crept onto the budget. Rule: only obtain a home equity line that is needed to get rid of your debt burden.
Recently a family came into my office to have their finances analyzed. One of the statements they produced showed a $6,000 credit card balance. I know they made enough money to develop an aggressive payoff program towards that 16% compounding interest. When I asked why they had the debt, the reply was that “the card gives them reward points” and they hadn’t got around to paying off the balance.
If you want reward points, open an account with a debit card that offers reward points, avoiding the potential for an outstanding balance to accumulate that will create non-deductible interest.
Penny Hastings, CA 11/21/08
For parents who have seen their savings for their kids 'college education drop to half (or even less) than had six months ago, it's a panicky time. On top of that, college financial aid and college loans have decreased. Kids with special talents, such as athletics, should look at the sports scholarship opportunities and take advantage of them by marketing themselves to college coaches. There is $1.2 billion awarded to skilled student-athletes every year...savvy student-athletes will try to get part of that to help them through college. Read the book, How To Win A Sports Scholarship, 3rd edition, for a step-by-step approach to drawing the attention of college coaches and maximizing your chances of being offered a sports scholarship.
Penny Hastings
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