The 9 Steps to Financial Freedom (41 page)

You want your children to do the best they can in every way, and you want to give them every advantage you can give them, right? You feed them well, dress them well, teach them everything about the world you know to teach them. You are stunned by how much love you feel for them, and now you understand why parents always say they would step in front of a speeding bus to save their child. You would, too, and of course you are teaching them how not to step into traffic, how not to step into the course of that bus when it’s barreling down the street. You want your children to know how to stay safe.

Money, however, is also a safety issue in your children’s lives. Just as you, and I, and all of us need money to keep us safe, so will your children need to know all the steps to financial freedom.

Remember how, in the beginning of this book, you went back to your own childhood and began to reconstruct your money memories, to show you how they led to your fears about money today? So, too, are your children becoming imprinted with money memories right now, and it is your responsibility as a parent—or aunt, uncle, godparent, or friend of a child—to give careful thought about how you transmit messages about money to the children in your life.

Over the past few years a small industry has arisen with books, games, and computer programs to teach children about money, which I think is great. If you have a child, buy as many as you can and pull the best ideas and information from them. The advice won’t all be the same—that’s okay; again, you will follow your inner voice about what and how you want your kids to learn. The best thing about these books and products is that they open up the dialogue about money, a subject that has been treated as a secret for so long. But they’re only good as far as they go, because money messages are transmitted as much through the heart as through words you learn in a book. If your kids hear you swear at your stack of bills, if they sense fear, if they’re constantly told what you can’t afford, that’s what they’ll learn, even if you go by the books to try to teach them healthier messages.

Today’s children will inherit a global economy, a high-tech world, an increasingly competitive universe in which they’ll have to make their way. Yet so many parents I see, when I ask them how they teach their children, talk about piggy banks and passbook savings accounts and allowances and how they plan to start saving for their children’s college education one of these days. A piggy bank will not exactly teach your children about life in the twenty-first century. It is just another financial symbol relaying the message that to retrieve what you have saved, something has to break. We relay this message many times over to our children, especially when it comes to college funding. In order to send our kids to school, the bank truly has to be broken wide open. You know it, and your kids can feel it, too.

The cost of four-year colleges tends to rise steadily at about 6 percent or so, while inflation is typically in the vicinity of 3 to 4 percent. Assuming that your child has seventeen years to go
before entering a four-year school that today costs $25,000 a year, for room, board, tuition, and so forth, the total cost of sending your child to college, in today’s dollars, will be above $200,000. If it is your plan to pay for a four-year college education for your child, here is what you need to know.

If these numbers seem staggering, don’t let them be. Try to make decisions today about education tomorrow that will be respectful to you and what you do feel is possible. This is where your inner voice will come into play.

There are alternatives to schools that cost this kind of money. The average state school today is considerably less for residents. In my case, I had to go to a state school while most of my friends went to private schools, because my mom and dad didn’t have the money for a private school—big deal. What was great was that I knew what to expect. I knew that I would have to work to get myself through school, and work I did (and have done better [financially speaking] than some of my friends who were given more expensive educations, I might add). So don’t feel bad about what you know you can’t afford.

Financial freedom is more than just having a lot of money; it’s also being proud of what you have and realistic about what you don’t have and instilling that pride in your children. It is not being respectful of yourself and your money to go into financial debt forever to pay for an education. Greatness will come to one’s life regardless of where one gets an education, because true greatness starts from within, not from without. True greatness and true education start with the messages that are passed down, the conscious messages and the unconscious ones.

The best time to start saving is when that baby you know you want to have is still a gleam in your eye—just a few years can make a tremendous difference. Let’s say you meet someone and you know that within a year or two you’ll be getting married and that shortly after, you’re planning on having a child. If you start putting money away right then and there, you’ll have to put away less than if you wait.

Let me show you the difference a few years can make. First let’s say that your child was just born today and you have projected that you will need $200,000 in eighteen years to pay for his/her college education. You feel you could average about a 6 percent annual return a year on your money that you would invest to meet this financial obligation. You could either put $70,000 in one lump sum and never have to put in another cent or if you did not have that kind of money, you could start from scratch with investing about $515 a month starting this year and continuing until your child is eighteen.

However, if you were to wait and not start saving until your child was eight years old, you would then have to set aside $112,000 in one lump sum if you could, or if you did not have money to start with, you would need to set aside about $1,200 a month.

It is far easier to find $515 a month than $1,200. So start early.

Many people open what is called a UGMA account—Uniform Gift to Minors Act account. There’s a tax break on money contributed to these accounts, but there are also drawbacks. If you are going to start saving for a child’s education, I urge you to
know all that you can about the ramifications of putting the money in your child’s name versus your own name, but here are the main things to be aware of.

When putting money into a UGMA account for your child, you are just the custodian for it until she turns eighteen or twenty-one (account regulations vary by state, so make sure you check), at which time you legally have to turn everything in the account over to your child. There is nothing wrong with this, but you have to keep the following in mind. If Johnny Angel turns out to be Johnny Devil and decides to take this money at that time and not go to college but to buy the latest BMW on the market instead, he can. I’ve seen it happen. Now, to avoid the above scenario, some may suggest that a UGMA account can be hidden from a minor, but this is a problem for two reasons. First, any minor over age fourteen is expected to sign his or her tax return and thus has a good chance to notice the income from the account. Second and more seriously, if the custodian fails to turn over money that is due to the UGMA beneficiary, he or she breaches the statutory trust terms set by law and is liable for the consequences of that failure, just as a trustee would be, which may include surcharges and other sanctions from a court. So when you put money into a UGMA account, it is your child’s, not yours.

TAXATION OF UGMA ACCOUNTS

Most people open a UGMA for the tax break that they do give you; in my opinion, there is nothing wrong with that. But in most cases this tax break is not as great in the end as one may think. Very likely, you’ll be investing in good growth-oriented mutual funds or stocks, which you will keep for many years, which in turn will make the tax consequences negligible. But this is how UGMAs are taxed, just so you know.