CFP Board eNewsletter
August 2008
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CFP Board eNewsletter |
| Kids and Money IV: Living at Home—Again |
In this, the last in a series of four articles on kids and money, It’s Your Turn presents some tools and tips to help parents and young adults still living at home get a handle on personal finance. The first article in this series focused on The Early Years, the second on The Adolescent Years, and the third on The College Years. When Sarah graduated from college with a BA in communications in 2002, she had one credit card and about $800 in credit card debt. Four years later, after consistently working full-time and living on her own for a spell, she had 10 credit cards and $30,000 in debt. Faced with that level of debt, as well as the day-to-day expenses of having her own place, Sarah realized she could no longer afford her independence. So she asked her parents if she could move back home. At 28, Sarah is typical of many of her peers. They have graduated from college, gotten decent jobs, and moved out on their own—only to find themselves living back with mom and dad because excessive credit card debt, student loan repayments, and the high cost of living have conspired to put an apartment or house of their own financially out of reach. Others haven’t even managed to strike out on their own. Having dreamed of getting their own place after college, many find that their salaries don’t stretch far enough to pay for food, gas, utilities and rent. The solution for many: live with the folks. Accurate figures on young people who have left the nest only to wing their way back again out of financial necessity—the “boomerang” generation—are hard to come by. But it’s a situation many young people find themselves in. According to Michael Rosenfeld, a social demographer at Stanford University, around 39% of single women and 46% of single men between the ages of 20 and 29 lived with a parent in 2005, up from 36% of women and almost 42% of men in 2000. On her Web site Elina Furman, author of Boomerang Nation: How to Survive Living with Your Parents the Second Time Around, cites statistics suggesting that some 18 million 18- to 34-year-olds currently live at home; some leave and return home again several times. The financial challenges that boomerangers face are easier to quantify. According to the report Young People: Living on the Edge, by Greenberg Quinlan Rosner Research, some 75% of those between the ages of 18 and 34 went deeper into debt over the past year. More than half said they were only paying the minimum monthly amount on their credit cards. Whatever the reason a boomeranger returns home, Furman argues, “Once you make the decision to return to the nest, it’s important to make good use of your time there.” Sadly, that is not always the case. “Most of us move home with the best of intentions,” writes Furman, a former boomeranger herself. “We figure, why throw away our money on rent when we can save up for major life goals, like house purchases, graduate school, or even a small business? But when it comes down to actually putting our money where our mouths are, we often find ourselves falling short of our goals.” Sarah fell well short of her financial goals when she was living on her own. She originally got into credit card trouble because her basic salary was enough to make ends meet, barely, but not enough to do much else. Since she worked in sales, all of her discretionary income came from bonuses and commissions, which were irregular at best and sometimes non-existent. She lived from paycheck to paycheck but could still afford to pay the rent for her apartment. The trouble was, she paid for everything else—clothes, dinners in restaurants, trips—on credit. And she only paid the minimum balance on her cards every month. “I refused to budget,” she says. “I wanted to do what I wanted to do. If I couldn’t afford it, I just put it on the credit card. I was ignorant of the fact that putting it on a credit card means you can’t afford it.” Things took a turn for the worse when she lost her job as a salesperson of business promotional products. She was unemployed for about six months, living off some savings and her monthly unemployment check. “But I lived like I had a job,” she recalls. “I took vacations, I didn’t say no to anything, and I used my credit card the entire time. I wasn’t thinking rationally. I didn’t want to have to tell people that I couldn’t afford it. So I pretended I could afford it.” When she accidentally missed a card payment, the minimum monthly payment tripled: “That’s when I realized, ‘Oh, I can’t afford it!’” The good news is, after she acknowledged her predicament, Sarah did everything right. First, she entered a debt management program. Her debt counselor helped her work out a realistic budget and negotiated deals with the card companies for Sarah to pay off the full $30,000—but at 2% not twenty-something percent interest. So, every month for the next five years, Sarah will send a check for $740 to her debt counselor, who will divide the money among Sarah’s three major creditors. Sarah also was careful to keep her 401(k) retirement plan going as soon as she started her new job. (For more information on debt management programs, see Is Credit Counseling Right for You? in the July 2007 issue of It’s Your Turn). While living at home, Sarah has resisted the trap that hits so many boomerangers: After moving home to save money, they end up spending even more. “Since many of us are living rent-free and have more discretionary income than we’re used to, it’s not unusual to indulge in a few splurge fests,” Furman writes in Boomerang Nation. “Not only that, the feeling that we’re somehow missing out on our best years by living at home can often lead to … ‘therapeutic spending.’” Not for Sarah. She’s cancelled all her credit cards, and operates on a strictly cash budget. Furman suggests there are some simple things boomerangers can do to make the most of their time at home. First of all, avoid spending danger zones: “The more you engage in consumer behaviors, like window-shopping, magazine browsing, and catalogue ogling, the more you’ll want the items you see. Burn your catalogues, delete all bookmarked shopping websites, and avoid malls like the plague.” Furman also urges boomerangers to stick to financial planning basics: make and hold yourself to a budget, keep growing your money and saving for retirement, and protect your assets by making sure to keep up payments on essential insurance. “There’s no better time than now, while you’re still living at home with your parents, to iron out your goals and develop better money management habits,” she says. (For more information on how to make a budget and manage cash flow, see Beyond the Dog Food Fallacy: How to Prepare a Personal Cash Flow Statement in the May 2007 issue of It’s Your Turn). Sarah did all that and, just as importantly, she broke the news to her parents in a constructive way. “Before talking to my parents, I knew I needed to have a plan,” she says. “I knew the approach should be, ‘Mom and Dad, I made some mistakes and need your help to fix them’ rather than ‘Gimme money because I can’t afford it.’ Conversations about money are a lot easier as long as you have a plan and are sticking to it. My parents don’t want to see me struggle, and they are proud of what I’ve done to fix the problem. It would have been a lot easier to just file bankruptcy rather than to pay off $30,000 in debt.” For parents, an empty nest that is suddenly full again can be a big adjustment. They have to recognize—and learn to live with—the fact that their child is not 16 anymore but an adult, with his or her own attitudes and opinions about money. Things can get even trickier when kids borrow money from their parents, as Sarah did to pay off the last few months of her rent before moving home. The Young People: Living on the Edge report found that the number of parents lending money to their children nearly doubled over the past year. Borrowing from the Bank of Mom and Dad, an article on financial information site MarketWatch, offers tips for parents considering lending money to their children. Have a frank discussion about why the money is needed, the article suggests, and be clear about whether the cash is a loan or a gift. “When all my finances were in front of my face, I knew I couldn’t live on my own,” Sarah says. “Even though my dad is an accountant, he could have told me about debt until he was blue in the face but I wouldn’t have heard it. I was $30,000 in debt—that’s how much some people make in a year!—and I had nothing to show for it: no house, no car. I went out to dinner a lot and bought some clothes. I won’t be living on my own again for another two to three years. It’s not my first choice but it had to happen this way. I would have never learned otherwise.” It’s also crucial that Sarah makes sure her parents don’t think she’s freeloading. She still works full time and, in addition to paying off her debts, she pays for her own cable TV subscription, contributes some money towards household expenses, and pays $100 to her dad every month to cover the loan he made to her. Next year, she expects to be able to start paying around $150 a month in rent. Plus, she’s trying to put aside something every month for—what else?—her own place.
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| 401(k) Savers Unfazed by Market Turbulence |
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Despite tough economic times, retirement savers ramped up their plan contributions this year, according to a new study by Fidelity Investments of the 401(k) plans it administers, covering 11.5 million participants. The average contribution among those who participated in the same retirement-savings plan both this year and last rose 7% to $3,512 through June this year, from $3,283 in the first six months last year. Looking at all the 11.5 million 401(k) plan participants in the study, the average contribution rose just 1.4%, to $3,187 from $3,142 in the first half of 2007. That figure is lower than the 7% figure cited for consistent savers because the entire universe of Fidelity plans includes aberrations such as employees joining plans for the first time, workers retiring out of plans, new companies adding their plans to Fidelity's lineup and others taking their plans to different 401(k) providers. Despite workers' higher contribution amounts, the volatile stock market pushed average account balances down. For those who stayed in the same plan both years, the average balance dropped 1% to $71,500 in June 2008, from $72,000 in June 2007. The decline was steeper—a 7.5% drop to $64,000, from $69,200—for the total pool of plans overall, but again that includes new contributors as well as people leaving the system. "There is no doubt that American workers are feeling the pressure from escalating energy and food prices as well as a slumping real estate market, but the majority are making retirement a priority and staying the course," said Scott B. David, president of retirement services at Fidelity Investments. "What we're seeing in the first half of this year is similar to what we saw during the last period of market volatility that began in 2001. During that turbulent market period, workers also continued to fund their workplace accounts, recognizing the importance of saving for retirement even during a down market." However, just 9% of workers participating in 401(k) plans contributed the maximum allowable $15,500 at the end of 2007, though that portion hit 38% among highly compensated employees, according to the Fidelity study. Despite other recent studies that find 401(k) loans on the rise, Fidelity said the percentage of 401(k) loans outstanding decreased slightly this year versus last year. As of June 2008, 19.2% of workers with a plan balance had a loan outstanding, compared to 19.4% in June 2007. And the portion of workers initiating a loan in the three months ended June 2008 was 2.8%, down from 3.1% in the same period a year earlier. Meanwhile, 401(k) hardship withdrawals rose slightly, with 0.6% of workers in Fidelity's study requesting one in the three months ended June 30, compared with 0.56% in the same period a year ago.
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| Check In to the Financial Planning Clinic! |
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For the past two years, CFP Board has organized Financial Planning Clinics in selected cities around the country. The clinics are designed to give consumers the chance to experience the benefits of competent, unbiased financial planning in a friendly, relaxed setting—free of charge. This year, Clinics will be held at the Grand Hyatt in Washington, DC on Saturday, Sept. 13, and at the Hyatt Regency in Miami, FL on Saturday, Nov. 15. Both Clinics will start at 11:00 a.m. and end at 4:00 p.m. More than 150 CERTIFIED FINANCIAL PLANNER™ professionals have already volunteered their time. Visitors to the Clinics can consult one-on-one with CFP® certificants regarding financial planning questions or address their specific financial inquiries. “The Clinics are great because they are not intimidating,” says Kathryn Kurre, CFP®, Director of Retirement Services for ICMA-RC, a non-profit provider of retirement services and 457 plans to public sector employees, who will be on hand to answer questions in Washington. “Questions can be as hypothetical or as specific as you wish. Some people come with general questions like, ’What is a mutual fund?’ ’What is asset allocation?’ Others sit down and openly share the details of their specific circumstances. Either way is fine. The important thing is for people to know they can ask a question and not feel threatened. The point is to get the financial planning process started.” The format is the same at every Clinic. Upon arrival, visitors receive an information package and take part in a 15-minute orientation session, during which some background on financial planning topics and examples of questions are provided. They can then enter the Clinic, where volunteer CFP® professionals are seated at tables designated for specific financial planning topics, including:
Volunteer CFP® professionals meet with only one individual, couple or family at a time, but there is no limit to the number of CFP® professionals that participants can meet. All financial planners at the Clinic hold the CERTIFIED FINANCIAL PLANNER™ certification and can provide answers that are tailored to individual needs. A variety of educational workshops are also offered during the day. “What’s priceless about the Clinics is the objective advice,” Elaine King, CFP®, Director of the Wealth & Well-Being Center at Gibraltar Private Bank & Trust who will be volunteering in Miami. “There are no products sold at the Clinics, and financial planners are not even allowed to give out business cards. So consumers know they will get the best advice for them, with no obligation to do something with that person afterwards. You can even ask the same question to five different CFP® professionals! Each time you’re sure to get an honest opinion.” Any attendee who wishes to follow up with a specific volunteer at a later time will have access to that volunteer’s name and contact information in the information package provided at registration. While walk-ins to the Clinics are welcome, large crowds are expected and admission will be granted first to those who have registered online. So CFP Board recommends taking a few moments to register online. Information and registration details about the Washington event can be found here. Information and registration details about the Miami event can be found here. A list of Frequently Asked Questions is available to help answer any additional queries about the Clinics. Other inquiries can be sent by email to clinic@CFPBoard.org. Since not everyone has access to qualified financial planners, CFP Board hopes the Clinics will help people experience first-hand how financial planning can improve their lives. So check in to the Financial Planning Clinic nearest you—and check out how financial planning can help you meet your goals.
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| Free Online Financial Planning Information for Women |
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The tagline to BreakFreee.org says it all: “A Women’s Guide to Financial Empowerment.” Somnath Basu wanted to create a Web site that empowered low- and middle-income women by providing them with personal finance resources they could use to help themselves. And that is just what BreakFreee.org, built with funds from a CFP Board grant, is set to do. “It is often women with the least financial resources who need the most help,” says Basu, director of the California Institute of Finance (CIF) and director of two CFP Board-registered financial planning education programs at California Lutheran University in Thousand Oaks, CA. “BreakFreee.org will provide them with information on a wide range of financial issues, from budgeting and debt relief through to retirement and estate planning. Many of the women we want to help do not have access to a computer at home, or they may be computer illiterate. They will be able to use computers in support centers or domestic shelters, where staff can help them log on and find the information they need.” To make using the site easy, information is organized according to real life situations, such as Divorced Women, Single Mom, Teen Moms, and Widowed. Each section contains resources targeted to that specific topic. The Teen Moms section, for example, features tips on everything from basic budgeting to guardian arrangements to public benefits. The site, which is user-friendly and pleasantly designed, also features a database of Frequently Asked Questions, with the answers provided by professional financial planners, including CFP® professionals. Women who need more, or more specific, information can use the on-line Ask A Question function to submit their own queries. Students at the CFP Board-Registered Programs at California Lutheran University will field the questions and answer them under the supervision of CIF faculty and CERTIFIED FINANCIAL PLANNER™ certificants. The answers will be e-mailed back to the person who originally asked the question and then added to the FAQ database. Still in the works is a series of 20-minute educational videos on subjects like getting out of debt and saving for college, which women can watch on their own or in small groups. The site will also sport a community area, called MyBreakFreee. “We want to build a community of women helping each other through the site,” Basu explains. “Senior women, for example, can join the discussion board dedicated to that topic. Women can post messages to the group and hopefully learn from each other’s experiences. In this way, we hope a group of kindred spirits, a sisterhood, will come to light.” The project, which involves both seasoned CFP® professionals and students in programs that meet the education coursework requirements for CFP® certification, furthers CFP Board’s objective of increasing access for all to competent and ethical financial planning and promotes CFP Board’s mission to uphold the CFP® certification as the recognized standard of excellence for personal financial planning.
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| Drop in Back-to-School Spending Seen |
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Buffeted by higher prices at grocery stores and gas stations and a soft job market, many consumers are putting the brakes on their back-to-school shopping and analysts say this year could be one of the most challenging in years. A series of surveys asking consumers about their spending intentions for the back-to-school season—second only behind Christmas in terms of consumer spending – underscores that projection.
As with most consumer surveys, there is the traditional caveat that consumers don't always do what they say they're going to do. Most times, they spend more than they say they will or pick up just as many items for themselves as for those for whom they're buying.
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| Survey: Do you Plan to Cut Back on Back-To-School Spending? |
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Many observers and economists say consumer belt-tightening in the current economy will cause a decline in back-to-school shopping. Do you plan to alter your spending patterns to get your youngsters ready for the coming school year? In the June edition of It’s Your Turn, we asked readers to let us know whether their financial plan included making additional stock purchases during the rest of 2008. More than half—58%—said they plan on making an additional investment in stocks. A sizeable minority—41%—say they will make purchases as part of a dollar-cost averaging program. A minority said they will stand pat—only 15% said they didn’t plan on making any stock purchase.
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| Financial Alerts |
Can You Thaw Out a “Frozen” Home Equity Line of Credit?
Don’t Fall Victim to Insurance Fraud
Scamsters Follow Natural Disasters Read more financial alerts.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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