(For years, in this blog we have advocated the extraction of the maximum equity from your home and withdrawal from your qualified plan. Take these funds and place them in a tax free investment vehicle that is not a countable asset for college funding, Medicare or Social Security. Contact us for more information.)

Colleges that use the FAFSA will determine financial needs based on your expected family contribution. The formula looks like this: Cost of Attendance minus Expected Family Contribution equals Financial Need.

Do not be tricked into putting a lot of assets into a child’s name. If you do, colleges will demand:
• The child use 35% of their assets for college before any aid is given to the family. If the asset is held in the parent’s name, then only 5.6% of that asset must be used before aid is given.
• If the child does not go to college, they can spend that asset as they please. Remember: You gifted the asset to them. Let’s see…would the child choose a new red sports car, or, would the child use the money for college? DUH!

Many private schools use the institutional method which counts home equity as an asset. If you have, say, $300,000 of home equity, it will be assessed at 5.6%, which means a difference of $17,000 in expected family contribution you will pay before getting any aid.

Keep in mind, many private schools cost in excess of $53,000 per year (without taking into consideration personal expenses of the child; e.g., football game tickets, new clothes, special events, etc.). Add in your retirement plan assets as being assessed in the formula, and parents will have a huge amount of Expected Family Contribution.

Public schools are making it so students have to go five or six years to complete their degree which pushes up these costs, also.

The best time to start saving for college is before the newborn leaves the hospital to go home with you.

Your plan should be to help them understand money management to avoid future stress, financial burdens, emotional strain and relationship problems that the misuse of money can bring.

Teach your kids to become savers and investors. Explain your values for spending and saving money to them. You will need to teach them the difference between need and want. Alert your kids to the problems of borrowing money to consume versus borrowing to conserve. As they grow up, teach them about checking accounts, savings, credit cards and investing. My folks, from my early age of 7, taught us that we had to have some type of job, and used our money for teaching us money principles. We were taught to set up “envelopes” to save for long term, which we deposited weekly in a savings bank. Then we set up holding pots for “charitable contributions,” short term goal spending and the rest was ours to “do as we pleased.” The folks had us buy stocks “on paper” and follow it weekly. When we ran out of money, Dad would lend it to us. We would sign a note and have to pay it back with interest, from our “do as we pleased money”. I learned to negotiate interest rates with my dad based on my savings account (which he held as collateral until the loan was repaid). He was tough on me from age 9 to 12 when I borrowed any money from him.

One of my other clients taught his children about money by giving them $100 on Friday night. The goal was to get through the weekend with some money left, but, the child had to pay for all family expenses and their wants out of the $100. When the money ran out…everyone came home – no TV, no games… everyone had to sit and talk as a family until bedtime each night.

Teaching the kids to be free from the stresses of unnecessary debt and overspending is a great legacy that you can leave them. Everyday I thank my mom, dad and grandparents for the knowledge of “wealth” they gave me.

Teach them the discipline or deal with the regret later.

1.) The 529 plan:

Although the plan formats are fine, the overall performance has been less than stellar. Most fund companies, i.e., Vanguard, Fidelity, etc., will make a proposal to be a state’s custodian for the plan. Knowing they will be presenting to the state bureaucrats, the investment options presented by the custodians are usually the most conservative performing funds. If approved, then the bureaucrats usually choose the most conservative performing fund of the conservative performing alternatives. Consequently, the returns have been below what one could obtain in the other alternatives.

2.) Funding:

Some people have had a difficult time funding the 529 plan. Suggestions have been to use a UPromise program (www.upromise.com) or Little Grad (www.littlegrad.com). These programs allow for rebates on items purchased. Use the rebates to help fund the 529 plan. Call on family members or friends to help in the funding. Also,Freshman Fund (www. Freshmanfund.com) lets people contribute online to any 529 plan.

3.) …Here is an alternative:

If a parent has an incorporated business (part or full-time), pay a child’s wages into a Roth IRA. Those monies can be used tax-free for qualified education expenses.

Folks, don’t fool yourself, simply because the kids are staying at home instead of at a dorm, does NOT lower your expenses. Heat and air conditioning are going to explode as well as your grocery bill. At home, actual room and board expenses are usually higher than at college.

The fatal statement I hear from parents is that these college expenses can NOT keep up like this in the future. Oh No? Costs for college are tied in to what average incomes are. Back when I went to college (yes, there were colleges back then), my undergraduate costs were $3,500/year when average incomes were $5,000/year; about 70% of incomes. Today, my alma mater states that the total student costs run about $35,000/year when average household incomes are at $50,000/year. So, it is the same 70%. I choose not to discuss the costs at Harvard, Yale, MIT or Stanford, etc.!

The College Board just issued a report that “A child born in 2010 that begins kindergarten in the fall of 2015 would attend college between the years of 2028 and 2032. If that child attended an average private 4-year college and if the annual price increases for private colleges experienced over the last 30 years continued into the future, the aggregate 4-year cost of the child’s college education (including tuition, fees, room & board) will total $506,423 or nearly $127,000 per year.”

So, when do you begin to save for the kid’s college….when you hear 2 sounds…”slap” and “waaah”. Just think, for the first year of college, $127,000, 18 years from now in an 8% return investment requires a $283/mo. to be set aside immediately after hearing those two sounds. Remember, that is for year 1 only. Multiply that times 4 years and times 3 kids…and the kids say… what have you done for me lately, mom and dad”.

May I suggest you have the kids borrow from your Family Empowered Bank and not just give them the money. Make them repay the loan with interest. Since the U.S. Government recently took over control of all student loans, your child probably won’t qualify for a student loan because they do not meet the agenda (quota) of the Government. Also, too many parents think their kids will get all their money from scholarships. Fat chance! Why not interview 10 parents in your local community or church and find out how much their kids actually got in scholarships. I asked one man who said his son got a full football scholarship. So, I asked, you mean you pay for nothing for him to go to college. He confessed he pays $18,000 per year. So, it depends on what the word “is” – is!

Funny, isn’t it, once you graduate, your college calls yearly for more money from you for the annual fund raising. Hmmmm…these colleges are starting to act like the IRS – They want money every year from you.

You have a host of examples that have accumulated over your lifetime. You can begin a simple mentoring program. The pressures and hectic activities the kids go through during the school year cease in the slower summer months.

For instance, many kids (possibly even you) that were latch-key kids, learned how to develop shopping lists, budgeting, reviewing bills, cooking, clipping coupons and how to use their allowance wisely.

I am sure you have your own stories that show simple ideas that you can teach and transfer a generation’s worth of financial knowledge. Obviously, children with financial skills and a history of being able to talk about money are better able to take on life. One method of education is an allowance. Do not tie the family chores to the money. Have the kids set up 3-4 “buckets” for their money: SAVINGS (say for college); Sharing (to contribute); Spending (for new purchases) and Spending later (for a later purchase).

Another method is to talk about bad habits of yours so they can learn. When driving to the mall with their kids, you may want to say out loud in the car: “I’m usually very tempted to buy clothes that are on sale, even if I don’t need them. Then I get home and wish I hadn’t bought them. So, I’m going to leave my wallet in the car. If I really want something, I can always come out and get my wallet.” Tactics like these can help your children understand how to value a dollar.

If the children run out of allowance money or want to buy an impulse item… let them “borrow” the money from you at a reasonable interest rate, but, they must put up some of their collateral until it is paid off… say a game or their computer. They can not use the collateral until the loan is paid off.

Oh, you say, that hurts and is “tough love.” Well, it is either discipline now or regret later.

Do you, without any thinking, give your children not only money when they want or buy them whatever they want and whenever they want it? The lesson taught to them: Life is easy I can have whatever I want with no consequences. With this approach who is going to be disappointed later in life?

I remember, very fondly, going to the Savings Bank every Friday night with my Dad. He put his savings in as the first expense out of every pay check and taught me that valuable lesson that I still carry on today.

Many of my clients have set up “weekend lessons” with their children. When the kids are say 7, 8, 9, or older they pick an amount of money…say $50, $100 or whatever to be given to the child. The child is responsible to buy/spend whatever they want from that money. This is not just for or on themselves, but rather, interact as a family for the entire family. Once the money is used up then everyone is to go home and there is no TV or games to play for the rest of the weekend so budget the money carefully. Some kids are given the money on Friday evening and within a few hours all of the money is gone. Boy, is it a long weekend sitting around looking at their parents, talking and with no games or TV until Monday morning. What a lesson builder of life!!

In other consults, we do an exercise and ask the kids to choose from three options when they’re grown up: (1) not having enough money to live comfortably and do for others, (2) having just enough to live comfortably and do for others, (3) and having more than enough money. The point is, if you never choose that third option, you’ll wind up as one of the other two. We all want things and we all make choices, but there has to be some fire in our choices.

In my opinion, children should not be paid for being a contributing member of the household. No allowance for chores. I suggest to parents that they actually “run the money” through their children. It costs something like $270,000 to raise a child to age 18. (Not counting college costs) Why not let them make decisions on half that money? The clothes, the music lessons, the trips, the books, the school decisions. You need new soccer shoes to further your athletic goals? Oh… but you just spent that money on a new outfit. It’s essentially saying kids, “We want you to be financially responsible and now – guess what – you’ll never have to ask us for money because we’re going to give you what you need and let you budget it on yourself.” What an incredible experience that would be.

Parents want their children to be self-sufficient and financially literate, but many are unsure of how to achieve these goals. They often look to me for help or education programs to help raise financially fit kids. When I was a child, very few families were very wealthy. Consequently, we learned the value of money quickly and every day. Today, many parents have high incomes (when your household income is over $75,000 that places you in the top 7% of income earners) and lavish their kids with everything they demand. At the same time, they are picking the kids up in high priced autos that, just a generation ago, one spent on a new home. The parents tell the kids to be more prudent with their money, but, the children are watching their parent’s actions.

Parents should begin discussing and educating their children about money at an early age. I have had clients come to the office with a child ready to go to college in 2 years, and the child has never had any responsibility for money. A child should be able to make good decisions about money before 10 years old.

Unfortunately, a report conducted by Strategy One, polled 1,100 American teens and found 62% believe they are prepared to handle adult financial responsibilities after high school. Yet, in the same survey only 41% knew how to budget, 34% knew how to pay bills, and 26% understood how credit card interest and fees work.

The Early Years

When children are in elementary school, parents should point out the advantages of starting to save and invest early. Around age 5 is a perfect time to provide an allowance so the child can make some of his/her own decisions. The parent should use trips to the grocery store to teach the child. If the child has money to use they can participate in the spending process.

After the child learns to spend, then, the next step is money management. The allowance should be distributed among different colored jars; spending, saving/investing, charitable giving and a fourth for education. This is a way for children to learn and see what their money can do for them. This helps families show their value system and for the kids to learn that money is not just for spending. The children can learn they can get whatever they want, but it takes time and discipline.

Parents should keep children and young adults aware of their financial situation so they can learn from their parents’ actions. Parents should discuss through large purchases with their spouse or another family member within earshot of the child. Keep in mind parents, although the kids may not be picking up their messy rooms, they are picking up their parents’ money thoughts and messages. Parents can and should teach their kids to be good consumers. In so doing parents will solidify their own skills.

In the Middle Ages

Around junior high school age is where investing should come into the education process. Kids could start setting money aside in, say, a custodial account. Maybe the incentive is for the parent to tell the child if they invest properly and make money, then, it is theirs to keep. If they invest poorly it is okay, but, they must write out what the learned from the experience. At this age some interesting stocks for the young teens may be in McDonalds, Coca Cola or Adidas. These stocks would have a connection for the child. As you go through the annual report with them the child begins to notice more and more. Disney is another stock children can get, relate to, and become excited about. Parents must emphasize to a child that it is okay to make a mistake when investing the first time. Above all the kids must learn that investments are volatile.

The Later Teen Years

As the child becomes a high school senior, send them to the website www.feedthepig.com for tips on how to save money and to receive a weekly email. In addition, there are courses that would be helpful like AIG’s “Kids Investing for Dollars and Sense” (KIDS). It has work sheets and internet based activities that parents can review with their children.

Parents, along with their financial advisor, should begin conversations with the child about what a 529 Plan is and the impact on their life. This is the time a serious discussion of debt, how to keep a budget, and why it is important to stick to it.

As the college years are coming to a close, this period is a time to emphasize that money is not just about spending. Explain what and how a 401K plan works. Share with them that $100/month saved from age 25 to 65, earning the stock market average rate of return will produce $1.2 million for retirement. (Don’t you wish your parents taught you that little gem?)

A Few Closing Thoughts …

• As a young child, my Dad made me read … The Richest Man in Babylon by George Clason. It was a turning point for me in money management. I encourage all my clients to read the book and have their children do the same. If the kids are young, then the parents should help them read and understand the great principles in this great book.
• I work with each client to set them up a “Family Empowered Bank”. This is not a chartered bank, but rather a place where we accumulate and store financial assets, human assets, and wisdom assets. These assets are to be shared with all family members. You see it does you NO good to “dump fish” on the kids … better you teach them “how to fish” with everything you have learned in life. A great financial tool used in the family bank is that as the kids request and want money or things – DO NOT GIVE them the money … lend it to them from the family bank at a reasonable interest rate. Have them pay it back out of allowance or from wages. This exercise will teach them about debt early in life and responsibility.
• Here are a couple of websites that provide information on money camps and instructions for kids on money.

Money Camps, Inc.
www.moneycamps.com

The Money Camp for Kids
www.themoneycamp.com

Independent Means Inc.
www.independentmeans.com

The American Dream Planner
www.americandreamplanner.com

I encourage you to discipline your children with money early, or, later live in regret.