Category Archives: College Planning

Financial resolutions for 30 and 40 somethings

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I’ll control the amount of money I spend on a house. What lenders will loan you is not necessarily what you should spend. Your housing decision drives the costs of many other things in your budget: upkeep, insurance, repair costs, and maybe status decisions such as where you send your kids to school and what car(s) you drive. Once you commit, it’s a fixed cost that isn’t easy to reduce. Keep your housing cost (mortgage+interest+taxes+homeowner’s insurance) to 28% or less of your gross and you’ll reduce stress and free up money for savings.

I’ll increase my retirement savings with every raise. Try to add at least half of every raise to your retirement savings. Aim for the maximum allowable contribution of $18,500 to your 401k/403b and fund a Roth if you can. In which order depends on your income, employer match, and investment options in the workplace plan.

I’ll start saving something for my children’s education as soon as they’re born. Just as with retirement savings, the earlier you start, the less you have to save later. No, they won’t earn their own way. No, they’re not so smart they’ll get a full-ride scholarship. Just. No. Save something—anything is better than nothing.

I’ll hold on to my bonuses and any inheritance. Too many people get used to depending on a bonus for their regular lifestyle, but a company can go south and the first thing eliminated is the bonus. Try to regard the bonus as bonus savings—for investment, emergencies, etc. What to do with an inheritance depends on the size, but consider no more than half of it available for spending, and make that spending a worthwhile purchase (such as real estate) that has some potential to grow. Windfalls don’t come that often in life, so don’t blow it.

I’ll do everything I can to become debt free. I don’t think I need to belabor the point about credit cards, but by your 40s it’s time to chip away school debt as well, before you have to start paying for your kids’ college.

I won’t cosign any loans. If the bank doesn’t think the person is creditworthy, why should you? And if were talking about guaranteeing a college loan, understand that if your child drops out, or becomes permanently disabled, or dies, you’ll probably still owe the money. You can always help the kid pay off the loan in the future if you can afford it—just don’t cosign it!

I’ll carefully consider the financial costs before deciding to stay at home with the kids. Deciding to quit employment to be with your children is, of course, not exclusively based on finances. I did it, and I’m glad I did. But there are costs—depending on how long, you can significantly impact your Social Security benefit, as well as your future employability, advancement, and re-entry salary. Most likely, you will have no disability insurance, and if you or the wage earner become ill or disabled, or you get divorced, it can be catastrophic. I urge most clients contemplating this to keep their professional networks alive, keep abreast of their field, and, if possible, get extra training or continue working at least part time.

I’ll expect my kids to contribute to household upkeep and earn money as soon as they’re able. Not only does this build life skills, but it conveys to the children that you respect them as being able to produce value and have worth. Any kind of outside job shows kids a world, life choices, and consequences beyond what they can learn in their family, and gives them the experience of being evaluated without the protection of a family or age cohort. Even the difficulty of finding one, and the perhaps soul-less experience of a really boring or difficult job can teach the kid a lot of motivation.

And, do take a look at my post for millenials–it’s still applicable to you.

Taxes: we’re not Europeans

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We don’t want to pay as much tax as the Europeans do. How many times have you heard that? If less than 1,000 times, congratulations—you live without internet service. But, I still retain an old-fashioned interest in verifiable facts, not just what I’d like to be true. I hope one or two readers still feel the same way, so let’s take a look at some numbers on just who pays what taxes, and what those taxes pay for.

The moment you delve into comparing countries, you have to contend with currency conversions, buying power and the cost of necessities (what’s a middle class house in Chicago vs. Lyons vs. Haarlem?) so of course we can argue “not comparable” whenever. We work with what we have, and what I found was some very interesting data on the Forbes website. Forbes states all figures in Euros, but I’m going to use a handy dandy currency converter to put this all in U.S. dollars. (I wish these figures were newer–2009–but it isn’t easy finding facts that are up to date. I just don’t know where all those Freedom Caucus people can get their information.)

Let’s look at a couple earning $108,667 (100,000 euros) with two children. Here’s what Forbes says their after-tax income would be:

United States (overall—some states like Illinois have higher taxes) $84,760
France $78,029
United Kingdom $72,154
Germany $73,676
Netherlands $64,113

 

I could add more countries, but as you might expect, taxpayers in countries with small population bases (Netherlands, Norway, Denmark, etc.) keep less of their gross because there are fewer taxpayers to pay for services.

So, we ARE better off by at least $6,000 and maybe as much as $20,000? Wait a minute—you get what you pay for. And our mythical couple is going to have to pay for a lot more out of that after tax income—stuff that is already paid by government programs in these other countries. I’ll admit I don’t have the specifics on every policy in every other country (but would welcome input from anyone who does), but I do know a few expenses our model couple would need to cover out of pocket:

  • Yearly deductible for health care. Mine’s $3,500/family but employer plans can range anywhere from about $2,000 to $6,000. I’ll be conservative and use just $2,000. Let’s assume the parents’ employers cover all health care premiums—increasingly rare, but I’m trying to be conservative here.
  • Savings needed to cover $30,000 in college costs per year for each of two kids—I’ll again be conservative and assume the kids aren’t going to Harvard, and are 2 years old and newborn, so the amount needed will be on the low side. If the kids were older, more would need to be deducted. According to the SavingForCollege calculator, the parents would need to be saving $613/month for the 2 year old and $558/month for the newborn: a total of $14,052/year.
  • If these parents have such young children, they’re probably not very old themselves. Nevertheless, since in the US people are “free” to pay for their own long term care, and this is covered by many European health systems, let’s estimate a low $1,000/parent per year for long-term care insurance: $2,000. (forget saving for the actual cost of care—it would about double the amount needed if the parents are currently in their 30s and can save for 40 years).
  • I’m not including the value of the living allowance that is given to college students in some countries (Netherlands), the free student exchange programs that are routine, the excellent trades and vocational schools available to non-college Europeans (and which are hard to get at any price in the U.S.), the lump sum children’s benefit given to parents upon birth of a child, or the cost of co-pays and prescription drugs, since these vary and I wanted to look at just a few things we can agree on. So how does that math look now?

 

US $84,760
health care deductible (cost of insurance premiums not included) -2,000
college savings -14,052
long term care insurance -2,000
what you actually have left after being “free” to pay for those services yourself. $66,708

 

Another “but wait”—what if mom and dad are both working and need to obtain child care? In my neck of the woods that’s going to cost around $20-25,000 a year, but Europeans can pretty much depend on free or very low cost service from shortly after the child’s birth. So now, our model couple could easily be down to $46,708 after paying for the same services the European family would get for free (or greatly reduced costs). I’ll try not to go on about the paid-for health spas that are routine in Europe, the far-more-luxurious birth center experience, the well-child checkups and assistance, the earlier retirement age, the longer paid vacations, guaranteed paid maternity leave, the housing assistance for the elderly and low-income families…

Yeah, I’m glad we pay such low taxes. And that we get what we pay for.

 

College planning, child-rearing expenses & a novel approach

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I put off having a child as long as I could. My own mother made it seem like a lifetime sentence, where you’d have a continuous stream of hard work and never have any time to yourself again. Also, in her assessment, I wouldn’t make a very good mother as I was far too impatient. She sure made it sound like fun.

How we live now

Okay, she was partly right but thank heavens mostly wrong, although you might get some agreement from my daughter on

Sunrise in Botswana

Sunrise in Botswana (Photo credit: Wikipedia)

the assessment of my parenting, depending on when you ask. Nevertheless, my mom was pretty much in tune with our current U.S. culture of child-raising. I know more than one mom with a full time job and more than 200,000 miles on the mommy-mobile. Most parents I see are quite worried about college for the kids, and even more worried about what a top-level admission will mean to their finances. When I see people with infants, we always discuss not only college, but how much tutoring, music lessons, sports activities, and arts training are going to cost. And if the kids are old enough, we’re probably going to talk about a college admissions coach.  In 2009, estimates were that it cost $1.1 million to raise a child through college—and college costs have gone up a lot since then.

It can seem like a rat race from the moment they’re born. However, as I mentioned in my previous post, I’ve been living in an alternate reality every night from 10:30 pm to midnight or so: I’ve been in Botswana. No not really, and I’m not even sure the actual Botswana is as depicted, but in the No. 1 Ladies Detective agency world, children are quite a different matter. In the 2nd book of the series, Tears of the Giraffe, we can experience an entirely different way of being with and rearing children.

Spoiler alert! Stop here if you don’t want to know details on this book!

An alternative life

A little background: Mma Ramotswe is the heroine and chief detective. Her fiancé is Mr. J.L.B. Matekoni, a warm hearted and easily buffaloed owner of a car repair service. He spends significant time doing free work for a friend who runs an orphan farm (which seems to care for many children orphaned by the AIDS epidemic, among other reasons). In one very swift meeting with the head of the orphan farm, Mr. Matekoni finds himself going home with two children, one of whom is in a wheelchair.

His thinking is extremely straightforward—these children would benefit by a home, he can give it to them, and Mma Ramotswe will be happy to have them also—because who isn’t delighted by children, any children? So the kids are bundled into his truck, with wheelchair, and off they go. He does consider that maybe he should have talked about it a bit with Mma Ramotswe, but he’s pretty confident she’ll go along.

Are you gasping at this point? Can you imagine this scene in the U.S.? Me neither. Contrary to my expectations, this is not setting the stage for a big blow-up. In fact, Mma Ramotswe does wish he’d talked to her ahead of time, but sees it as further evidence of what a good man her fiancé is. She does mention that some people have too many children—6 is enough, she says—but since they do have extra bedrooms and do make enough money to feed them,  she’s okay with the sudden transformation into parents.

Parenting transformations

I think the way this sudden parenting is handled is what makes it all so different, and indeed a pleasurable experience:

  • Everyone sits down to dinner every night after school and work. Mma Ramotswe cooks dinner nearly every night anyway (with help from the girl, and Mr. J.L. B. Matekoni at times.) What’s on the table is what Mma Ramotswe likes (with an eye to pleasing Mr. J.L.B. Matekoni). No special meals, no complaints, and plenty of family togetherness. No extra work.
  • School is pretty simple. They walk, and go to the public school. Private schools are mentioned, but in the context of helping kids with problems. At one point the kids experience some bullying, but it’s dealt with very matter-of-factly by helping the kids (in a family discussion) decide how to respond.
  • Entertainment and recreation are simple and center on the family. After dinner, the kids clean up and study (no driving to endless activities). They spend time with each parent, and when the boy starts acting sullen, Mr. J.L.B. Matekoni spends more time with him and takes him to some sporting activities. On weekends, the kids go to visit relatives with one or both parents. Mma Ramotswe remarks how one aunt is extremely long winded, but it’s good for the kids to hear her stories because it teaches them about Botswana and who they are.
  • There’s a huge awareness of the natural world, and one of the favorite recreations is sitting outside listening to sounds, talking with each other, and walking through the garden.
  • When there are behavior problems, the parents are confident that they can be solved by connecting with the kids. Mma Ramotswe also attributes some misbehavior to “kids are like that” and is certain that with time will come wisdom. She has a great ability to laugh things off.
  • Both parents are confident that the kids will find their niche in life. They both value education, and are very impressed by people with college or other advanced training, but there’s no mad rush to channel the kids toward anything specific.
  • Even though Motholeli has a significant handicap, it’s not a cataclysm. She is still regarded as a capable person who can make a contribution, has tasks, and has interests that the family finds ways to involve her participation. No one is ashamed of her, and she’s fully integrated into all activities.

What financial planning lessons do I take from this?

People more than things.  What gives this family pleasure and solid relationships is the emphasis on being together. They have very little interest in acquiring more than is necessary and they are very dedicated to making things last and wringing the last bit of use out of anything. The things they treasure have personal meaning, not monetary value: a photo, a commemorative plate, a teacup, but mainly each other.

Confidence, optimism, and realistic expectations toward life. Without a pre-planned agenda or specific expectations for the children, they are much freer to allow natural talents and preferences to emerge.

Reliance and enjoyment of friends and family. When you keep up with even remote relatives, there are plenty of ways to get help, advice, entry, information, and support when you need it. Mma Ramotswe is also very conscious that she has reciprocal obligations, and hands out time, sometimes money, and effort for her vast network of distant relatives and friends. When, in a later book, an employee asks her to be godmother, she sighs a little knowing that this will require obligations to contribute to school fees, gifts, and all sorts of needs (for the rest of life), but focuses almost immediately on the need of the child and the honor being done to her, and gracefully accepts the offer. She thinks we cannot always choose whose lives will become entangled with our own; these things happen to us, come to us uninvited.

We don’t live in Botswana, but these books are giving me lots of opportunities to think about how to dial down the burners a little bit, to enjoy what we have, and to choose relationships and activities over possessions. Even for a financial planner, it’s not all about money.

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