Saturday, July 9, 2016

The Family Contract - Managing Expectations

The cost of higher education has pushed many folks to work past normal retirement age to finance their children's education. Either through home equity line of credit or co-signing for loans parents mortgage their retirement for the sake of their children

After the 2008 financial crisis where many graduates could not find employment, they naturally moved home. Even when they found a job, the "rent free" lifestyle persisted. The additional cost of food, utilities, cell phone, car insurance thwarts retirement plans and savings. Young people do not realize the parental sacrifice unless someone enlightens them.

Sharing a home includes sharing responsibilities. Putting those responsibilities in writing clarifies the situation for everyone. Some parents might have the means to continue supporting their children but is it really fair? Earning, saving, spending are all financial realities of life. Denying children those lessons helps no one, hence The Family Contract.

List the expectations AND the consequences.
Put it in writing and have all parties sign.

For example:
Son/daughter may live at home until June, 2017. During that period he/she will:
1. occupy one bedroom and use one bathroom, keep them neat and clean them (scrub/dust/vacuum) once every two weeks.
2. grocery shop once every two weeks to purchase favorite foods, replace essentials (milk, coffee, eggs, laundry detergent) and pay for such items.
3. refill the gas tank when borrowing the family car.
4. pay their own car insurance (if applicable).
5. do their own laundry.
6. assist with house upkeep (e.g. mow lawn, take out trash, walk the dog, etc.)
7. pay $200 a week to cover utilities and other household expenses.

Parent(s) will:
1. pay utilities and mortgage/ rent.
2. provide heat, hot water and A/C.
3. provide simple meals
4. make car available for occasional use (could be specific days/times).

Consequences should also be specific such as:
1. loss of car privileges,
2. an increase in weekly "rent",
3. finding another place to live.

If you feel uncomfortable charging "rent" realize your child must allow for rent in their future budget. You are not helping him/her live independently by providing a cushion. If charging rent truly bothers you, put the weekly money in a savings account and give the money to them after they move out.

Yes, they are your children. Yes, you love them. Your goal is to raise healthy, social, independent, responsible human beings. A Family Contract facilitates respect and growth for all concerned.

Be $ Smart - Make your children welcome but not so comfortable to jeopardize their future or your retirement.

Take Advantage of Your HSA

Health Savings Accounts are becoming more popular. They are usually part of a high deductible plan and are different from flex-spending.

They are triple-tax-advantaged where you pay no state or federal income tax on the money as it is deducted from your pay before taxes are calculated or

1. Contributions you make to a HSA are tax-deductible,
2. Contributions made by your employer are tax-free,
3. Interest accrued in the HSA is also tax-free,
and the accounts are “portable” meaning they stay with you even if you change jobs or leave the workforce.

Unlike flex-spending which must be used up annually (up to $500) or you lose it, HSA money can be carried forward indefinitely. This makes an HSA account another form of savings to use in retirement where healthcare can be a major expense.

Tax-free distributions from your HSA are made upon presenting receipts for qualifying health expenses like deductibles and co-pays. If you are able to cover these expenses out of pocket, you may hold on to the receipts and get a tax benefit in future years. Meantime, your money in the HSA grows tax-free.

Over time, If you are healthy and hardly draw from your HSA you could amass a sizable amount of money in your HSA to be used for future health expenses. There is no time limit on your receipts!

Be $ Smart
- Save as much as you can in your HSA to take advantage of the triple tax exemptions. Use every tax break Uncle Sam offers. It leaves more money in your pocket!

Building Wealth

Wealth is not how much you make.
Wealth is how much you have accumulated. Big difference!

We have often talked about the various aspects of building wealth. Today I'll list some of those aspects so you may choose one or two for focus.

How to build wealth starting with THE MOST IMPORTANT:

!. Pay yourself first. Automatic savings, automatic 401k contributions, automatic 529 contributions all give you the advantage of not having to think about it. Build your emergency fund first; without a cushion all your wealth could dissolve with the first crisis.

2. Reduce and eliminate debt. Debt is the antithesis of wealth. It drains you emotionally and physically. Double up on your payments when you can. Or better yet, don't build up debt by using your credit cards wisely and paying them off in full each month.

3. Take full advantage of matching contributions in your 401k or 403b. Employer contributions are free money!

4. Create a plan for spending a windfall like an inheritance or tax return. This is not play money. This is not recurring money like your pay check. It happens rarely. Use it wisely. Plan to spend 10% for fun and use the balance to pay down credit cards, loans or your mortgage.

5. Know what you owe and what you own by creating a Net Worth statement at least once a year. You know your making progress when you compare the numbers year to year and see the growth: Debt (liabilities) diminishing, Assets growing.

6. Create a long-term strategy to build your wealth starting with measurable, attainable, short-term goals like building your emergency fund and paying off credit cards. Then add where you want to be in 5, 10 and 20 years.

7. Get professional help. If you are unsure about saving, investing or debt reduction take a course, read a book, hire a money coach. Your future is too precious to entrust to amateurs.

Be $ Smart - pick one, work to complete it in the next three months. Then pick another to keep you moving forward. You will be so proud of yourself!