I spend a lot of time on the Internet. Most of this time is for work – researching investments, watching market trends, learning the latest wealth management strategies, etc. But I also spend time online seeking out good long-form writing on topics I find interesting.
One recent article I read was on The Atlantic’s website, “The Secret Shame of the Middle Class” by Neal Gabler. I highly recommend you read the full article too. The author’s basic premise is that a combination of financial ignorance, flat wages and compulsive spending driven by a desire to “keep up with the Joneses” is squeezing middle class households. The author details his own financial failings and how they affected his personal affairs, his relationships and his ability to provide for the future. On Bloomberg View, columnist Megan McArdle offers a good dissenting opinion of Gabler’s reasons behind his family’s financial struggles. (For more, see: 7 Lessons to Teach Your Kids About Money.)
The choices Gabler discusses are ones we all have to deal from time to time. As an advisor, my main job is to help my clients navigate many of these same difficult decisions so they can feel confident about their ability to achieve their financial goals.
When I offer advice to clients, I focus on the system we have in place now, not the system that we hope to have. Wishing for a better system is nice, but not productive for prudent planning. So here is some guidance you can use to avoid many of the mistakes that Gabler fell into.
- Check your ego at the financial door. My kids often get upset with me when I forbid them to do something that another family permits. “Different family, different rules” is what I tell them. This should be rule number one in every family when it comes to financial decisions. We need to be blind to the choices other people and other families make, especially those about money and spending. Families should focus instead on how to best allocate the resources they do have.
- Pay yourself first. Saving for the future is the best practice parents can do for their children. Because when parents are financially secure, they will not be a burden on their children later in life. Build a cash reserve first, then start saving for retirement. When you make saving the first priority in your household budget, it can help stop you from living above your means. That would’ve helped Gabler and millions of other families in the country who are stretched to their financial limits. It’s also good for parents to set an example for their children, because kids will learn money lessons from watching the way their parents save and spend their financial resources. (For more, see: Don't Wait to Pay Attention to Your Finances.)
- Be smart about college selection. Applying for and financing higher education is one place where I tell clients to plan for the system we currently have, not the one we should have or wish we had. Student debt is an important issue for families and young adults. But many get into trouble by not saying “no” to schools that cost $50,000 to attend. (This is assuming much or all of these costs will be funded through borrowing. If parents have the means to pay high tuition costs and still save for retirement, they can do so.)
Planning for Education Expenses
Borrowing to cover high tuition costs sets up the student and the parents for a vicious cycle that can last more than a lifetime. Here are a few questions I ask my clients when discussing planning for college expenses:
- Do you know what your child would like to study?
- Is it a career that could potentially support a high debt load, or will their career choice always have them struggling to get ahead?
- Are you or your child looking at other schools that offer similar courses of study? Does one school offer better chances of job placement or career advancement that justifies the higher tuition expense?
I usually advise my clients that if all else is equal, choose the school that is going to cost the least out of pocket, especially if the child is thinking about a career that doesn’t pay enough to justify the expense. That could mean staying closer to home at an in-state school and avoiding the increased tuition that out-of-state students pay. College is an opportunity for adult children to venture out on their own, but it’s also about preparing for the future. Limiting the student’s debt load is part of that preparation. (For more, see: Financial Tips for Parents on a Tight Budget.)
Here are some other considerations when it comes to planning for educational costs:
- Invest time, not just money, in primary education. I live in an area where private schools are prevalent, because there is a perception that public schools are substandard. (There is some truth in that, depending on what part of town you live in.) Similar to college planning, if you can afford the cost of private school tuition, still save for retirement and higher education and pay all other bills, then paying private school tuition can make sense. If not, you should consider public schools or less expensive private school options.
While school choice is important, I believe a child’s learning outcomes depend more on parental involvement. Children with parents who are engaged in their education – checking homework, reviewing tests and more – will be in a better position to succeed no matter what kind or what quality of school they attend.
- Think big about housing costs. Where a family chooses to live is about more than costs. I know school district choice is an important factor when house hunting too. But many families tend to overbuy when shopping for a home, especially with borrowing rates at such low levels. Many people also underestimate or don’t even think about the costs of overhead and maintenance that comes with a bigger house.
When you’re looking to move into a new house, make sure your budget can handle not only the mortgage but also all of the other associated costs you’ll encounter. Ideally, your total housing costs should be no more than 30% of your household budget.
Hire an Advisor Who Serves Your Interests
I don’t mean this to be self-serving, but there is tremendous value that families get from working with a skilled, independent financial professional. It’s important to hire an advisor who is required to put the interests of his or her clients first at all times.
A good advisor will tell the truth when it comes to overspending or borrowing, even if it’s uncomfortable for a client to hear. A good advisor will present a wide range of options and have deep knowledge of financial concepts and strategies to help you make educated decisions. A good advisor will take the time to lay out all of the pieces of a financial plan in an organized way, and not start a fire drill to rush you into a hasty choice.
Perhaps most importantly, a good advisor will present solutions that can help improve your entire financial life and not zero in on a specific problem that one product will help solve. That’s why I discuss a wide range of life lessons, financial and otherwise, with my clients – from raising children, to education, to household living arrangements.
The financial decisions we make every day become lessons that children learn and will use on their own in the future. It’s time for parents to be more deliberate and thoughtful in the financial choices they make. (For more, see: Why Paying Down Debt Faster is Not Always Better.)
Milestone Wealth Advisors, Inc. is a Registered Investment Advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.