March 2008

5 Moves to Financial Fitness

By Erin Mantz

From the moment your child was born, you would do anything to keep him safe and secure. You learned how to care for him along the way, mastering diaper changes and separation anxiety. But fast forward a few years, and when it comes to figuring out all the right financial moves toward his (and your) financial security, you might still be floundering. You’re not alone. According to a December 2007 survey by InsightExpress for Countrywide Bank, FSB, more than 67 percent of respondents called “becoming financially fit” a top New Year’s resolution for 2008. Many parents said they want more confidence and direction in doing so; only 30 percent of moms – and 51 percent of dads – believe they are financially fit. We sat down with certified financial planner Terry-Ann Gardemal of Jaffe Financial Management in Gaithersburg to focus in on five smart financial moves parents should make before their child starts kindergarten.

Finding Your Financial Road Map

Perhaps several items on your financial to-do list got lost in the chaos between bringing baby home from the hospital and bounding through the preschool years. But kindergarten will bring more costs, concerns and challenges. While your kids are still on the edge of entering elementary school and you are still in the peak of your earning years, find your financial road map, urges Gardemal. “Whether you develop a plan yourself or have a certified financial planner design one, you will gain a better understanding of your current financial position and be able to forecast the consequences of different scenarios” she says. As you start developing healthy savings habits, you can say good-bye to at least some of the guesswork and stress around planning for retirement, saving for college and being prepared for emergency situations.

Five Moves to Make

1. Craft your protection strategy.
Picture your financial landscape like a pyramid. The floor of the pyramid is the stability – what you have to guard against life’s uncertainties that might create financial hardships. Put a current will, a medical directive and a power of attorney in place. Family and estate planning attorney Suzy Eckstein of Oakley & Eckstien LLC in Rockville recognizes how hard this step can be for parents. “People get busy, or a lot of people hesitate to do wills because they don’t know who to leave their kids to,” she says. “But the consequence of not doing the will is the money would go directly to the children. An unknown person would have to go to court, set up a guardianship and determine who would manage the money.” Eckstein also reminds parents they can pick one person to manage the kids’ finances and another to raise their kids – it doesn’t have to be the same person.

Another important safeguard is to have an “emergency reserve.” This should be a liquid account like a money market fund – something earmarked to cover three to six months of expenses, depending on other sources of cash you may have available. A 2007 survey by the Consumer Federation of America showed just 4 in 10 households reported having these savings. Of those, more than half said they built the accounts by making regular automatic deposits from their checking account, half saved from tax refunds, and a third contributed loose change. Now, that is a penny for your thoughts (or at least something to think about).

2. Assess your insurance.

Contact a financial advisor to run a life insurance needs analysis and – very important when you are still young – a disability insurance needs analysis. Ask about supplemental insurance, too. Many people are covered by their employer’s group life and disability insurance plans, but those are usually not sufficient. The next step is to purchase personal insurance to cover the gap. Ask your financial planner or insurance agent to run the quotes for you. “It’s not just a matter of having sufficient insurance, it is important to have an insurance portfolio that corresponds to your different financial events,” Gardemal says. For example, if your first child is entering kindergarten and you have another child two years younger, consider a 20-year term life insurance policy that will pay to “replace” one parent if she died prematurely. Think of this as your “nanny policy.”

Sometimes, grandparents get things started more quickly. When Suzy Snyder of Vienna had Ethan, now 7, and Rebecca, now 5, her dad opened life insurance policies the kids can borrow from when they start college. And as soon as Snyder had her son, she and her husband sat down with a financial planner to figure out 529 plans and commit to continued contributions into their employer-provided 401(k)s. Her advice to new parents? “Start saving right away!” She also makes an optimistic point about the timing of kindergarten: “For some parents, saving can get easier then, thanks to no more day care costs!”

3. Figure out how to start - or continue - saving for retirement.

The middle section of the pyramid is where you grow your money. Remember, you can borrow to pay for college, you can finance a vacation home, but you cannot borrow or finance your retirement. “Even if you are still relatively young, once the children are in school and ‘life’ takes over, it is difficult to consistently save in a disciplined manner if you do not have a plan,” Gardemal says. A financial planner can help you develop an asset allocation strategy that is consistent with your retirement timeline and your ability to tolerate risk. She will develop a mix of domestic and international stocks and bond investments tailored to your particular situation. Once you have that in place, defer a portion of your salary into your employer’s 401(k) plan, 403(b), thrift savings plan (TSP) or other retirement plan. Contribute at least as much as the company match. Otherwise, you are basically leaving money on the table. Parents who are not employed may want to consider an Individual Retirement Account (IRA) or a Roth IRA.

4. Explore college savings plans.

As you zip up the lunch box and shuffle your son out to the bus stop, you may think college is a long way off. But time passes fast, and college costs are growing at a rate far in excess of inflation. The time to start saving is now, but make sure your plan is realistic for life now, Gardemal says. “While many parents would like to finance the full cost of college, this is a tall order for most of us. Remember that students can, and should, also apply for scholarships and financial aid and even work part-time to help pay tuition,” she says. Consider this: If your son finishes college with a little debt, the rates on student loans are only about 3.5 percent now – low in comparison to raking up high interest earning consumer debt.

Parents have about one dollar saved for every four they’ll need to pay for their children’s college education, according to a Fidelity Investments College Savings Indicator survey in December 2007. However, the survey did show that one group of parents is doing better than average. Those families that put money into a 529 college savings plan are on track to cover 52 percent of their children’s college education expenses. Rising in popularity, 529 plans are tax-advantaged savings plans designed to encourage saving for future college costs. Earnings in 529 plans are not subject to federal tax and, in most cases, state tax, as long as you use withdrawals for eligible college expenses. Just make sure you understand any fees and expenses associated with your plan.

Leslie Cohen of North Potomac started a 529 plan for each of her three children right after each was born. She credits her dad for telling her about the plans; she wasn’t even thinking about 529s when she was pregnant with her first child. Working full-time, Cohen also contributes to her retirement, just as she did before having kids. April Fulton of Silver Spring credits her financial planner sister and an unexpected windfall for starting her son Caleb’s 529 plan. “My husband and I had been talking about 529 plans while I was pregnant, and my sister helped me pick one,” Fulton explains. “I’m really glad we started one. We contribute sporadically, but my New Year’s resolution was to take charge of this account before Caleb starts kindergarten in fall of 2009!”

You may qualify for two tax credits when saving for college. Look into the Hope Credit and Lifetime Learning Credit. Determine the amount you want to save, do your research or speak to a financial advisor to help you find what’s right for your family.

5. Create a household budget.

This step sounds simple, but it’s something many people struggle with or put off doing: coming up with a household budget so that you can put the above strategies into place! Look over your bills and spending patterns for the last 6 to12 months, and average them out to come up with a monthly budget. Once this is complete, look over your essential and nonessential items and see if there are places to cut back, if necessary.

As you make your financial way, one thing will never get old: your ability to teach your kids by example and demonstrate the benefits of financial responsibility. This is not a step, but a daily and lifelong process. A 5-year-old may think money just spits out the ATM machine anytime. Begin to explain why to budget, encourage him to start saving a little and even do some charitable giving. “The steps are up to you,” Gardemal says. “But find a way to set your strategies, formulate and fund your plan. Your family’s future and your peace of mind depend on it.”

Erin Mantz is Washington Parent's editor at large. She lives in Potomac with her husband and two sons. You can find her blog at http://blog.erinmantz.com.