NEW YORK (MONEY magazine) -
Attaining (and keeping) financial security is one thing. Optimal financial planning is another.
From time to time, most people wonder how their money management strategies measure up. Have you covered all your long-term bases? Are you setting the right example for your kids? Do you shave costs where you can?
Of course, you can't plan for everything. But MONEY assembled a list of practical financial concerns that many people face. Hash these out with your loved ones, and you'll breathe easier.
How can I keep illness from depleting my finances?
Should I pay off my mortgage or save more for retirement?
How can I talk to my elderly parents about their finances?
How many credit cards should my family have?
Should I allow my kid to have a credit card?
How do I cut auto insurance fees on a teen driver?
How can I protect my family in case I lose my job?
Back to Family Matters main page to see other categories
How can I keep illness from depleting my assets?
The numbers are sobering. By age 85, Americans have a 50 percent chance of needing long-term care. In 2030, when the youngest boomers turn 65, nursing homes will run $190,600 a year, reports the American Council of Life Insurers, up from $55,000 today. The best way to prepare for these escalating costs depends on your age, your assets and your health.
While you're working. Disability insurance replaces income if illness or injury keeps you from work. You may get this coverage at your job. If so, be sure it will replace at least 67 percent of your pay. To determine how much your coverage will pay out, check Northwestern Mutual's Disability Insurance Gap Calculator.
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If you need to supplement an employer's policy or get coverage independently, Peter Katt, a fee-only life insurance specialist, advises that you buy residual coverage. These policies help you replace income you've lost because your disability forced you to work less or take on a lower-paying job. You can trim costs with a long elimination period, the time before benefits start. (The standard is 90 days.)
In retirement. Long-term-care insurance is generally the best way to protect assets against chronic-care costs. But there are two caveats: You've got to be healthy enough to qualify -- which is why many pros advise buying a policy when you're in your fifties. (A policy that pays $150 a day, adjusted for inflation, for up to five years, costs $1,500 a year for a healthy 55-year-old, and $4,200 for a 70-year-old, according to N.P. Morith Inc., a long-term-planning company.)
And you must be able to pay the premiums over the long haul. According to the United Seniors Health Council, that means having assets of least $75,000, excluding your home and car, and income of $25,000 to $35,000 for singles and $35,000 to $50,000 for couples.
If you have very substantial assets, say $600,000 or at least $100,000 a year in retirement income, you may be better off buying a policy that pays a smaller daily benefit. This would allow you to save up to 50 percent on premiums, and still protect your assets if you're hit with a chronic long-term illness, says Nancy Morith of N.P. Morith.
Choose a top-rated insurer. Check A.M. Best (A++ or A+ rating). Look for a comprehensive policy covering care at home, nursing facilities or assisted living; an inflation rider if you're under 75; and coverage for five years. For more information, check Long-Term Care Planning: A Dollar and Sense Guide (800-637-2604; $19.50). Whatever your decision, remember that even a benefit of $150 a day may not pay the entire cost of nursing-home care.
If you can't afford (or can't qualify for) long-term-care insurance, Medicaid will pay for chronic care, but only after you've spent down most of your liquid assets except your house, one car and burial expenses. (Federal law allows the spouse of a Medicaid recipient who is in a nursing home to keep a maximum of $87,000 in additional assets.)
Asset and income levels vary by state. Click here to see what your state offers. Two possible ways to keep your assets in the family and still be eligible for Medicaid: a long-term program of gifting or setting up a trust.
The rules are complicated, so you should get the advice of an elder-care lawyer. back to list of questions
Should I pay off my mortgage or save more for retirement?
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Nobody likes a lingering financial obligation, so why not simply pay off your mortgage as soon as you can? Aside from the emotional gratification of feeling debt-free -- which is of immeasurable value for many people -- a mortgage-free home is also an asset that can be drawn against for emergencies or even as a retirement kitty.
But we'd encourage you to think twice because, in purely financial terms, it is rarely the best strategy. If you have extra money after paying the bills and funding tax-deferred retirement plans to the max (and perhaps socking away a few dollars for your kids' college tuition), the smart thing is to invest what's left.
Here's the math: Since interest on mortgages is tax deductible and current mortgage rates are averaging around 7.25 percent, families in the 28 percent tax bracket need earn only 5.5 percent annually on their investment to come out ahead. For those in higher tax brackets, the break-even point is even easier to reach. (If you're paying more than 8 percent on your mortgage, you should at least look into refinancing.)
What about the argument that paying off a mortgage gives you guaranteed savings in a way that investing doesn't, since you forgo years of interest payments? That is certainly true. But the value of those savings may not be as great as you imagine, especially since it is spread out over all those years. Over the long haul, you're likely to find compounding returns far more rewarding.
Plus, by paying off your mortgage, you're giving up on one of the great vehicles for wealth creation: leverage. Let's say you've got the cash to pay for a $250,000 house. If you put down only, say, $50,000, and later sell the place for $300,000, you've made 100 percent on your investment -- and left yourself free to put the other $200,000 to work elsewhere (which should compensate for your mortgage costs).
On the other hand, if you put the whole quarter-million into the house, your rate of return would be just 20 percent. Your financial options and liquidity would be more limited.
There are a few caveats to bear in mind, however. Leverage can be a good thing, but it can also be dangerous, and many people leveraged themselves to the hilt during the '90s boom. If you stretched your finances dramatically to buy a home and now find yourself house-rich but cash-poor, cutting your debt exposure is absolutely the right call: For you, trimming a mortgage will give you more financial flexibility.
The second caveat is for those who know, without a doubt, that they will live in their house forever. If you're in that position and find yourself longing for the certainty of that guaranteed interest savings, no one could criticize you for taking advantage of it. back to list of questions
How can I talk to my elderly parents about their finances?
Broaching the topic of finances with your parents can be touchy at any age, but it's especially tough when they're elderly. For your part, you don't want to appear greedy and overly interested in an inheritance; for your parent, fears of dependency, incapacity and death can stifle meaningful discussions.
Says Dr. Sandra Timmermann, a gerontologist and director of the MetLife Mature Market Institute: "Parents fear the loss of control, and it's up to you not to take the control away. Instead, you want to strike a balance between safety and independence."
If family relationships have not been smooth, a discussion about finances could bring up past conflicts and hard feelings. But if you are empathetic and supportive, a conversation that demonstrates your concern can break down those barriers.
One key: Make plans before there is a family emergency, at a time when tensions are low. If possible, include your siblings. You may want to start by saying something about yourself to break the ice, like: "I'm thinking of long-term-care insurance for myself, what do you think?"
Suppose your parents adamantly refuse to discuss their finances? Ask a trusted friend of your parents to prod them to talk to you. If your parents' cultural traditions make talking about money a sensitive (or even taboo) topic, hire an experienced financial pro of the same ethnicity as your family.
Your first goal is to learn the full scope of your parents' medical and financial situation, including the names and addresses of their financial and legal advisers. You also want to know where they keep financial documents such as Social Security numbers, investment accounts, insurance policies, safe-deposit box keys, tax returns, wills and other estate-planning documents.
If they resist, encourage them to at least make a list of these items and let you know where it can be found in case of an emergency. (Perhaps suggest they file it with a lawyer or other adviser.)
Goal two is to determine whether your parents' current financial situation will provide sufficient income for their future. Even a well-funded retirement plan can run out of money too soon if it's poorly constructed. If changes are required, the sooner you raise the issue, the better.
When it comes to estate planning, some older adults believe it's enough to simply add an heir's name to bank accounts or on stocks or bonds so that they are jointly held. Not so. If the parent becomes disabled and can't sign his or her name, the other owner usually can't make any changes to the account.
Solution? Discuss the benefits of having your parent give you a durable power of attorney or draft a revocable living trust. Both give you the authority to conduct your parent's business and financial affairs if he or she can not.
For details on buying a long-term-care policy, read the question on protecting assets in case of illness. A roster of elder-care resources appears at the top left of this page. back to list of questions
How many credit cards should my family have?
According to CardWeb.com, a consultancy that tracks the U.S. credit-card industry, the average American family totes around 14.7 pieces of plastic. That's at least three times as many as you need. Most families should have no more than two to four cards per adult -- and preferably just two. One card should be used for major purchases that you need to pay off over time; it should have the lowest interest rate available.
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The other, to be used for convenience purchases, should be paid off in full every month. This second card (which could even be a debit card) should have no annual fee--and should be your affinity card, enabling you to collect perks such as frequent-flier miles.
Some exceptions to the have-only-two rule: If you have a home business or you frequently expense business purchases, it may be easier to track reimbursements and deductible expenses on a separate card. Also, if you are loyal to a certain retail store or gas station where you already spend significant dollars, a credit card might give you access to special deals or discounts.
There are real drawbacks to piling up plastic: It's a temptation to accrue excess debt; it can reduce your ability to qualify for loans; and it leaves you more vulnerable to credit-card fraud.
As Robert McKinley, CEO of CardWeb.com, explains, "If someone rips you off, it's a real mess to clean up."
If you currently carry a full deck of cards, pay off any outstanding balances and start canceling. But don't let your overall credit limit get too low. Aside from the fact that you may need to tap your credit cards in case of an emergency, having little or no available credit can, ironically, look just as bad on your credit score as having too much, says Gerri Detweiler, a consultant at the debt counseling organization MyVesta.org.
When you're canceling unused cards, Detweiler advises, get rid of your newest ones first. The credit-scoring folks look for a history of responsible debt management, so the older your accounts, the better. back to list of questions
Should I allow my kid to have a credit card?
At a time when college students graduate with an average credit-card balance of $3,000, it's not a bad idea for parents to teach kids to manage credit before they leave home, says Detweiler, author of The Ultimate Credit Handbook.
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Start when your child is 15 or 16 by getting a card with training wheels, like Visa Buxx. It looks like a credit card (your teen is sure to like the fact that it's embossed with his or her own name) but is actually a stored-value card: You deposit money (a kid's allowance, for example, or baby-sitting earnings) in the account; your teen spends it. And -- if you're smart -- you'll tell your child that once the money's gone, it's gone.
Then stick to it. The nice thing about Visa Buxx is that fees are generally minimal since many issuers waive or lower their fees if the parents have a credit card with their bank. The downside: It doesn't help your youngster build a credit rating. That's why a year before college, you should upgrade your kid to a real credit card and a checking account.
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More about kids and money
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If your child is 18, he or she can get a card independently. If not, co-sign for a joint card, but instill in your teen that the card is his or her responsibility. We recommend that you make the following agreement with your teen: He or she makes the charges and pays the bills, but you get to see the new statement each month to make sure there's no running balance.
What if your kid starts to blow it? Make sure that at least the minimum is paid (remember that your credit is on the line). Then Detweiler suggests some tough love: Haul your teen to the local Consumer Credit Counseling center and let a stranger explain how messing up a credit rating can hurt peoples' chances of getting the car they want, the apartment they're savoring, even the job they aspire to.
"It's much more effective than hearing the same message from you," Detweiler notes. back to list of questions
How do I cut auto insurance fees for my teen?
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More insurance help
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Call it a rite of passage or the biggest headache of your parental life. Either way, when your teen hits the road with a freshly minted driver's license, your insurance bills will hit the roof. A son could double what you're paying now; a daughter can up your bill by 50 percent, explains Jeanne Salvatore of the Insurance Information Institute. The reason: Teen drivers are four times as likely to have an accident as adults. Nevertheless, you can keep costs down if you shop around.
Enlist the aid of your insurance agent. Ask if discounts are available if your teen gets good grades, passes a driver's education course or plans to drive an old but safe clunker rather than a speedy sports car. A good insurance agent will clue you in to the right discounts. Also, adding your child to your own policy will generally cost less than getting a new one just for your son or daughter.
And if the kid has his or her own car, you can always lower premiums by purchasing only liability coverage (though if it's a new or late-model used car, you may want the extra protection). Finally, if your child is going away to college without a car -- and the campus is at least 100 miles from home -- request a discount for the months he or she will be away.
Emphasize safety. Since accidents or speeding tickets and other driving infractions drastically hike insurance premiums, make it clear to your teen that bad driving habits can be dangerous and expensive. Many states are even implementing graduated licensing programs that restrict the hours of unsupervised driving for young drivers.
But even in states where these precautions are in place, it's wise to plan accompanied practice sessions under a variety of weather conditions, in heavy-traffic areas and at night. And of course, keep reminding your child to always wear a seat belt, not to talk on a cell phone while at the wheel -- and never, ever to drink and drive.
How can I protect my family in case I lose my job?
There's no such thing as total job security, especially when times get tough. Which is why we should all have an emergency fund. Unfortunately, if you're like most people, you probably find it hard to commit to a just-in-case account. Keep in mind that the assets are meant to cover basic expenses, not to supplant all your current income. Here's our three-part action plan.
Make a bad-times budget. Total up your fixed expenses -- housing, car payments, utilities and so on -- and add an occasional movie or night out. Being unemployed is tough enough without sacrificing a modest amount of fun money. Assume, also, that you'll need to cover some job-search expenses. Now you know what you need to get through a month.
Guesstimate how long you'd be out of work. You've likely heard the maxim that an emergency fund should cover three to six months' worth of expenses. But where do you fit on the continuum?
In general, single wage earners or dual-income couples with no dependents should have three months' set aside, says Jim Blinka, head of the executive compensation and employee benefits consulting division at BDO Seidman.
Conversely, families with lots of dependents or hefty fixed costs (such as a mortgage or college tuition bills) should plan for a more prolonged stretch without a paycheck -- at least six months -- because the long-term repercussions of exhausting your cushion are more dire.
Middle- and upper-level executives, professionals in volatile industries (can you say dotcom?) and other high earners also need to fund a long period between jobs.
"The average search time for executives earning over $100,000 is about a month longer than other wage earners in the same community," says John Challenger, CEO of international outplacement firm Challenger Gray & Christmas.
Set up a dedicated account. Once you've settled on a target figure, start making regular deposits into a dedicated emergency account. Try to build your savings quickly, but don't stop funding other important goals like retirement. When you're starting out, build up your cash in something safe, like a money-market fund.
Once you've accumulated enough to cover your cushion, funnel those emergency savings into a diversified portfolio of stocks, bonds and cash. "If you're keeping six to 12 months' living expenses in a money fund throughout your lifetime, you're missing opportunities," says David Rhine, regional director of family wealth at Sagemark Consulting. back to list of questions
IS MY FAMILY SPENDING TOO MUCH?
Affluent families with annual income of $75,000 or more -- the median for MONEY readers -- like to travel (averaging seven round-trip flights last year) and own or lease an average of 2.5 cars per household. Here's what upper-income consumers spent, on average, for a variety of items. How does your family stack up?
Children's apparel
Fraction of affluent households that bought it: 55.6 percent
Average amount spent in a year: $515
Men's apparel
Fraction of affluent households that bought it: 88.7 percent
Average amount spent in a year: $916
Women's apparel
Fraction of affluent households that bought it: 90.7 percent
Average amount spent in a year: $1,402
Artwork and collectibles
Fraction of affluent households that bought it: 35.4 percent
Average amount spent in a year: $1,256
Books
Fraction of affluent households that bought it: 85.6 percent
Average amount spent in a year: $230
Cigars and cigar accessories
Fraction of affluent households that bought it: 13.6 percent
Average amount spent in a year: $159
Computer software
Fraction of affluent households that bought it: 60.3 percent
Average amount spent in a year: $326
Entertainment appliances
Fraction of affluent households that bought it: 60.8 percent
Average amount spent in a year: $1,111
Fragrances, cosmetics and men's lotions
Fraction of affluent households that bought it: 88.7 percent
Average amount spent in a year: $255
Home furnishings
Fraction of affluent households that bought it: 82.6 percent
Average amount spent in a year: $3,352
Internet access/online usage
Fraction of affluent households that bought it: 59.2 percent
Average amount spent in a year: $242
Internet purchases
Fraction of affluent households that bought it: 44 percent
Average amount spent in a year: $372
Jewelry
Fraction of affluent households that bought it: 57.8 percent
Average amount spent in a year: $1,124
Luggage
Fraction of affluent households that bought it: 36.7 percent
Average amount spent in a year: $203
Personal computers
Fraction of affluent households that bought it: 40.9 percent
Average amount spent in a year: $2,418
Photographic equipment
Fraction of affluent households that bought it: 79.3 percent
Average amount spent in a year: $256
Sports equipment/home fitness equipment
Fraction of affluent households that bought it: 52 percent
Average amount spent in a year: $437
Telephone/mail-order purchases
Fraction of affluent households that bought it: 68 percent
Average amount spent in a year: $504
Source: Mendelsohn Affluent Survey 2000, Mendelsohn Media Research. back to list of questions
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