Photo: Robert Trachtenberg
Saving for College
Q: I have two daughters in junior high school, and not a penny saved for their college educations. How can I play catch-up quickly?
A: Even if you're starting late, the important thing is to start—but you need to take the time to plan the right way to save. Desperation can lead to rushed, unsafe investments, and the worst thing you could do for your daughters would be to put your money at risk in an attempt, as you say, to play catch-up. The expenses of college are daunting, and for many parents—especially those with more than one child—the thinking is, 'I'll never manage.' You need to get out of that mindset, because saving for college can begin with a few very simple actions.
Since you know you'll need to begin spending your savings in four to five years, be conservative. Keep your money in high-yield money market funds (you can find the ones paying the best interest rates at www.ibcdata.com), treasury notes, certificates of deposit and series EE bonds. The steps to open these accounts are quick and simple and can be completed right at your local bank, but you need to start very soon. You should also remember that as the cost of higher education increases, both the government and colleges are beginning to offer more financial aid in the form of grants, loans and work-study programs. More than half of all undergraduate students are awarded some form of financial aid, so the odds are you won't have to shoulder the financial burden on your own. The most important thing, though, is for your daughters to see you taking responsibility for your money. True education starts with messages that are passed down.
Protecting What You Save
Q: I'm a 38-year-old single mother of three young children, and I'm considering moving in with my boyfriend, who's older and living on a fixed income. I want to split our expenses evenly, but he'd like me to pay more to cover my kids. (His are grown.) He'll handle the bills because I'm bad with money. Am I obligated to give him additional funds?
A: Nothing brings my blood to a boil faster than a capable woman telling me she leaves money matters to her man. Your first challenge, my dear, is to take on your role as an equal partner in the management of your soon-to-be-blended finances.
I always advise cohabiting couples to add up their monthly expenses, then split them according to each person's monetary contribution to the household. Let's say you bring in 60 percent of the family's combined income—you're responsible for 60 percent of the bills. If your boyfriend wants you to fork over more than your share, you need to have a serious talk with him before you pack a moving box. He's in a different stage of life; he's already raised his children. If he doesn't want to support yours, this conflict isn't about splitting finances. It's about determining whether he's ready for the responsibility that comes with a young family.
Q: In the past four years, I've paid off all my debts and saved enough for a six-month emergency fund. Should I invest some of it in the stock market? If so, what percentage? I've never had this much cash sitting in the bank before, and I don't know if it's doing what it should.
A: Paying off debt and building a six-month backup fund is a major accomplishment—good for you! (And keep it up.)
While it's fantastic that you want to make the most of this money, you should definitely not invest it in the stock market. This is your emergency savings—so you need to know it's going to be there for you the next time one inevitably arises. You just can't count on the market in the short term: Say you had $20,000 in emergency savings on January 1, 2008, and you put that money into a stock market index fund. Then, on December 31, 2008, you were laid off. You might have told yourself you'd be okay with your severance and your savings. But when you checked your account, you'd have found that its value had fallen to $12,600, since the S&P 500 stock index fund was down 37 percent.
The key with emergency savings is safety first. And second. And third.
Q: I gave a friend my life savings to put away for me. She has since been laid off and is going through some financial trouble. She has called several people asking to borrow money. I'm afraid she has tapped into my funds. How do I ask for my money back without telling her I know about her financial problems or jeopardizing our friendship?
A: The real question is, why did you give your life savings to someone else to manage? Were you trying to avoid dealing with it? If so, you have just learned one of the most important money lessons: You, and only you, should control what happens to your money. With your financial future on the line, it makes absolutely no sense to push responsibility onto somebody else. You need to find your power and take control of your life.
Even if your friend is a professional whom you hired to help manage your money, that does not mean your finances should be out of sight, out of mind. At the very least you should be receiving a quarterly statement from a legitimate third-party bank, brokerage, or mutual fund where your money is invested. Your panic tells me that hasn't been happening.
You have put your life savings at risk simply because you don't want to hurt your friend's feelings. It is time to summon the courage to be responsible for yourself and your money. There need not be any accusation or apology in your talk with your friend. Simply say you appreciate her willingness to help, but you have turned over a new leaf and are now taking responsibility for your own finances. The fact that your friend was laid off and may be in financial trouble is irrelevant. This is about you gaining control of your future—control you never should have handed off in the first place.
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