Thursday, August 13, 2009

Please – Divorce Your Children Now!!

From the Desk of Joe Rollins

The following post was originally published in my old quarterly newsletter, The Rollins Report, in 2006. Almost every week, a client tells me about the horrors they are facing after putting their children through an expensive college. Most of the time, the graduate finds no viable employment opportunities available to them. I directed this article at parents who are financing their children’s education on their dime without providing any direction to their children on the focus of their education. Of course, the title of this post is cynical, but I do hope you’ll read my suggestions and try to follow some of the guidelines I recommend.

When I graduated from college, the last thing I wanted to do was move back home to live with my parents. More importantly, I’m certain my father would never have allowed that to happen. This wasn’t due to finances; it had more to do with it being time for me to move on to the second phase of my life.

Almost every week, I have discussions with parents who’ve allowed their children to move back in to their homes after graduating from college, where they can basically come and go as they please. These children often obtain menial jobs, but spend every dime of their earnings without contributing at all to the household expenses. Worse than all of that, many times the children have no incentive for establishing their own livelihood, and therefore, they are perfectly comfortable having Mom and Dad pay all of the expenses associated with their living arrangements. If you are in that particular situation, I think it’s wise for you to ask yourself if you think you’re doing your child a favor or a disservice. By agreeing to subsidize their lifestyle, parents are not preparing their children for the reality of dealing with their own financial obligations in the real world.

One of the more controversial topics that I discuss with clients pertains to financing their children’s college educations. It is a standard in the financial planning industry that parents should never incur any form of debt to provide for a child’s education unless they have first completely provided for their own retirement. The theory is relatively simple – a child has a lifetime to pay off any debts they incur in obtaining a college education, but parents only have a short period of time to pay off those debts, and doing so becomes more difficult in retirement years.

The financial planning industry standard is that unless you have already saved 100% of your own retirement, then your children should borrow money (or get a part-time job) to provide for their own college education; the parents should not be financially responsible. I know that this statement is controversial and that many of my readers will disagree with this concept, but I personally believe that the theory is correct and that parents should not incur any debt to finance their children’s college educations if they have not provided for their own retirement.

Another item that has created a lot of controversy with my clients is my opinion on allowing a child to dictate which college they will attend (on their parents’ dime, of course). I believe you have an obligation to your children to point them in the direction of obtaining a quality education, but it should not come at a cost that will break the bank or risk your retirement. Many high schools today are directing children to very expensive private liberal arts colleges that only provide a general higher education. In almost every case, these schools are very expensive compared to public institutions.

There is absolutely nothing wrong with directing your children to attend an affordable, quality public college that is close to home. I find it amusing when clients tell me that their children are demanding to attend an out of state institution (usually somewhere in Colorado for some reason).
While Colorado has excellent colleges, their curriculum is often just as good (and sometimes worse) than schools in Georgia. Therefore, the money spent to go to some colleges is certainly not warranted by the credibility you would get from a degree from one of those institutions.

In one particular case, when I questioned why a client’s child wanted to attend a college in Colorado, I was told it was because he liked to ski. I couldn’t help but point out that it would be much cheaper to send their son to the University of Georgia and fly him to Colorado every weekend to satisfy his skiing appetite. Besides that, he would probably get a better education and be closer to home.

The other comment I hear from too many parents is that their children just want to get away from home. If you live in Marietta and your child goes to Georgia Tech and lives on campus (only 15 miles away), that is plenty of distance for a child to feel all the freedom they need. It is imperative for parents to discuss with their children that it’s more important to obtain a quality education than it is to attend an expensive institution. If parents or children have to borrow significant sums of money to finance a child’s education, then they are doing themselves and their children a disservice.

Along the same lines, I am often amazed by parents who set up accounts for their children without ever discussing the importance of saving and budgeting with them. This only leads to trouble down the road for the child (and of course, you).

Another great tragedy in America today is that all college kids are given credit cards upon arrival at campus. They are allowed to use these credit cards however they wish and they typically wind up incurring a ridiculous amount of debt before graduating. For example, I recently visited a college town and ate at a typical hamburger joint for dinner. I was sitting by a group of 15 students eating hamburgers and drinking sodas. I noted that every single student paid for their individual tab with a credit card. While credit cards are certainly convenient, I do wonder whether their parents ever discussed the dangers of getting into credit card debt with them. Have you?

I don’t think it’s inappropriate for parents to discuss with their children the money that they’ve set aside for them. While it can be discussed at the time the parents decide to give the funds to their children (if they are still alive at that time), I recommend that it be done before then. I have seen too many children inherit large sums of money without any type of direction from their parents as to how to spend it or invest it, nor have they ever been advised on the manner in which it is intended to be used.

Another gripe I have about parents and college education is that children often major in subjects that are completely irrelevant to obtaining a job. While it may be great to be a Latin major or study medieval history, it qualifies a college graduate for virtually nothing. I think it is the parents’ responsibility to emphasize to their children that their degrees need to be in subjects that will allow them to obtain a job that will support the child’s financial needs. How is your child going to support their expensive habits while you are paying for them?

It hardly seems appropriate to me for anyone to incur debt to obtain a college degree when the only thing they are qualified to do is wait tables. This, of course, is fine if the parents are not expected to supplement their child’s income when they cannot pay for their own cost of living. If you allow your children to waste their education on an irrelevant degree, you will spend many years paying for that poor decision.

My intention is not to advise you to abandon your children as soon as they graduate from high school, but the fact of the matter is that you need to save for your own retirement first and then begin a savings plan for your children’s educations. One method for saving for higher education that I highly recommend is that all parents establish a 529 plan when a child is born so that there will be money available to them when they reach college age.

I am certain that all parents reading this blog could afford to put away at least $300 a month for a child’s education. But, I think simply putting money away is not a parents only obligation. The obligation extends to you counseling your children about the money, suggesting quality colleges that are nearby and affordable, and encouraging your child to go into fields of study that will allow for a fruitful financial future.

Every time I mention a 529 savings plan to a parent who will soon have college-age children, I get nearly the same excuse. They’ll either say they plan on putting some money aside for their child’s education when they get a bonus or an unexpected amount of cash, or they’ll simple provide for that child’s college education when the time comes. That’s all well and good if you do get a bonus or if you’re able to pay for it when the time actually arrives. It’s amazing, however, how much money can be accumulated in an education account for your child if you only deposit the small $300 amount as indicated above. The magic of compounded interest would allow you to accumulate a significant amount of money during the child’s adolescence.

For example, if you save $300 a month for 18 years and the account only earns a nominal 5%, you would have over $106,000 available for your child when they reach college age. If you started saving a little later and only saved for 15 years before the child reached college age, you would still have in excess of $81,000 accumulated. In the worst case scenario, if you’ve only saved for five years before your child reaches college age, you could still accumulate over $20,000. My point is that it’s never too late to start to save money for your child’s higher education.

As I’m sure you’re aware, Rollins Financial can establish 529 plans, Coverdell Educational IRA’s or custodial accounts for your children to help you begin this important savings process. The absolute best way to provide for these accounts is to have money drafted out of your checking each on a monthly basis and moved directly into the investment account that we would manage on your behalf. I truly cannot imagine that there are very many clients of this firm that cannot afford a program such as this. Furthermore, I honestly doubt that my clients would miss this sum of money on a monthly basis.

Finally (and most importantly), at some point, it is time to cut the apron strings to your children from a financial standpoint. I encourage all parents to establish an age that they believe their children should be financially independent and advise your children accordingly. Then, when your children reach the age that you discussed, they are on their own to succeed or fail. Establish a date, advise your child of that date, then kick them out of the nest when that day arrives.

Parents that continue to support their children for years after they have graduated from college are not benefiting themselves or their children. A child needs to be given a goal to reach, and when the day comes that they have reached their goal, then they need to be turned loose to provide for themselves financially.

Again, I am not recommending that you abandon your child from an emotional standpoint. They need to be emotionally supported by you as long as you are around. However, I believe that financially, there needs to be a day when you take them off your payroll and divorce your children. Review your current situation; could I be addressing you?