From "The landscape has definitely changed," says Frank Boucher, a financial planner in Reston, Virginia. "But even if you haven't had to downscale your lifestyle yet, a little planning can help you avoid having to temporarily downscale your dreams." Now more than ever, you need to take stock of your finances and come up with a smart plan of action. Our life cycle guide will help get you started.
Money Strategies for the Whole Family
- College-Bound: Getting on the Right Track
- Young and Single: Paying Off Debt, Starting to Save
- Newlyweds: Making Plans for Life
- Parenthood: The Balancing Act
- Separation: Navigating for the Worst
- Empty Nest: Fixing the Cracks in the Nest Egg
- Retirement: Getting Ready
College-Bound: Getting on the Right Track
Secure college financing. Whether you think your family will qualify for financial aid or not, fill out the Free Application for Federal Student Aid (FAFSA), which you can get online at fafsa.ed.gov. Families who have the greatest need qualify for the most aid, but even with a high income (there's no limit), you can still get a low-rate government education loan.
Here's how government aid and loans break down. Pell Grants, available only to families with the lowest incomes, have no merit requirement, and you don't have to pay them back. Perkins Loans are the lowest-rate federally guaranteed student loans (5 percent interest for 2009-2010). Stafford Loans come in two varieties: subsidized (currently 5.6 percent) and unsubsidized (6.8 percent). After you fill out your FAFSA, the school will calculate what you qualify for. If you're still falling short, fill out a PLUS Loan application, now at 8.5 percent. (The official site for information on federal student aid is federalstudentaid.ed.gov. Finaid.org does a great job of explaining the many options.) Avoid private loans from banks or student loan companies because they tend to charge a lot more in fees and interest.
Have the money talk. Help your son or daughter find a low-cost bank or credit union near your home, and look for accounts with low overdraft penalties and no monthly fees. Teach your child how to manage an ATM card and monitor a checking account online. Spend a little time agreeing on some rules: Who pays for extras like late-night pizzas? Can studying be his full-time job, or will he need to find part-time work to help cover costs? Talk through expected expenses for the year, and make clear what you're willing (and able) to cover and what you expect him to handle.
Steer clear of credit cards. Certified financial planner Nancy Lange of Hartland, Michigan, recently sent her son Josh off for his first semester away with one nonnegotiable rule: no credit cards. Instead, he's got his debit card, and Lange has set up a system with her credit union so she can monitor his spending. "Taking revolving credit off the table reinforces the value of budgeting by making your student live within the limits of cash flow," she says. "Otherwise, the temptation to splurge may be too strong."
First-year college students who carry a balance on their credit cards rack up an average of $1,300 in credit card debt, according to the U.S. Public Interest Research Group. It's hard to believe in these economic times, but students can still easily qualify for a credit card. The best thing you can do is educate your child about the potential pitfalls of credit card abuse. Go to getrichslowly.org and search for "The Dirty Secrets of Debt Reduction." One young man tells how his collegiate credit card abuse turned into $20,000 in debt.
QUICK TIP: Josh Lange
After graduating from high school in 2007, Josh Lange decided to attend nearby Cleary University for one year. Not only did he save on room and board by living at home, he also received a significant tuition discount, since his mother, a CPA and financial planner, taught at the college. Without these expenses, Josh, 20, was able to save most of the $14,000 he made working part-time at the local marina during the school year and the following summer. The result: When Josh transferred to Western Michigan University for his sophomore year, he had a nice cash cushion to help defray the cost of his off-campus student apartment.
Savings Advice: Provided Josh gets decent grades (a B average or better), his parents will keep him on their car and homeowners insurance as well as their cell phone plan -- a net annual savings of $200, since family rates are cheaper than individual coverage.
Young and Single: Paying Off Debt, Starting to Save
Make sure you have health insurance. Young people are negotiating the toughest job market since World War II and have to be that much smarter about getting a handle on their money. If you find a job, make sure you evaluate the various health care plans available and select one that best fits your health needs and budget. Too many twentysomethings start their working lives as part-timers or freelancers without benefits. They are so happy to get a job at all that they don't think about how a freak accident or major medical situation could bankrupt their loved ones.
If you don't get health coverage from your employer and you are about to lose your dependent-child status under a parent's plan, look into continuing your coverage for an additional cost. Federal law requires many company plans to allow an extra 36 months of coverage. But you have to notify your parent's employer that you're about to age out of the plan (that age varies from plan to plan), and you have to sign up within 60 days of receiving the election form from the plan. If that doesn't work out, check with your state department of insurance for other options. Or find a religious or professional organization that offers group coverage. This will usually be less expensive than buying equivalent coverage as an individual.
Get aggressive about paying off debt. It's the No. 1 financial issue facing this age group. Students with loans graduate from college with over $20,000 in debt and nearly $3,000 on their credit cards. Since the credit cards tend to carry higher interest rates than the student loans, it's best to attack them first. If you have a $3,000 balance on a card with a typical 14 percent rate, it will take you 21 years and $3,201 in interest if you make the minimum payments, which shrink over time. But make your current minimum payment ($65 in this case) every month, and you'll pay only $1,345 in interest, a savings of $1,856, and it will take just five and a half years.
Sign up for your 401(k). A workplace retirement plan is still one of the best ways to save. Andy Sturges, 25, a research associate at Lawrence Berkeley National Laboratory in Berkeley, California, has diligently put away about $28,000 in various retirement accounts. "I'm young, and I expect to be contributing to IRAs and 401(k)s for many years," he says. Sturges's employers did not match his 401(k) contributions, but employer matching is a key savings advantage to many plans, and it's free money. If your company is no longer matching funds during this economic crisis, consider a Roth IRA, since it offers more investment choices and greater flexibility when it comes to withdrawing money early.
If you lose your job, try to avoid tapping your 401(k) or you'll be hit with heavy withdrawal penalties, plus taxes. Instead, roll it over into an individual retirement account at a low-cost mutual fund company such as Vanguard (vanguard.com). Then, if you need to withdraw a bit to cover your bills, you'll just pay tax and penalties on that portion, leaving the rest to grow tax- and penalty-free.
Also visit: wesabe.com
Geared toward younger adults, this financial networking site gives people of all ages budgeting tools and a place to share tips on debt, savings, and more.
Newlyweds: Making Plans for Life
Lay it all on the table. It's important to approach money as a team from the start. The first step is for both partners to open the books on their financial lives: credit histories, outstanding debts, bank balances, and other assets and liabilities. This is also a great time to list each other as beneficiaries, if you haven't already, on 401(k)s, IRAs, insurance policies, and checking and savings accounts. "There really shouldn't be any secrets," says Jeff Kostis, a financial planner in Vernon Hills, Illinois, who specializes in counseling newlyweds.
Establish a system. Joint or separate checking accounts? (My advice: For many people, it works to keep small separate accounts for personal expenses and put the bulk of your money in a joint account.) Shared or individual credit cards? Who writes the check to the landlord or mortgage company? Many young couples find that answering these questions in advance helps to avoid potential tension.
Treat this aspect of the marriage like a business partnership, Kostis advises. Each one of you should keep one line of credit open in your own name (a card with a small credit line should do it). Your credit report is like your Social Security number: Whether you marry, divorce, or become widowed, it stays with you (and only you) for life, so it's important to maintain a record of good fiscal behavior.
Set goals and figure out the trade-offs. Work out your shared financial goals, then decide on a plan for achieving them. Whether it's graduate school in one year or a home in five, it's important to spell it out to make sure you're both on the same page. Drexel University students Josiah Kiehl, 22, and Prineha Narang, 19, got engaged in December. They haven't even set a date yet, but they're already wondering how they're going to pay for the wedding. "We will both have about $50,000 in loans when we graduate," Kiehl says. "And as full-time students, we don't make a lot -- Prineha has a student stipend, and I've got a paid internship with Amazon.com -- so we're still deciding whether we should do something small now, then save the big event for later." Smart thinking, since the average wedding costs $21,804 -- a big chunk of change that new couples could use for other purposes, like a down payment on a home.
Parenthood: The Balancing Act
Save for retirement first, then college. Nancy Tang of Dublin, California, has two boys, ages two and four, and is eager to figure out how much she and her husband should be saving for their college education. It's a question asked by many parents. The answer? According to the experts, retirement comes first. "You can always borrow for college," says Mackey McNeill, a Kentucky-based certified public accountant and financial planner. "You can't borrow for retirement." This is especially critical now that retirement savings have to last longer than in the past, since many of us will live into our 90s.
Get life and disability insurance. You need to provide your kids with financial security if something should happen to you or your spouse. The least expensive way: term life insurance. It covers you for a certain period, during which time the insurance company will give your beneficiaries a specified amount of money if you die; as a general rule, try to get enough to replace your income until your children are financially independent. To shop for the best deal, go to sites like term4sale.com. Make sure you purchase disability insurance, too, enough to replace 60 to 70 percent of your income if you are unable to work for any reason. (You may already have this coverage through your job, but you can't take it with you if you leave.)
Look into buying a home. It's a bittersweet side effect of the housing crisis, but first-time buyers may qualify for a tax credit -- up to $8,000 (details at www.irs.gov). And mortgage rates are near an all-time low right now (around 5 percent) for families with good credit and money to put down on a house. If that doesn't describe you, now's the time to build a record of managing credit responsibly and to save up for that down payment so you can buy in a few years. Get a free copy of your credit reports at annualcreditreport.com; for your credit scores, go to myfico.com and spend $16 each for scores from two rating agencies.
Even if you have the 720 credit score that qualifies you for the best mortgage rate, you'll still have to come up with a bigger down payment than you might have needed a few years ago. "Shoot for 20 percent down because that's what lenders want," says financial planner Jeff Kostis. But even if you have only 3.5 percent, you can still qualify for a Federal Housing Administration loan (portal.hud.gov).
Write a will. You need a will to make sure your kids are taken care of and that your assets are distributed to your loved ones according to your wishes. Consider filling out a medical power of attorney statement as well. Make sure you both know where these and other important documents are filed, whether that's at home in a fireproof box or safe or a secure e-mail account.
QUICK TIP: Nancy Tang
Before she had kids, Nancy Tang, 36, religiously socked away the maximum in her 401(k) at the telecom company where she was an account manager. But when she became pregnant with her first child, she left to become a stay-at-home mom (her boys are two and four now). Her retirement savings, still with her old company, have dropped 50 percent. Tang's husband contributes the maximum to his company 401(k). They are young, Tang says, and feel confident they can ride out the ups and downs of the market over many years. They own their home and have saved three months of emergency living expenses.
Savings Advice: The Tangs save about $200 a year by keeping their electric costs low. "We unplug appliances we aren't using," says Tang, "and we keep the TV on a power strip. That way, it doesn't keep draining power when it's turned off."
Separation: Navigating for the Worst
Stay in the loop. Financial planners often tell the story of a widow who doesn't know where her husband kept important financial papers like pension plan documents. It's critical that both spouses educate themselves on everything, just in case. And if you should lose a spouse, through death or divorce, don't make any sudden changes until you have a better sense of your financial assets and liabilities or until you've consulted a lawyer or a financial planner.
It's your pension too. Women tend to live longer than men but earn less over their lifetimes, and that makes it especially important for the wife to make sure she gets her fair share of the retirement money during a divorce. One of the biggest mistakes women make, says pension attorney Cindy Hounsell, is that they let their exes have the 401(k) or pension in order to keep the house. "It's usually better in the long run to sell the house and split the retirement accounts," says Hounsell, president of the nonprofit Women's Institute for a Secure Retirement (wiserwomen.org). "That way, she's locking in something for her own future, and the only time to do that is in the divorce agreement. Afterward, it's too late."
Make a new reality. Divorce often entails extra costs for housing, transportation, child care, utilities, and insurance-for starters. Becky Cooper, 51, of Richmond, Indiana, ended a 27-year marriage last October even though it meant giving up her health insurance and taking a substantial cut in her standard of living. But she's happy to have a job managing a community theater. And because she kept working, she's earned Social Security credits (they're based on your earnings and determine your eligibility for benefits) toward her retirement.
"A divorce is not just about the immediate reduction in your standard of living as you split one household into two," Hounsell says. "The impact on your long-term financial outlook is enormous. You need to revise your expectations about everything from retirement to your career to how you'll cover the monthly bills."
Start by taking a hard look at your budget, she advises. Experiment with new systems for paying the bills. This might be a good time to do your banking online.
Also visit: divorce360.com
One of the most extensive networking sites for people looking to share information and support, both before and after a breakup.
QUICK TIP: Becky Cooper
Running a nonprofit community theater has provided Becky Cooper, 51, with a small but steady income and a safe, fun environment for her 14-year-old daughter, Meghan, after school. "I didn't want to have to raise a latchkey kid," says Cooper. Since her divorce, she has tightened her budget and put her house on the market. She hasn't received many offers, but her ex-husband (who pays the mortgage) isn't pressuring her to sell.
Savings Advice: Last Christmas, Cooper gave family and friends personal letters and cherished pottery bowls she'd been collecting for years. "It's not regifting," she says. "It's taking a treasure that was yours and giving it to someone with a story attached." Cooper says being creative easily saved her $500 to $700.
Empty Nest: Fixing the Cracks in the Nest Egg
Boost your retirement savings. With the kids grown and on their own, your expenses should be shrinking. Meanwhile, you're at the peak of your earning potential. Make the most of this by contributing as much as you can to your retirement accounts. Once you turn 50, you're allowed to put an additional $5,500 a year in a 401(k), for a total of $22,000, as well as an extra $1,000 in an IRA, for a total of $6,000. If you've been stung by market losses, don't assume that you should increase your risk (say, by increasing the portion of your account that's invested in stock mutual funds) in the hope of repairing the damage. Be realistic about the fact that you may need to work longer than you'd planned. To make sure your savings are in line with your goals, services like Financial Engines (financialengines.com) will get you on track for about $40 for a three-month subscription.
Prepare for emergencies. George Pokorny, 57, of St. Paul, Minnesota, was laid off last spring when the nursing facility he'd worked in for 31 years shut down. He has been living off his savings while looking for a new job. Pokorny expects that he'll have to work well into his 60s to make up for lost time. "I took care of seniors for so long, and now that I'm almost one myself, who's going to take care of me?" he asks.
Pokorny isn't alone; about 13 percent of laid-off Americans are 55 and older. Getting laid off relatively late in life can be devastating to your finances, your dreams, even your health (if you can't get insurance). That's why it's important to have money in the bank, over and above your retirement assets, to pay the bills while you're planning your next move.
"We all have to work today with the possibility that we may get laid off," says financial planner Frank Boucher. He tells his clients -- of all ages -- to try to save a year's worth of living expenses. You can search for the best savings yields at bankrate.com.
Keep the nest empty. In a tough economy, more young adults move back home because they've lost a job or a house, got divorced, or are simply looking for a cozy spot to regroup. We all want to help our kids when they hit hard times, but experts insist parents establish firm boundaries with their boomerang kids. Talk through realistic time limits: Can they get back on their feet in three months? Six months? At the very least, get them to chip in for household expenses. The cardinal rule: Don't let their needs overwhelm your budget to the point that you skimp on your retirement savings.
Also visit: aarp.org
A good collection of retirement news, advice, and resources from AARP.
Retirement: Getting Ready
Don't retire too early. "Working longer will become a necessity for many people," says Andrew Eschtruth, a spokesman at Boston College's Center for Retirement Research. "If you can work into your mid to late 60s, it will make a huge difference." For one thing, your savings and 401(k) can grow without your drawing on them for everyday expenses. That extra time can improve your chances of maintaining a comfortable retirement lifestyle.
Waiting also gives your Social Security benefits time to build up. To see how much you can expect to receive from Social Security, go to socialsecurity.gov. Remember, if you start collecting government checks at age 62, when you become eligible, your monthly payments will be smaller for the rest of your life. For each year that you work beyond your full-benefit retirement age (that's 66 or 67, depending on your year of birth) up until age 70, your Social Security benefit rises 8 percent.
Know how much money you'll really need. Some retirees, like teacher Pat Forest, 65, are having the time of their lives. Forest made sacrifices throughout her career to stretch her income and is now spending time with her grandkids between trips to dream spots like Egypt and Italy. But in an environment where nearly $2 trillion in 401(k) and IRA assets evaporated in the 12 months after October 2007, how do you know when you're ready to start the retirement chapter of your life?
One traditional rule of thumb: Expect to spend about 70 percent or 80 percent of your final working salary each year you're retired. But planners like Mackey McNeill say that's an oversimplification; after all, people tend to underestimate their expenses and overestimate how well their investments will perform. Instead of working toward an abstract number, she suggests, make yet another budget for yourself to uncover how much you'll really spend. Consult a fee-only planner -- napfa.org has a list -- or work with calculators like the one at choosetosave.org for a guide.
Think carefully about health care. This is especially true if you're planning to retire before you're eligible for Medicare, at age 65. Even then, Medicare won't pay for everything, so look into the Medicare Advantage program or private Medigap insurance, which covers the difference (a typical policy costs $100 to $300 a month).
Stay conservative. Keep cash you absolutely can't afford to lose in government-insured bank accounts, even though their rates aren't very high right now. Bank deposits are insured for up to $250,000 this year, but the rules may change in 2010, so check with the FDIC (fdic.gov) for the latest updates.
Also visit:
socialsecurity.gov
The official (and best) source of information on retirement benefits.
wiserwomen.org
A great retirement guide for women of all ages.