Oh, The Financial Mistakes We Make (part 1)

Want to have a quick lesson in real-life economics? Check out the May issue of The Atlantic and read Neal Gabler’s essay, “The Secret Shame of Middle-Class Americans,” in which he summarizes the financial plight of many Americans – which is enlightening enough – but then boldly summarizes his own life and the mistakes he’s made that helped lead to his rather precarious financial position. I admire his candor and plan to share it with all three of my children because his story reads like a what-not-to-do manual. If you ever wonder how someone who makes good money can become a financial mess, this is the article to read.  Gabler did virtually everything wrong, and though I suspect there are many other people who’ve gone down similar paths, he may have undermined his argument by lumping his experience into those millions of Americans who’ve done everything right yet still find themselves in financial dire straight. Gabler has no such claim.

(After you finish the article, scan through the comments section over a glass of wine or two or three – some are critical, some are empathetic, some are self-righteous, but nearly all are illuminating.)

The essay begins with frightening statistics about American’s lack of savings, lack of liquidity and lack of assets. Nearly half of Americans couldn’t cover a $1000 emergency room visit or $500 car repair out of their own pockets. This should scare the hell out of all of us, because how long can a society thrive and survive when half its population is “financially fragile”? These are real problems with real ramifications, no matter what your financial situation, and I suspect it’s why we find ourselves in such a heated and unexpected political campaign this year.

But then Gabler takes the courageous step of telling us his story, and in it he comes clean. He writes, “I am a financial illiterate, or worse—an ignoramus.” He’s not joking, and it’s troubling because he – like many Americans – not only hasn’t learned from his mistakes, he seems determined not to learn from them, as if being financially illiterate is a condition instead of a choice. In a world where TV and radio have made mini-celebrities out of financial self-help gurus like Suzy Orman, Dave Ramsey and Clark Howard, there’s no excuse not to become at least somewhat educated on financial matters. It’s as important – hell, it’s more important – than learning how to swim or throw a curve ball or learn a Bach prelude.

As parents we need to do much more to help our kids grow up to be financially-functioning adults. I’m going to do my part by forwarding Gabler’s article to my kids and I encourage you to do the same, but I also recognize that the odds of them actually reading the article are low. So next week I’m going to write a quick summary of financial no-brainers that I hope encapsulates all the what-not-to-do’s that Gabler did (and probably many he did not do) and then discuss it with my kids over dinner.  Stay tuned for part two...

Revisiting College Planning

About a year ago I blogged about college costs and how the increasing rate of tuition has been a game changer for our teens as they approach college.

One of the guys I mentioned in that blog, Frank Palmasani, has a new book: Right College, Right Price. Here's the cool part - it's on sale as an eBook for a dollar.  Not too shabby.  True, a large reason this book is so cheap is because it's a self-advertisement for Palmasani's Financial Fit (TM) Affordability Program, which currently costs $49 for a year's use.  But after purchasing the book yesterday and finishing it in about three hours, I can say that it's a great read and hugely beneficial regardless of whether you buy into the full program.  I may do some of my own calculations with Excel for the time being, but in about a year, I could see ponying up the money for the program.

Palmasani spoke at my daughters' high school last year, and I was impressed with his approach to finding the right college because it was so logical, but as the exploding student debt crisis in the US illustrates, sometimes logic needs to be learned.  Palmasani's approach?  Find out what your family can afford to pay for college first and then focus your search on those institutions whose net costs fall within your budget. Obvious, right?  But until recently, it was nearly impossible to figure out what the net cost to your family would be.  That is, not until March or April of your child's senior year, when she was already gaga about attending her dream school.  

With the advent of Net Price Calculators that are now required for all colleges and universities (thank you congress and GW - apparently things CAN get done in Washington from time to time), you can now plan in advance and avoid taking trips to universities that aren't within your budget, and more importantly, avoid the heartache that comes with one of two very bad choices: 1) telling your child she has to go someplace else; or 2) take out mountains of debt to pay for her dream college.  Clearly, option two has been the preferred method for parents in the US as of late.  It's time to change that strategy.

This isn't to say that your child shouldn't aim high if he wants to.  Depending on your income, it's quite likely that an Ivy League education will cost less than your premier state school.  How will you know how much aid you qualify for?  It's not an exact science, but the FAFSA Forecaster might be a good place to start.  You can input your income and assets, and then change the numbers if you want to determine how, say, paying down your house more quickly or investing more money into your retirement account might affect your eligibility for loans.

Frank Palmasani has loads of advice regarding loans, scholarship searches, strategies your should be wary of, and the risks associate with various decisions.  Most importantly for me, the book gives a great summary of the entire college search process so that I have a better idea of what lies ahead.  I'm actually excited, because I feel that regardless of how my children do in school or how much my wife and I can help them with costs, there are plenty of opportunities for our kids.  And now, thanks to so many helpful online tools (and a good book), there are plenty of opportunites for parents to make the process more palitable.