Do you have to support your parents?

Dear Liz: Regarding the 30-year-old who complained about supporting his or her parents (“Parents expect another bailout from son“), you should have discussed state laws that require an adult child to support his or her indigent parents. California’s law says that every adult child who, having the ability so to do, fails to provide necessary food, clothing, shelter or medical attendance for an indigent parent, is guilty of a misdemeanor.

Answer: According to ElderLawAnswers.com, a site that provides information for consumers and elder-law attorneys, 30 states have laws making adult children responsible for their parents if the parents can’t afford to take care of themselves. You can find more information and a link to the state statutes in the resources section of the website.

These laws are rarely enforced, and the 30-year-old wasn’t proposing letting his parents starve or go homeless. His parents aren’t indigent; they’re struggling to pay for a lifestyle they can no longer afford and perhaps never could.

Parents expect yet another bailout from son

Dear Liz: My parents never developed good behaviors when it came to money. They didn’t save, budget or make good spending decisions. Recently they’ve fallen on hard times. My mother is on disability, and my father is unable to get a salaried job. He’s an independent contractor who doesn’t make enough to regularly cover their mortgage payments, let alone food or medical expenses.

I love my parents and want to help, but I don’t want to financially ruin myself or become their money tree. I’ve bailed them out in the past (including several months’ worth of mortgage payments to avoid foreclosure). I am 30 and have a good job, but they seem to think I have an obligation to help them. I resist doing so when I’m told they expect me to pay, but I’m troubled because the situation is affecting their health. How can I establish and maintain proper boundaries?

Answer: No one, including your parents, can dictate what you owe your family. You have to work that out for yourself.

Helping your parents with a life-threatening emergency is one thing. Repeatedly bailing them out of stressful financial situations they’ve created for themselves is quite another, particularly if you’re stinting your retirement savings or going into debt to do so.

So even if you can afford to help, the question remains whether you should. Often people who mismanage money continue to do so if enabled with cash infusions. They don’t have to change, so they won’t.

Your parents, like everyone else, need to learn to live on their current income — not what they used to make or what they hope to make soon. If they can’t cover the mortgage payments, they need to find a cheaper place to live — preferably one that costs less than 30% of what they currently earn. (If your father’s income is extremely irregular, they may need to base their affordable rent on your mother’s income plus whatever he’s reasonably sure he can make each month.)

So instead of giving cash, you might give them a session with a fee-only financial planner (you can get referrals to planners that charge by the hour from Garrett Planning Network, at http://www.garrettplanningnetwork.com) or ask them to meet with a budgeting counselor at a nonprofit credit counseling agency (you can get referrals at the National Foundation for Credit Counseling, at http://www.nfcc.org). You can make these education efforts a requirement of any further financial help from you.

If they can’t manage a decent lifestyle on their incomes despite their best efforts, you may want to step in to help. But just as they weren’t obligated to hand you cash with no strings attached, neither are you required to dole out money freely to them.

What comes first: savings or debt payoff?

Dear Liz: Should I pay off my debts before I start my emergency fund savings?

Answer: It’s smart to put at least a few hundred dollars in the bank before you begin to pay down your debts. That way, if you face a small financial setback, you can tap your emergency fund and not have to add to your debt. But it doesn’t make sense to wait until you have several months’ worth of expenses saved before you pay debt, because that can take years to accomplish and you’d pay a fortune in interest in the meantime.

What you should do with your cash depends on your goals

Dear Liz: I am 22, single, work full time and have no outstanding debts. I have $18,000 in a savings account and am contributing 15% of my paycheck to a 401(k). How do I invest my savings to get a better return? I’ve been looking into certificates of deposit, money market accounts, IRAs and Roth IRAs, but don’t know enough to start.

Answer: Let’s first get clear on some terminology. CDs and money markets are types of investments, while IRAs and Roth IRAs are types of accounts — specifically, they’re retirement accounts. Think of IRAs and Roth IRAs as buckets into which you put investments, such as CDs, money markets, stocks, bonds or mutual funds.

The next thing you need to get clear about is your plan for your savings. If the money is meant to be an emergency fund, to tide you over in case of job loss or a large expense, then you probably shouldn’t put it in a retirement account, which could have penalties or restrictions on withdrawals.

You also shouldn’t put your emergency fund into investments that could lose value in the short term, such as stocks, bonds or most mutual funds. The best place for emergency money is usually a federally insured bank account. If your bank isn’t paying much interest, you can check with others, including online banks and credit unions, to see if you can get a slightly better return.

If you don’t need the whole sum as an emergency stash, however, then you might want to think about taking more risk to get more return, and perhaps using an IRA or Roth IRA as your savings vehicle. To learn more, check out Kathy Kristof’s “Investing 101″ or Eric Tyson’s “Investing for Dummies.”

Don’t borrow for an education you can’t afford

Dear Liz: My son will be going to a for-profit technical school about 120 miles away from home. Unfortunately, we have not saved any money for his college education. What are our best options for borrowing to pay for his college education, which will cost about $92,000 for four years? He is not eligible for any financial aid other than federal student loans. Our daughter will graduate debt free with her bachelor’s degree in December. Since we concentrated on her education first, our son kind of got left behind.

Answer: Please rethink this plan, because your family probably cannot afford this education.

Federal student loans would allow your son to borrow, at most, about a third of this school’s cost. If he were to borrow the rest of the money, he would have to turn to private student loans, which have variable rates and none of the consumer protections embedded in federal student loans. Private student loans are like using credit cards to pay for college — except unlike credit card debt, student loan debt can’t be discharged in bankruptcy.

The other alternative would be for you to borrow the difference between his federal student loans and the cost of his education using PLUS loans. These are federal education loans for parents and graduate students. As with federal student loans, the rates for PLUS loans are fixed, although they’re somewhat higher — 7.9%, compared with 6.8% for unsubsidized Stafford student loans.

But using PLUS loans means taking on a lot of debt at a time in your life when you should be concentrating on saving for your own retirement. If making the payments would interfere with your ability to contribute sufficiently to your retirement funds, you shouldn’t even consider borrowing the money.

Even if you already have a well-funded retirement plan, you should think twice. Your son may be able to get a better, more affordable education from a public college — particularly if he starts at a two-year community college nearby, allowing him to live at home more cheaply, and then transfers to a four-year school.

For-profit colleges can be expensive, and loans made to students who attend four-year for-profit colleges have twice the default rates of loans made to other college students. Figures provided by the U.S. Department of Education show that of loans that entered repayment in 1995, 30% of those made to students attending four-year for-profit colleges were in default 15 years later, compared with 15.1% for four-year public colleges and 13.6% for four-year private nonprofit schools.

That high default rate should give you pause, even if you were paying cash for this education, because it indicates that many graduates either aren’t finishing their educations or aren’t finding jobs that pay well enough to repay their loans.

Critics complain that for-profit schools often over-promise and under-deliver when it comes to training students for existing jobs. The for-profit schools attribute high default rates to the demographics of their students, who are more likely to be lower income and from minority groups than other college attendees.

You may feel guilty for shorting your son when it came to saving for college. But please don’t compound the problem by blessing an education that could leave him, and you, with unaffordable debt.