Financial planners agree that the first budget item should be retirement savings. This has to come first because otherwise the money goes to mortgage, kids, college savings and all those other demands. If people wait to save what’s left after taking care of all this, there won’t be anything to save.
“Don’t become retirement account poor,” warns Paula Friedman of McLean Asset Management Corp. Those who fail to save for retirement end up being a burden on their kids, so it becomes self-defeating.
As employers have shifted to opt-out for 401(k)s instead of opt-in it has boosted savings because people don’t have to take any actions. Automation enforces that savings discipline. “Do anything you can to automate,” says Kelly Campbell from Campbell Wealth Management. If savings are not withdrawn from your paycheck, then set up a bank transfer for the day after your pay arrives. Many retirement plans have an “auto-escalate,” so you can increase the percentage withdrawn over time.
The cost of college is an issue that is getting some rethinking, Michael Egan from Egan, Berger & Weiner says. The grandson of a friend went away to college, lived on campus, partied instead of studying and was asked to leave. He came home, lived with his parents and attended Northern Virginia Community College while working full-time. He finished his bachelor’s degree at George Mason University and graduated without any debt.
“People are making smarter decisions,” Egan notes. “They are realizing NOVA is the best deal going, spending $3,000 a year instead of racking up debt.”
Egan, like other financial planners, urges parents to instill a savings habit in their kids. “Get the kids on track,” he recommends. “That helps keep the parents on track,” he adds, because it keeps them from having to use all their savings for the kids. Sooner or later, he acknowledges, “parents will have to bail out the kids one way or another.”
Angela Bender from AMJ Financial Wealth Management has found that videos she makes for her clients help their kids as well. “They forward the emails to their kids,” she says. Her recent video on excessive withholding was popular with both generations. She also features them on her website and on YouTube.
Rose Price at VLP Financial Advisors suggests teaching kids the difference between good debt and bad debt. “Good debt is secured by something,” she says. Mortgages, secured by the house, are good debt. Ditto for a car loan. Student debt, however, is not good.
Credit card debt is the worst kind of bad debt. “Avoid the credit card stands in the student union,” is Bender’s advice.
Planners all urge clients and their kids to avoid student debt as much as possible, especially for graduate school. “I recommend kids go to work before graduate school,” says Egan. “See if their employer will pay for a graduate degree.”
What the younger generation should not avoid, however, is spending to cover risks—usually with insurance, Campbell says. Young people are prone to do without health insurance. “I don’t need that,” is the refrain. But when something happens—and it does often enough—the results can be catastrophic. “It can cost tens of thousands,” Campbell warns. “They won’t have it and it can wreck the parents’ finances.”
