Are you failing your kids?

I’m reading a fascinating book, “How to Raise Your Adult Children,” by comedy writer Gail Parent and psychotherapist Susan Ende. It’s not quite like any other parenting or money book I’ve ever read, but it makes some great points about how many parents are failing their kids by not expecting more of them.

Some highlights:

• No one is truly independent unless they’re financially independent. Our kids may resist cutting the financial umbilical cord because of fear of the unknown, but our job as parents is to teach them to be independent and then boot ‘em out of the nest.
• The dependent resent those they’re dependent on. Parents who support adult children may believe the kids will be grateful and will love them more, but financially dependency creates “shame and self-doubt” in the offspring.
• Living on their own is part of becoming independent. “We need to expect and prepare our children to live on their own after school,” the authors write. Financial setbacks and unemployment may bring them back to the nest, but their stay shouldn’t be indefinite. There should be a plan for returning them to the wild and they should contribute to the household in the meantime.
• College is a proving ground, for kids and for parents. “By the time a kid leaves college he should have mastered the skills of budgeting, financial planning, delayed gratification, working, spending wisely and saving for a rainy day,” the authors write. “College is a good time to practice those skills. We shouldn’t send money on demand, or bail a kid out.”

It’s still early days with our daughter (she’s only in elementary school), but I can easily understand the temptation is to keep her “close,” safe and dependent long after it’s time for her to start spreading her wings. I know it’s our job as parents to make ourselves obsolete, and teaching her to be financially independent is just one of the ways we’ll do that.

How we encourage our daughter to save

We opened a savings account at a local credit union for our 7-year-old daughter a few weeks ago, and we made her a deal.

She’s already required to save $1 of her $7 allowance each week. Mandatory savings have been part of her allowance since she started getting one four years ago. With the new savings account, we made a bargain that if she saves any more than $1 week, we’ll match it dollar for dollar. So if she saves $2, we’ll kick in an extra buck.

Then, each December, she’ll be allowed to withdraw half of her savings to spend. The other half has to be left alone to grow.

The cool thing is that our credit union pays a 7% return on the first $500 in a savings account. It’s a lot easier to show the value of savings when you have an actual interest payment to show, instead of the three cents a month or so she’d be earning at a regular bank.

We think our arrangement will strike the right balance between teaching delayed gratification and making savings fun. We hope the incentive will encourage her to save more, while giving her access to the funds once a year will reassure her we’re not locking away her savings forever. (Although “hands off” savings helps me sleep better at night, most kids see it as confiscating their money.)

How was saving encouraged in your family, if it was? What are you trying with your kids to make savings a habit?

When to pay down your mortgage

ear Liz: Should you pay off your mortgage or keep a sudden financial windfall? I’m in that situation and was surprised to find that financial experts, including you, generally recommend investing the cash. I understand the attraction of the argument but am not sure the assumptions hold water.

The experts’ argument boils down to this: You can make more money by investing the proceeds than you’d save by paying off the mortgage. Keeping the mortgage — with an interest rate of, say, 5.8% — is fine because the returns on your investments, plus the tax deduction for the mortgage, will more than cover that cost. A mortgage is the cheapest money you can get and a hedge against inflation. This plan also gives you more liquidity.

I say: Unless I can guarantee that I can make 5.8%, I might lose money. And I’d basically be borrowing money just to invest it (and keep some liquidity). That seems risky! If certificates of deposit were earning 6% it would be a no-brainer, but they’re not. Also, it’s impossible to put a price on the sleep-well-at-night factor.

I’d like to read your thoughts.

Answer: You’re right that the investing argument requires a lot of assumptions that may not hold up in real life. But that’s not the reason most people should think twice about paying down a mortgage.

The reality is that most people have better things to do with their money than pay down a low-rate, deductible debt such as a mortgage. For one thing, they should be taking maximum advantage of their tax-deferred retirement options, especially if their company plan offers a match. They also need to pay off other, higher-rate debt before considering extra mortgage payments, and they should have a substantial emergency fund set aside as well. Then there’s insurance to consider: If you don’t have adequate life, health, disability and long-term care coverage, those policies should be purchased before considering mortgage repayment.

If you’ve got all your bases covered and still want to pay down or pay off your mortgage, then have at it. For many people, the security of a paid-off home is well worth forgoing some extra investment income.

Why credit scores differ

Dear Liz: I monitor my credit reports through an identity monitoring program offered through my credit card company. Month after month, my Experian and Equifax scores are similar; however, my TransUnion score is much lower. I was recently denied for a car loan because the lender pulled the TransUnion score. Should I call TransUnion, or is its scoring method different from the other two companies’?

Answer: If you were turned down for credit, you have a right under federal law to a free copy of the credit report that was used in making the decision. You should examine the report to see if there are errors that need to be corrected. If so, dispute the incorrect information directly with TransUnion.

Remember that the three credit bureaus are private, competing companies, so the information they collect and report isn’t necessarily going to be the same. Some creditors report information to just one bureau. Other times, one bureau will mistake you for someone else or combine a stranger’s information with your file.

Your scores across the bureaus can vary because the underlying information in the reports can vary, and also because the bureaus sell different credit scores to consumers. Equifax typically sells FICO scores, the same scoring formula most lenders use, while Experian and TransUnion may provide their in-house “educational” scores or a VantageScore. The next time you’re about to apply for a major loan, you’ll want to buy FICO scores from MyFico.com to get a better idea of where you stand.

“Your Credit Score” free Kindle download this week

Kindle owners, take note: The latest edition of my book “Your Credit Score: Your Money and What’s at Stake” is a free download on Amazon this week, until July 31.

I announced this offer last week on my Facebook fan page, and based on feedback there, I offer the following clarifications:

• This is a Kindle deal only. No freebies for Nook, Sony Reader or iPad owners. Sorry, guys. I didn’t make the deal–FT Press did. Bug them.
• This is a download. No physical books will be given away. Just ebooks.
• If you don’t have a Kindle, you don’t have to buy one because of this deal. It doesn’t make sense to spend $189 to get a $13 book for free, now, does it? Go to your library. They’ve probably got a dead-tree copy there you can read. Or hang out at Barnes & Noble. There’s usually at least one on the shelf. If not, you have my permission to ask why. (UPDATE: You can also download free Kindle software to get the book. See below.)
• No, I don’t get an incentive for selling Kindles. And I don’t get royalties on books that are given away for free, either. My publisher tells me this may spur sales in coming weeks, but sales have already been fine, so I’m not holding my breath. I just think it’s cool you can get something besides Jane Austen books for free on Kindle. Not that I’m against Jane Austen. Love her. Kiss kiss.
• You don’t have to love the credit scoring system to want to know more about it. Credit scoring formulas can be opaque, frustrating, seemingly illogical–but they’ve also become important to our financial lives, and knowing how they work can save you tens if not hundreds of thousands of dollars in your lifetime. A little education can go a long way.
• Update: You don’t need a physical Kindle to get this deal. You just need a Kindle app on your phone or the software downloaded to your PC (link to download HERE) or Mac (link to download HERE).