Suze Orman's Action Plan (29 page)

ACTION:
Okay, this is a tough one. You’d love to go on a great trip like this yourself, let alone provide your child with an amazing experience. But no one ever said good parenting was about always saying yes at any cost. I just can’t abide sending your child on the trip if it puts your family’s security at risk. This is one instance where I could get behind advancing your child money for the trip. That is, make a deal that he is to get a job to repay
you for the cost, or maybe half the cost. That’s up to you to work out; the point is that if he wants to go badly enough he will be motivated to contribute to the cost. You’ll likely need to front him the money, but just work out a plan in which he agrees to repay you a certain amount each month. And you better hold him to it. For what it’s worth, I bet he might even get more out of the trip knowing he financed some part of it himself.

ACTION:
Would it hurt to come clean? Sit your kid down and explain that you are worried that you have let him down by letting him think you are an endless ATM to be tapped. Tell him that you worry he has no clue about the value of money. So out of love, you are going to institute some new family financial habits.

Back-to-school is a great time to let kids loose with a fixed budget for clothes and supplies. Tell them how much they have to spend and then help them figure out how to make it cover their needs.

If you have been doling out allowance without any stipulations, that has got to change right now. You need your kids to fulfill certain tasks to earn
that allowance. And people, good grades and good behavior are not part of the allowance deal. You do not pay children for behaving well. You expect that from them, not reward them for it.

ACTION:
When your child is between the ages of 13 and 16, I would have her use a debit card on a bank account that you both have access to. Each month you deposit a set sum in the account and discuss with her what expenses she is to pay for with her debit card. A rule change that takes effect in July 2010 will require banks to specifically ask you if you want overdraft coverage on a debit card. You are to say no. Do you hear me? Banks have literally made billions letting customers charge more than they have left in their checking accounts; then they hit them with steep overdraft charges. The best move you can make for your child is to decline the overdraft coverage. If your child tries to buy something without sufficient funds, he or she will not be allowed to make the purchase. That’s good! It is much better than running up big overdraft charges, and it’s also a great way to learn basic cash management.

You both can keep track online, and I would sit down at least once a month to review how the spending is going. This is just a nice low-key way of giving her some responsibility, but with you still firmly at the controls. (One important step with debit cards: Check your account online every few days to make sure there are no suspect or unauthorized charges. If you report any fraudulent debit charges within a few days of the money being debited from your account, you will typically be fully reimbursed; if you let weeks or months go by, the debit card issuer is not legally required to cover the mistake.)

Once your daughter is 16, add her to one of your credit cards as an authorized user, but only if you have a FICO credit score of 720 or better. This serves two purposes. First, you want your daughter to get experience using the credit card. I would make it a ritual to have her sit with you when you pay the bill; read over the statement together. Beginning in February of 2010 credit card statements will have to show the cost and time it will take you to pay off the balance if you make only the minimum payment due each month. What a great eye-opening conversation starter that will be about the high cost of credit card debt! The other benefit is that as long as you continue to handle your credit card responsibly, your daughter will begin to piggyback on your FICO score. I would make it a priority to talk to her about how
that FICO score is going to play a big role in her life in a few years. Explain how a good FICO score will make it easier for her to rent an apartment, get her own cellphone account, and open an account with the local utility without having to fork over a security deposit.

If your FICO score is not above 700, I wouldn’t add your child to your card. Instead, have her apply for a secured credit card—you can help her make the required deposit. A secured card works just like a credit card in terms of where you can use it. The only difference is that a deposit is required to open the account and your child’s credit limit will be limited to the amount on deposit. The card is “secured” by that deposit. Just make sure the secured card reports her bill payment history to at least one credit bureau so she can start building a solid credit history of her own. You can call the credit card company’s customer service and ask them if they report.

Beginning in 2010, credit card issuers will no longer be able to give accounts to a person under the age of 21 unless he or she has verifiable income that can cover the payments, or an adult co-signs for the card. This is great news. The sad fact is that too many kids are graduating from college with thousands of dollars in high-interest-rate credit card debt because the card issuers were handing out cards at freshman orientation like ice cream sandwiches on a hot beach.

Once your child heads to college you can talk about cosigning for a credit card, but you must set clear parameters about how this will work. You set the credit limit, and only you can request it be raised. Both of you have access to the account online. Your child is to pay the bill each month; in fact, it is to be automatically paid from a checking account. But you are to set up an email alert (as a cosigner you have access to the account) if the bill is unpaid.

ACTION:
The more honest you are today, the happier you and your child will be in the future. I know it is hard to contemplate changing your strategy, but doing what is right is often not easy. Making this hard choice could be what determines your future security. I want all parents to seriously rethink what they can afford to spend on college, be it through loans or out-of-pocket savings. The best school for your child is one that provides a solid education and doesn’t put the family $150,000 to $200,000 in debt. I have no patience for anyone who tells me “cost is not the issue—a quality education is more important.”
People, cost is a huge issue
. You can’t afford to take on debt that
keeps you from being able to pay your bills or to save for your retirement. Nor does it make sense to let your child pile up $100,000 in private student loans. Student loan debt, in most cases, is not forgiven in bankruptcy. It is the Velcro of debt; you cannot shake loose from it. Student loan debt will make it that much harder for your children to build their own financial security after they graduate. When you have a lot of student loan debt, it makes it harder to qualify for a mortgage or a car loan. And I cannot tell you how many smart, well-intentioned young adults tell me they had no idea how much their monthly payments would be and they cannot afford to pay them at all.

Keep an open mind: Look for affordable schools, starting, of course, with your in-state college system. A quality education is not dependent on price. You can find a great fit for your child and your finances if you make it a priority. Go to
Kiplinger.com
and under “Your Money” click on “Best College Values.”

ACTION:
The goal is a college education that is affordable. Don’t forget the affordable part. At the risk of repeating myself, I will remind you that there are no scholarships or loans for retirement; you are on your own. If one college would leave you in much better financial shape than another college, walk through the math with your son. He’ll get it. The more you can save now, the less likely you will need his help when he is just starting out and has his own young family to support.

But I also want you to check with his first-choice school; let them know the package you are being offered at the backup. There is no harm in seeing if his aid package can be increased. If not, school number two it is.

ACTION:
This is all too common. And to be honest, it’s not entirely your kid’s fault. You may have dropped the ball on instilling credit card basics before she went off to school; also, as I mentioned earlier, not long ago the card companies were relentless in signing up clueless kids to cards and letting them charge away. So you need to size up
the situation. The last thing we want is for that $5,000 to continue to rack up more interest charges; nor do we want it to spiral so far out of control that it absolutely decimates her FICO score. So help may be appropriate, but only if you can afford it, and only if you attach some strings.

The absolute worst thing you can do is write the check and wipe out the debt without any lessons learned. I am telling you that anyone, at any age, who is let off the hook without being held accountable is apt to repeat the behavior again. That’s not the goal.

So here’s your plan: If you can cover the payment and still have eight months of living expenses left in your emergency fund, you have no credit card debt, and your retirement savings are in great shape, I will approve your paying the bill. But only if you and your daughter have a written agreement that she is to pay you back every month starting right now. No interest. But each month she is to pay you X dollars. That’s her lesson in responsibility. However, if paying the bill in full would take your emergency fund below eight months’ worth of coverage, or would put a dent in your other financial goals, then I need you to face facts: You can’t afford to help her financially. You can help her plot out a repayment plan.

Once that is squared away, sit down and talk through those credit card basics you should have covered a few years ago. Do not reprimand. You
can’t blame a child for not knowing something no one ever bothered to explain. You could do worse than having her read the chapter in this book about credit!

ACTION:
Give her your blessings, but do not give her a penny. Your budget is already stretched thin, and you are actually contemplating helping to pay for this adventure? Come on, that’s crazy. This isn’t about denying her, it’s about taking care of your important financial goals (such as making sure you’re not a future financial burden on her in your retirement). If she wants to have this adventure badly enough, she will figure out how to pay for it. She’s a college grad; this is definitely within her capabilities. She’s your daughter, but she’s no longer a kid. Okay?

Maybe she has to move home for six months and get a job to save up enough to finance whatever shortfall exists. Make it clear you are 100% behind this adventure, that you are so excited for her, but you also need her to understand you have competing financial needs: retirement, paying off
the mortgage, maybe a sibling still in college. So she needs to step up and finance this adventure on her own.

ACTION:
Discuss your child’s goals for moving back in. Is it some sort of free-formed notion that moving back is a cheap alternative to reality that comes with built-in laundry, room service, and housekeeping? Those are not acceptable terms for you. Here’s what I suggest: Write up a one-page agreement that covers his financial obligation and codes of conduct.

First the finances: If he has a job, you must charge rent. I don’t care if it is $50 a week, it has to be something. Whatever you charge it must include his share of the utilities and food. This is especially important if your kid lived on campus all four years and has no clue what it costs to cover basic necessities. If that makes you queasy, stick the money in a savings account, and when your child finally moves out, give him all the rent back to help him with his new place.

If your child is looking for work, you need to be supportive, but you do not need to be his personal Ritz-Carlton. I would go back to chores. Only this
time it can be picking up the groceries, doing the laundry, maybe even running your errands for you. Sure you want your kid to focus on job hunting, but that’s not a 12-hour-a-day job. He can work for you an hour or two a day.