Saving for college is often a priority for parents -- as it should be. But saving for school doesn't give moms and dads license to neglect the rest of their financial goals, advisers say.
According to AllianceBernstein Investment's "College Savings Crunch," a recent report that measured college saving trends, 70% of families surveyed don't have a plan that takes into account all of their financial goals. AllianceBernstein is a global asset-management firm based in New York.
Melissa Osuch has seen first-hand proof of those findings.
"In talking to fellow moms and fellow parents, I realized they had no idea what their priorities should be and where they should start. A lot of times they do nothing," said Osuch, a Glenview-based financial planner and educator with Strategic Advisors of Illinois. When they do take action, "they focus so much on college planning that they completely ignore retirement planning."
And the immediate, everyday needs and desires of their families often get more attention than college saving. The AllianceBernstein survey found that of families intending to fund at least part of their children's education, 58% spent more on eating out or ordering take-out food than saving for college in the past year, while 49% spent more on vacations.
For Vicky de los Reyes, a 38-year-old who lives in the Chicago suburb of Hawthorn Woods, buying a house was the priority when her oldest daughter was young. She and her husband began saving for all their children's college expenses around the time her oldest turned 6.
Even though the couple began saving for their daughter's education later than they would have liked, they have a catch-up strategy: When their youngest child no longer needs day care, the money saved will be put into their oldest child's college fund.
To help parents prioritize their finances, Osuch has a formula: The most important component is protection and insurance, followed by establishing an emergency fund, saving for retirement and then, finally, socking away money for college.
Rick Brooks, a financial planner with Solana Beach, Calif.-based Blankinship & Foster, has a similar approach.
"The way we tend to look at financial planning is first covering the risks," he said. The young families he works with are typically successful professionals in their 30s and 40s with high educational degrees on their resumes -- yet still are often left scratching their heads when it comes to creating a family financial plan.
Below are five common financial mistakes advisers often see parents make:
1. Buying the wrong life insurance -- or none at all
It doesn't cost a bundle for parents in their 20s or 30s to purchase life insurance. But it may mean the world to that parent's bundle of joy. A working parent may have life insurance through an employer. Do the math and make sure it's enough.
According to Osuch, there are two ways someone can estimate how much life insurance to buy: Either multiply income by eight or multiply income by six and then add in one-time expenses such as paying off a mortgage or paying for college. It's also possible to estimate how much is needed by considering only expenses -- both one-time costs and living expenses for several years -- instead of income, Brooks said.
Both stress, however, that each situation is unique and it's best to consult with a professional on how much insurance is necessary.
Also give special consideration to the stay-at-home parent, Osuch said. Often a parent not earning an income figures he or she doesn't need life insurance. But large child-care expenses could appear if a stay-at-home parent dies, she said.
To figure how much a stay-at-home parent needs in life insurance, estimate the costs of replacing the work that the parent does, she said. The figure will likely vary depending on the ages of the family's children.
Having enough life insurance is especially important for young families to consider, especially since they are more likely to have a tighter cash flow, said Cicily Maton, a financial planner and partner of Chicago-based Aequus Wealth Management Resources.
At the age of 28, Osuch bought herself a 30-year, $250,000 term policy for $165 a year. Mortality tables have changed since 1998 when she bought the policy due to increased life expectancy, thus lowering the rates even more, she said.
2. Ignoring the need for disability insurance
Maybe even more important than life insurance is for parents to have disability insurance, Osuch said. "If you get into a car crash, there's more of a chance you're going to be injured than actually die from that," she said. "Life insurance isn't going to help you out there."
Luckily, that expense also can be modest; Osuch recently sold a 36-year-old a disability insurance policy for $34 a month.
When deciding how much insurance to buy, parents should aim to replace at least 60% of their income. Disability insurance most often is paid out on a monthly basis.
As an aside, don't skimp on liability insurance, Brooks said. Inadequate auto and home coverage is a common mistake across his entire client base.
3. Postponing a will
Young parents often feel healthy and don't think they need to prepare for the inevitable by drafting a will. But it's a task they probably shouldn't put off.
"Younger people don't have death on their minds," Maton said, at least not to the same extent that older clients do. But it takes only one related horror story about the consequences of a parent dying without a will to change someone's perspective, she said.
Without a will, the state decides who cares for the deceased's children and who manages their finances. When parents put their wishes in writing, they make those decisions instead.
If finding the money for attorney fees is the biggest hurdle, at least have a conversation with aunts, uncles and grandparents regarding who will take responsibly of the children in the event that a parental death occurs, Brooks said. And put those decisions in writing.
"If money is that tight, at least spend the 10, 15 bucks at the stationary store and fill in the blanks," he said, referring to premade will documents. Remember to have the document notarized, he added.
4. Forgetting to save for retirement
"When you're young and you have kids, retirement seems so out of reach," Osuch said. "It's something you can do tomorrow."
But delaying retirement saving makes it harder for a nest egg to grow. And remember college savings can be supplemented with student loans. "There are a lot of ways to finance college, but no one is going to give you a loan for retirement," she said.
Neglecting retirement savings also doesn't do any favors for grown children, who could be faced with the burden of financing their parents late in life, Maton said. At the very least, people should put as much money in their 401(k) plans as their companies will match, Osuch advises.
5. Putting off saving for college
Save for college while saving for retirement, Osuch said; starting early allows more time for the fund to grow. But dedicate fewer dollars to school than to the retirement fund.
If, for instance, someone has $100 a month to save, he or she should put $75 into some sort of retirement plan and $25 into college savings, she said. "Most people do the opposite or don't put anything into retirement at all."
But even though financial aid can supplement college savings, don't count on receiving aid that doesn't need to be paid back.
"Fifty-six percent of financial aid is in the form of loans," said Jennifer DeLong, director of college savings plans for AllianceBernstein. "People hear 'financial aid' and they think 'free money.'"
And although it's easy for proud parents to picture their prodigy as a star athlete or coveted artist, don't plan on them financing their entire education with scholarship money.
In the AllianceBernstein study, two-thirds of financial aid administrators said they believe that scholarship and grant dollars are less available for the average family today than they have been in the past; 92% said that parents overestimate the amount of scholarship and grant money their children will receive.
finance.yahoo.com
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment