Ask Liz Weston

Get smart with your money

Kids & Money

Q&A: Living like a student after graduation

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Dear Liz: Regarding your recent column advising recent college grads to keep living like students: I helped my three children do just that. I had them live at home rent-free for six months after graduation and told them to save money like crazy.

Then when they rented an apartment, they would have the rental deposit saved as well as money for utilities, food and so on. I taught them to cook simple nutritional meals. We had already given each kid a car senior year and covered the insurance. I took home equity lines of credit to pay college tuitions, room and board, so they had no debts and six months to transition to serious responsibilities.

Answer: You’ve given your children a good head start in life at a time when so many others are starting out deeply in debt. Hopefully you didn’t do so at the expense of your own finances.
Home equity lines of credit may seem like cheap money, but the rates are variable and could spike if interest rates rise. If the debt is relatively small and can be paid off in a few years, that’s one thing.

If the debt is large and you can’t pay it off quickly, though, you may have put your home (and your retirement) at risk.

Baby coming? What to consider before you quit

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Dear Liz: My husband and I have decided that next year we want to have a baby. So we have at minimum a year and nine months to make sure we’re financially prepared. I did some cursory Googling and I’m already a bit overwhelmed. I’m not sure where to start.

I know I should figure out how much the medical costs will be, but how do I figure out how much everything else costs? Do you have a checklist of things we should be aware of and consider? One thing I could use some guidance on is whether I should stay home or put our baby in daycare so I don’t miss out on work benefits like healthcare and 401(k) matching. I like my job and bosses, and if I leave I will have to find a new job that may not be as good when I decide to reenter the workforce. But if we decide to have a second child, I’m worried that childcare costs will be too much for two young children. Know of any good books on this subject?

Answer: By leaving work you wouldn’t be missing out only on benefits. Research by economist Stephen J. Rose and Heidi I. Hartmann, president of the Institute for Women’s Policy Research, found that women’s average annual earnings decline 20% if they stay out of the workforce for one year and 30% if the absence stretches to two or three years. Many find it tough to rejoin the workforce after extended absences.

Quitting work is the right choice for some parents, but you shouldn’t do so simply because you fear childcare costs. For a few years, those costs might eat up most or all of your paycheck, but such expenses decline over time. If you continue to work, your earning power and retirement contributions will continue to grow.

Meanwhile, some parents find they can reduce childcare costs by staggering their work schedules, tapping family members or sharing a nanny. Research the childcare options in your area so you have an idea of what’s available and the costs.

You can continue your research into budgeting for a child with the excellent, constantly updated book “Baby Bargains” by Denise and Alan Fields. This field guide offers product reviews and realistic assessments of what you actually need to buy for your child and what you don’t.

Another good resource is financial writer Kimberly Palmer’s “Baby Planner,” available on Etsy.

With all your planning, keep in mind that parenting always presents surprises. You may decide to stop after one child or keep going until you have a houseful. The important thing is to remain flexible and don’t assume you know how your future self will choose to live.

One of the best pieces of advice in Facebook Chief Operating Officer Sheryl Sandberg’s bestselling book, “Lean In,” is that women not cut themselves off from career opportunities because of how hard they think combining work and child-rearing will be. “What I am arguing is that the time to scale back is when a break is needed or when a child arrives — not before, and certainly not years in advance,” she writes.

Elderly parent wants to help unemployed sons

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Dear Liz: Both of our sons, ages 63 and 59, are currently unemployed. We are 93 and self-supporting with Social Security and my retirement benefits. We live in our own home and are able to handle all our expenses, even though my wife requires a companion for 12 hours each day.

I believe we should financially aid both sons, to the limit of our ability, but my wife disagrees.

They are the two main beneficiaries of our estate. Each one is scheduled to receive about $40,000 upon our deaths. How should we proceed?

Answer: If your estates won’t amount to much more than $80,000 at your deaths, it doesn’t sound as if you have the financial wiggle room to help your sons. Your wife already requires significant care and may need more in the future. Plus, she’s likely to outlive you, which would mean getting by on less (certainly a smaller Social Security benefit, and perhaps a smaller pension amount as well). Any money you give them, in other words, is likely to be to her detriment.

How to start Roth IRAs for your kids

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Dear Liz: I would like to start a Roth account for each of my kids. (They’re in their 30s.) Is it better to start an account in my name with them as beneficiaries or to start the accounts in their names?

Answer: Roth IRAs can be a wonderful way to save, but they’re not custodial accounts. You won’t be able to control the accounts or prevent your adult children from spending any money you deposit.

If you still want to help, though, let your kids know you’ll contribute to any Roths they set up. They can open a Roth if they have earned income at least equal to the annual contribution and their incomes are below the Roth limits. The ability to contribute to a Roth phases out between $178,000 to $188,000 for married couples in 2013 and from $112,000 to $127,000 for singles.

Ideally, you’ll contribute to your own Roth first. The limit on contributions is $5,500 this year.

Are prepaid cards good for an allowance?

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Dear Liz: My son is 12 and receives a regular monthly allowance that I’ve been giving to him in cash. I think it might be time for a checking account. I would like to teach him about using a debit card and not overdrawing his account. All the banks that I have called will not open an account for a minor, even a joint account. I’ve heard about prepaid cards being used for allowances, but I’m concerned about the fees.

Answer: You’re right to be concerned. You wouldn’t be teaching financial responsibility — the whole point of an allowance — if you gave him a prepaid card larded with fees to access his own money.

Prepaid cards, also known as prepaid debit or reloadable cards, typically aren’t linked to a checking account as regular debit cards would be. Instead, you can “load” them with cash in a variety of ways and then use the card to spend that money wherever regular debit cards are accepted. Many prepaid cards also can be used to withdraw cash at ATMs.

Unfortunately, many issuers charge fees to open, use and close their cards. Monthly “maintenance” fees and fees to replace cards or talk to customer service are common. Some of the most expensive cards are the ones endorsed by celebrities. Those marketing expenses have to be recouped somehow, and fat endorsement contracts often seem to be paid for with higher-than-average fees.

Anisha Sekar, vice president of credit and debit products for card comparison site NerdWallet, recommends two cards for allowances: the Bluebird from American Express and the Chase Liquid.

The Chase Liquid card doesn’t charge most of the usual fees. There’s no fee for activating a card, closing an account, getting paper statements or paying bills. The card can be loaded with money for free at a Chase bank branch or Chase ATM. Withdrawing cash at a Chase branch or Chase ATM is also free. The monthly fee is $4.95, but it’s still one of the cheapest cards available, she said.

The Bluebird doesn’t charge a monthly fee, and activating the card is free if you apply online. The card allows free ATM withdrawals within the MoneyPass network if the cardholder is enrolled in direct deposit; other withdrawals incur a $2 fee. The card can be loaded for free from a bank account or by using cash or a debit card at a Wal-Mart. Loading with a debit card costs $2.

You’ll still face age limits, but there’s a work-around. Most cards have to be opened by someone 18 or older. A child must typically be 15 or older just to have his name on the account as a joint user. (With the Bluebird the age limit is 13.) So you would have to open the card in your own name and then give it to your son to use.

Another option may be to simply wait a year. Some national banks, including Wells Fargo and Chase, offer teen checking accounts for those 13 and older, although the accounts may not be available in all areas.

How much college savings is enough?

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Dear Liz: My husband and I have three children, two in elementary school and one in middle school. Through saving and investing, we have amassed enough money to pay for each of them to go to a four-year college. In addition, we have invested 15% of our income every year toward retirement, have six months’ worth of emergency funds and have no debt aside from our mortgage and one car loan that will be paid off in a year. Considering that we have all the money we will need for college, should we move this money out of an investment fund and into something very low risk or continue to invest it, since we still have five years to go until our oldest goes to college and we can potentially make more money off of it?

Answer: Any time you’re within five years of a goal, you’d be smart to start taking money off the table — in other words, investing it more conservatively so you don’t risk a market downturn wiping you out just when you need the cash. The same is true when you have all the money you need for a goal. Why continue to shoulder risk if it’s not necessary?

You should question, though, whether you actually do have all the money your kids will need for college. College expenses can vary widely, from an average estimated student budget of $22,261 for an in-state, four-year public college to $43,289 for a private four-year institution, according to the College Board. Elite schools can cost even more, with a sticker price of $60,000 a year or more.

Another factor to consider is that it may take your children more than four years to complete their educations, particularly if they attend public schools where cutbacks have made it harder for students to get required courses in less than five years, and sometimes six.

So while you might want to start moving the oldest child’s college money into safer territory and dial back on the risks you’re taking with the younger children’s funds, you probably don’t want to exit the stock market entirely. A 50-50 mix of stocks and short-term bonds or cash could allow the younger children’s money some growth while offering a cushion against stock market swings.

A session with a fee-only financial planner could give you personalized advice for how to deploy this money.