It's the media's fault. I usually disdain arguments that blame "the media" for anything. For one thing, "the media" isn't one big monolith, despite Rupert Murdoch's best efforts. For another, most media outlets are so chaotic and disorganized they have a tough time organizing annual company picnics, let alone a vast conspiracy.
But there's no question we're bombarded with details of the lives of the rich and famous. Those who consume a steady diet of such pap can get a distorted idea of what's normal.
It's society's fault. Our whole society, and our economy, is built on the idea that "money will make you happy," said attorney Jon Gallo, co-author with his wife, Eileen Gallo, of the book "The Financially Intelligent Parent." "It's part of our cultural ethos. . . . These teenagers are just epitomizing that."
In reality, money doesn't add much to people's happiness once they're raised above the subsistence or poverty level.
"Money does make a huge difference when you're talking about going from $8,000 a year to $30,000," said Gallo, citing the research of Harvard psychology professor Daniel Gilbert, who wrote "Stumbling on Happiness." "Between $50,000 and $500,000, though, the difference is scarcely measurable."
Many of the things that do make us happy, such as a sense of purpose and strong relationships with family and friends, don't necessarily add much to our nation's gross domestic product. In fact, Gallo joked that our economy "would grind to a halt" if people gave up the idea that happiness lies in more money and more stuff.
It's the parents' fault. Have you ever traded in a perfectly good used car for a newer one? Bemoaned your financial state and wished out loud for a raise -- or a winning lottery ticket? Expressed envy about someone else's income or lifestyle?
And you're wondering why your kids are so darned materialistic?
Children are awfully good at picking up the messages we send them, consciously or otherwise, said Mary Hunt, author of several books including "Debt-Proof Your Kids." If we believe "more is better," they're likely to believe that, too -- and they often don't have the real-world experience to understand that money is a limited resource and that every expenditure has consequences.
"They watch their parents swiping plastic, living on credit, keeping up with the neighbors," Hunt said. "Kids learn through observation and emulation, and without allowing them to experience suffering, yearning and delayed gratification, they grow up with unrealistic ideas of what life it really about."
3 things parents can do So what's the antidote? Most of us parents don't want to quash our children's dreams, but there are ways to tune them into reality. For instance:
Talk with your kids about their career aspirations. Once they get beyond the "I want to be a ballerina-veterinarian-astronaut" stage, you can start having real conversations about their interests and what jobs might suit them. Research together what those jobs actually pay, advised Kristine Dixon, Schwab's director of consumer education. You can get average hourly earnings for different professions from the U.S. Department of Labor's National Compensation Survey (this is a .pdf file; data for specific jobs start on Page 7) or see typical salaries across the country with Salary.com's Salary Wizard. Contrast that with what people typically spend on shelter, food, transportation and other living expenses in your area. (If you're comfortable revealing details of your family's finances, you can show them what you spend.)
Give your kids some hands-on experience with money. If your children's only money skill is knowing how to successfully nag you into buying something, they will be woefully unprepared for the real world -- either that, or you'll still be supporting them when they're 50. Better to start turning chunks of cash over to them now, either in the form of an allowance or in payment for work around the house, and let them make decisions on how to spend it. As one poster on the Your Money message board put it, "Let them learn when a lesson is cheap." By the time they're in high school, they should be assuming more responsibility for their own living expenses, as I wrote in "Why allowances don't work."
Adjust your own attitudes about money. Recognize that even if you do win that raise, or that lottery jackpot, you'd adjust pretty quickly to the improvement in your circumstances and would soon want even more. That's not to say you shouldn't be ambitious or want to improve your family's financial circumstances -- far from it. But expecting money to be the magic-ticket solution to all your problems is just as unrealistic for you as it is for your teenager.
Columns by Liz Pulliam Weston,
Showing posts with label raising kids. Show all posts
Showing posts with label raising kids. Show all posts
Friday, September 5, 2008
Why your kids expect to be rich part 1
Why your kids expect to be rich
Turns out most kids think they'll soon earn six-figure incomes. Here's why their expectations are so removed from reality and how you can help your offspring avoid the fallout.
By Liz Pulliam Weston
Plenty of adults are delusional about money, so it shouldn't come as too much of a shock that teenagers can be unrealistic when it comes to their future finances.
Still, the extent to which teens misjudge their prospective earning power says something interesting -- about them and about the rest of us.
I refer to tidbits from the "Teens and Money" survey Charles Schwab released earlier this year. This poll of 1,000 Americans aged 13 to 18 from a variety of socio-economic backgrounds found that 73% believed they would earn "plenty of money" when they were adults.
In fact, the teenage boys expected to make an average $174,000 annually. Teenage girls expected to earn $114,200.
The reality check:
Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.
Women working full time made a median $31,858.
Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve's 2004 Survey of Consumer Finances.
Great expectationsYou might expect teens to overestimate their potential earning power if they were planning to become professional athletes, actors or hip-hop recording artists.
But sports and entertainment ranked only in the middle of the 20 career options chosen by the surveyed teens. Far more popular were medicine (including jobs as doctors, nurses and medical technicians), technology (including jobs in programming, network operations and computer repair) and teaching, the three career fields that most interested the kids polled.
Yes, teaching. Now you begin to see how truly out of whack these kids' earnings estimates are.
So what, you might say. Let the kids have their fantasies. They'll find out the truth soon enough.
But that's the problem. These adolescents will soon be making decisions about money that will affect their lives for years, even decades, to come. Those who misjudge their earning power could:
Take on crippling student-loan debt. I hear from too many young graduates with six-figure student loans and salaries under $50,000. These debts cut into their ability to save for retirement, buy a home or meet other financial goals. And you typically can't shake off student-loan debt in bankruptcy court or anywhere else; this is debt that can literally follow you to the grave.
Overspend on credit cards. Eight out of 10 college students have at least one credit card, and many graduate with significant balances. It's easy to justify paying only the minimum on your cards if you think a fat paycheck is just around the corner. But that bad habit can quickly snowball into huge debts that, at best, cost the borrowers thousands of dollars in interest and at worst lead them to bankruptcy.
Overspend on everything else. People who don't understand that there are limits to their financial resources, and that tough choices must be made, are suckers for a credit industry that's happy to let them overspend on cars ("The real reason you're broke") and homes ("Who's most at risk for foreclosure?"), among other expenses.
Fail to take advantage of the time value of money. Once overcommitted, young people find it tough to come up with even the paltry amounts it would take to make them rich in their later years ("Young all but ignore 401(k)s, IRAs"). For example: Every dollar you tuck away in a Roth IRA when you're 21 could grow to nearly $30 by the time you're 65, assuming 8% average annual returns. Wait 10 years to start funding your retirement, and that same dollar grows to less than $14.
Dream all you want, but plan for realitySo clearly, there are serious potential consequences to overestimating future income, and in a minute I'll address what parents can do to help their kids avoid the worst fallout.
But to get there, we need to understand why teens assume they'll be rich -- or if not rich, at least very well off. There are several potential explanations, including:
Turns out most kids think they'll soon earn six-figure incomes. Here's why their expectations are so removed from reality and how you can help your offspring avoid the fallout.
By Liz Pulliam Weston
Plenty of adults are delusional about money, so it shouldn't come as too much of a shock that teenagers can be unrealistic when it comes to their future finances.
Still, the extent to which teens misjudge their prospective earning power says something interesting -- about them and about the rest of us.
I refer to tidbits from the "Teens and Money" survey Charles Schwab released earlier this year. This poll of 1,000 Americans aged 13 to 18 from a variety of socio-economic backgrounds found that 73% believed they would earn "plenty of money" when they were adults.
In fact, the teenage boys expected to make an average $174,000 annually. Teenage girls expected to earn $114,200.
The reality check:
Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.
Women working full time made a median $31,858.
Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve's 2004 Survey of Consumer Finances.
Great expectationsYou might expect teens to overestimate their potential earning power if they were planning to become professional athletes, actors or hip-hop recording artists.
But sports and entertainment ranked only in the middle of the 20 career options chosen by the surveyed teens. Far more popular were medicine (including jobs as doctors, nurses and medical technicians), technology (including jobs in programming, network operations and computer repair) and teaching, the three career fields that most interested the kids polled.
Yes, teaching. Now you begin to see how truly out of whack these kids' earnings estimates are.
So what, you might say. Let the kids have their fantasies. They'll find out the truth soon enough.
But that's the problem. These adolescents will soon be making decisions about money that will affect their lives for years, even decades, to come. Those who misjudge their earning power could:
Take on crippling student-loan debt. I hear from too many young graduates with six-figure student loans and salaries under $50,000. These debts cut into their ability to save for retirement, buy a home or meet other financial goals. And you typically can't shake off student-loan debt in bankruptcy court or anywhere else; this is debt that can literally follow you to the grave.
Overspend on credit cards. Eight out of 10 college students have at least one credit card, and many graduate with significant balances. It's easy to justify paying only the minimum on your cards if you think a fat paycheck is just around the corner. But that bad habit can quickly snowball into huge debts that, at best, cost the borrowers thousands of dollars in interest and at worst lead them to bankruptcy.
Overspend on everything else. People who don't understand that there are limits to their financial resources, and that tough choices must be made, are suckers for a credit industry that's happy to let them overspend on cars ("The real reason you're broke") and homes ("Who's most at risk for foreclosure?"), among other expenses.
Fail to take advantage of the time value of money. Once overcommitted, young people find it tough to come up with even the paltry amounts it would take to make them rich in their later years ("Young all but ignore 401(k)s, IRAs"). For example: Every dollar you tuck away in a Roth IRA when you're 21 could grow to nearly $30 by the time you're 65, assuming 8% average annual returns. Wait 10 years to start funding your retirement, and that same dollar grows to less than $14.
Dream all you want, but plan for realitySo clearly, there are serious potential consequences to overestimating future income, and in a minute I'll address what parents can do to help their kids avoid the worst fallout.
But to get there, we need to understand why teens assume they'll be rich -- or if not rich, at least very well off. There are several potential explanations, including:
Parents gone wild (for their kids)
Parents gone wild (for their kids)
Moms and dads are spending with abandon on their kids while sacrificing their own needs, such as saving for retirement.
Stretching a $30,000 income isn't easy for Brittiany Dillon and her husband. Each month, gas and grocery bills alone eat up their disposable cash.
But when it comes to their 2-year-old daughter, the young parents -- she is 21, and he is 23 -- simply can't say no.
"You want your child to have this idyllic childhood and not say, 'My mommy never did this for me,' " says Dillon, a stay-at-home mom.
For their daughter's first and second birthdays, the couple threw bashes that set them back at least $600. Christmas gifts, planned to not exceed $50, somehow hit at least $300. That may not seem like a lot of money, but it's a fortune for the Dillons, who last year moved back in with family so they could make payments on their $30,000 credit card debt, accumulated after a failed business start-up. (They have since paid the credit card balances down to $13,000 and rented an apartment on their own.)
"We've done a lot of things (for her) we know we can't afford," Dillon says. "It's an emotional thing."
The Dillons aren't alone. When it comes to the kids, parents often let emotions rule over financial prudence. Often, that leads to financial mistakes most are embarrassed to admit.
Mistakes are common Parents, even those with generous incomes, overspend on birthday gifts, buy homes in the best school districts that leave them house-rich but cash-poor, or pay thousands of dollars in private-school tuition while carrying thousands more in credit card debt. School trips and lavish family vacations take priority over retirement savings.
"I'm fascinated by the universality of these mistakes," says Marie Claire Allvine, a certified financial planner in Chicago and a co-author of "The 7 Most Important Money Decisions You'll Ever Make." "The interesting thing with parents is, they're with the best of intentions, trying to do all the right things. And they stumble into errors."
In wealthy Westchester, N.Y., a couple earning $200,000 a year could barely afford the $2,500 fee that Kathy Boyle, a New York certified financial planner, charged for creating a plan.
"If you drive by their house in Westchester, their life seems like nirvana. They live in a $1.1 million home on a gorgeous road, with two luxury cars in the driveway," Boyle says. "But walking inside their financial house, it's in shambles."
Today, their 19-year-old son's college bills are paid by a generous family friend because they cannot afford them. Yet the mother stays at home with the 13-year-old daughter.
Boyle advised the mother to consider going back to work, but she declined, saying her daughter "needs her." The extra income could have helped the couple tackle their $20,000 credit card debt and maybe start a college-savings fund for their daughter.
Living beyond one's means -- so the kids can have the best -- is a common picture in the wealthy suburbs, Boyle says. It's also a particularly common scenario with divorced couples. Mothers often insist on keeping the house, even if they can't afford it, because they don't want to "uproot" their children.
"I can't tell you how many women tell me, 'I don't want to move to another school district. I've got to keep the kids steady.' And they don't realize that with no income, they may not be able to refinance if they need money down the line," Boyle says.
To be sure, such mistakes are so often rooted in family values that it's difficult, if not impossible, to override. That's OK as long as parents understand the trade-offs, says Elaine Scoggins, a certified financial planner in Seattle.
Telling parents they need to pay themselves first or else risk ending up penniless in retirement, Scoggins has found, often does the trick. "When they realize how they could affect their own independence and elder years, they become more motivated to cut back in other areas," she says.
Where things go wrong Here are four common mistakes parents make:
Ignoring their retirements. "Every new parent seems to jump into 529 plans before their babies are sleeping through the night," Allvine says. "They don't look at the trade-offs in their own financial lives -- specifically getting themselves out of debt or funding their retirement -- as higher priorities than college education." Borrowing for school, after all, is easy and relatively cheap compared with other kinds of debt. Remember, the kids can always get student loans, while no one will give you a loan for retirement.
A bedroom for everyone. "Somewhere in time, good parents decided every child needed a bedroom," Allvine says. "Bigger houses, bigger mortgages, bigger real-estate taxes. They all lead to longer commutes, the need for two incomes and, often, the AMT (alternative minimum tax). Along the way, they're convinced the house was a 'good investment,' not an expense, but they're trapped in these higher fixed costs, lowering both quality of life now and financial options -- retirement, debt payoff, the chance to quit or change a job -- down the line."
Keeping up with the Joneses' kids. "Throughout the suburbs of America, there is a fierce competition for who can throw the most lavish birthday parties for their children," says Scoggins. "Renting ponies, carnival rides, etc., is a common scene. Setting the bar so high can destroy a child's appreciation of the fact that some of the best things in life are free and set him up for a lifetime of needing a high-cost lifestyle in order to be happy."
Not teaching them about money. "Parents who are struggling themselves to get the most out of their money become terrible role models and teachers for their children," Allvine says. "Instead of preparing their children to be financially independent by the time they get to college, I see parents either overprotect or educate inappropriately. Tracking Disney's stock is not going to teach a child how to balance a checkbook, learn to be charitable or communicate some day with a spouse or partner."
This article was reported and written by Aleksandra Todorova for SmartMoney
Moms and dads are spending with abandon on their kids while sacrificing their own needs, such as saving for retirement.
Stretching a $30,000 income isn't easy for Brittiany Dillon and her husband. Each month, gas and grocery bills alone eat up their disposable cash.
But when it comes to their 2-year-old daughter, the young parents -- she is 21, and he is 23 -- simply can't say no.
"You want your child to have this idyllic childhood and not say, 'My mommy never did this for me,' " says Dillon, a stay-at-home mom.
For their daughter's first and second birthdays, the couple threw bashes that set them back at least $600. Christmas gifts, planned to not exceed $50, somehow hit at least $300. That may not seem like a lot of money, but it's a fortune for the Dillons, who last year moved back in with family so they could make payments on their $30,000 credit card debt, accumulated after a failed business start-up. (They have since paid the credit card balances down to $13,000 and rented an apartment on their own.)
"We've done a lot of things (for her) we know we can't afford," Dillon says. "It's an emotional thing."
The Dillons aren't alone. When it comes to the kids, parents often let emotions rule over financial prudence. Often, that leads to financial mistakes most are embarrassed to admit.
Mistakes are common Parents, even those with generous incomes, overspend on birthday gifts, buy homes in the best school districts that leave them house-rich but cash-poor, or pay thousands of dollars in private-school tuition while carrying thousands more in credit card debt. School trips and lavish family vacations take priority over retirement savings.
"I'm fascinated by the universality of these mistakes," says Marie Claire Allvine, a certified financial planner in Chicago and a co-author of "The 7 Most Important Money Decisions You'll Ever Make." "The interesting thing with parents is, they're with the best of intentions, trying to do all the right things. And they stumble into errors."
In wealthy Westchester, N.Y., a couple earning $200,000 a year could barely afford the $2,500 fee that Kathy Boyle, a New York certified financial planner, charged for creating a plan.
"If you drive by their house in Westchester, their life seems like nirvana. They live in a $1.1 million home on a gorgeous road, with two luxury cars in the driveway," Boyle says. "But walking inside their financial house, it's in shambles."
Today, their 19-year-old son's college bills are paid by a generous family friend because they cannot afford them. Yet the mother stays at home with the 13-year-old daughter.
Boyle advised the mother to consider going back to work, but she declined, saying her daughter "needs her." The extra income could have helped the couple tackle their $20,000 credit card debt and maybe start a college-savings fund for their daughter.
Living beyond one's means -- so the kids can have the best -- is a common picture in the wealthy suburbs, Boyle says. It's also a particularly common scenario with divorced couples. Mothers often insist on keeping the house, even if they can't afford it, because they don't want to "uproot" their children.
"I can't tell you how many women tell me, 'I don't want to move to another school district. I've got to keep the kids steady.' And they don't realize that with no income, they may not be able to refinance if they need money down the line," Boyle says.
To be sure, such mistakes are so often rooted in family values that it's difficult, if not impossible, to override. That's OK as long as parents understand the trade-offs, says Elaine Scoggins, a certified financial planner in Seattle.
Telling parents they need to pay themselves first or else risk ending up penniless in retirement, Scoggins has found, often does the trick. "When they realize how they could affect their own independence and elder years, they become more motivated to cut back in other areas," she says.
Where things go wrong Here are four common mistakes parents make:
Ignoring their retirements. "Every new parent seems to jump into 529 plans before their babies are sleeping through the night," Allvine says. "They don't look at the trade-offs in their own financial lives -- specifically getting themselves out of debt or funding their retirement -- as higher priorities than college education." Borrowing for school, after all, is easy and relatively cheap compared with other kinds of debt. Remember, the kids can always get student loans, while no one will give you a loan for retirement.
A bedroom for everyone. "Somewhere in time, good parents decided every child needed a bedroom," Allvine says. "Bigger houses, bigger mortgages, bigger real-estate taxes. They all lead to longer commutes, the need for two incomes and, often, the AMT (alternative minimum tax). Along the way, they're convinced the house was a 'good investment,' not an expense, but they're trapped in these higher fixed costs, lowering both quality of life now and financial options -- retirement, debt payoff, the chance to quit or change a job -- down the line."
Keeping up with the Joneses' kids. "Throughout the suburbs of America, there is a fierce competition for who can throw the most lavish birthday parties for their children," says Scoggins. "Renting ponies, carnival rides, etc., is a common scene. Setting the bar so high can destroy a child's appreciation of the fact that some of the best things in life are free and set him up for a lifetime of needing a high-cost lifestyle in order to be happy."
Not teaching them about money. "Parents who are struggling themselves to get the most out of their money become terrible role models and teachers for their children," Allvine says. "Instead of preparing their children to be financially independent by the time they get to college, I see parents either overprotect or educate inappropriately. Tracking Disney's stock is not going to teach a child how to balance a checkbook, learn to be charitable or communicate some day with a spouse or partner."
This article was reported and written by Aleksandra Todorova for SmartMoney
Raising your $290,000 Baby Part 2
Transportation Cost through age 17: $20,670 to $38,670
Transportation can eat 13% to 14% of the total. This includes the purchase and finance charges of vehicles, repair and fuel expenses and insurance.
What you can do
Avoid buying a new car. Estimates hold that the value of a new car drops by as much as 40% in the first two years of ownership. Instead, look into a used car such as a relatively new model that's coming off of a one- or two-year lease. It's likely to be in good shape, may have some of its original warranty in place and, best of all, should be available at a huge discount off its original price.
After you've found the car, don't forget to shop for the best insurance rates. The cost of auto insurance can vary by several hundred dollars for the exact same level of coverage. Use our auto insurance planner to find the best deal. Here's how to cut the costs of insuring a teen driver.
Tax tips
If your children work for you and use your car for business purposes, then the business percentage (business miles over total miles) of your gas, insurance, repairs, interest, maintenance, registration, depreciation, tolls and parking are all deductible. Alternatively, you can deduct your business miles at 48.5 cents for 2007, plus tolls, parking and interest expense for your car.
Put your children's cars in your name. It reduces the insurance you have to pay (multiple-vehicle discount) and allows you to deduct any business expenses incurred on your return. The downside is that you may be liable for any accidents. That's why you have auto insurance . . . which is deductible to the extent the car is used in business.
Clothing Cost through age 17: $8,430 to $12,720
Clothing accounts for about 6% of the total costs at higher incomes and 4% at lower incomes.
What to do
New parents quickly discover the cottage industry of saving and sharing newborn and toddler clothes, so take full advantage to skirt the outlandish expense of buying clothes for your little one(s). Also, seek out some of the thousands of manufacturer outlets across the country where you can buy perfectly good clothes at upward of 50% off their original price.
The Internet also offers outlet-shopping opportunities -- at Bluefly, for example, shoppers can choose from dozens of designer labels at discounts as large as 75%.
Buy neutral-colored clothing that can be shared easily among siblings, regardless of gender. Shop sales, and shop at the end of season, so you're not paying a premium for your children's clothes. Finally, as your children get older and start generating some sort of income -- baby-sitting, shoveling snow, perhaps a part-time job -- make it clear to them that, should they want a designer-label piece of clothing, they'll have to cough up at least part of the cost, if not all of it.
Clothing is not deductible. However, advertising is deductible if you are self-employed. If you are an employee, remember that you can be self-employed with a second job. Schnepper had shirts made for his children to promote his book, with "Ask My Dad How to Pay Zero Taxes" printed on the front. That's tax-deductible advertising. Think Century 21 and their gold jackets.
How does your baby measure up?A dietitian from Childrens Hospital Los Angeles explains how to gauge your baby's growth and weight gain.
Health care Cost through age 17: $11,520 to $17,250.
Health care represents 6% to 8% of the total costs, but those numbers are misleading. For some families, it's a nonissue; for others, the numbers can be mind-boggling.
What to do
Because much of this expense comes from health insurance premiums, it pays to shop around if you have the option of choosing your insurance carrier. Monthly premiums can vary a lot. Sites such as eHealthInsurance.comalso offer information on health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
From there, you can trim your health-care expenses by going with the largest deductible you can handle. Also, check to see if your premiums are lower if you pay semiannually or annually instead of more frequently. If the cost of prescription drugs seems off the chart, check to see if Internet-based drugstores can supply you for less -- two are Drugstore.com and Rx.com. If you can't afford health insurance, you can find free care.
If you work for a large company, make certain you use your employer's cafeteria plan if one is available. This lets you set aside pretax dollars for expenses such as deductibles, copayments and noncovered items such as dentistry and eyeglasses. It doesn't reduce the cost of health care directly, but it shaves money off the taxes you pay on money that does go toward medical bills.
Tax tips
Medical expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income. Such expenses include not only doctors and hospitals, but also dentists, prescription drugs, medical insurance and any necessary medical equipment.
If you are self-employed, 100% of your health-insurance costs can be deducted, without any reduction, even if you don't itemize.
Anything you pay for the diagnosis, cure, relief, treatment or prevention of any disease is deductible.
Child care/education Cost through age 17: $13,710 to $38,220
These expenses account for 10% to 13% of the overall cost -- up several percent from last year. Big caveat: The figures do NOT include college.
What to do
If staying at home full time isn't feasible, look into forming a cooperative with other parents. For instance, each parent could agree to look after all of the children in the group for a certain number of hours a week. However, this may require a potential investment in day-care equipment and local licensing if enough children are involved. Alternatively, if you have a parent of your own nearby, see if he or she would be willing to do some baby-sitting.
Tax tips
Child care: If you and your spouse both work (or one is disabled or a full-time student), then you qualify for the child-care credit. That credit, a dollar-for-dollar reduction in your tax, ranges from a minimum of 20% to a maximum of 35% of the first $3,000 you pay for a child under age 13. For two or more children, the credit tops out at $6,000. That could mean, if you have two children in care, an additional $2,100 in your pocket.
Here's where it gets to be fun. Not only does the credit apply to child care and baby-sitting, but it counts any home care necessary for you both to work. Therefore, if you hire a maid to clean your house because you work, the cost of that maid counts toward the credit! The cost of a day camp can be deducted too, but not if it includes overnight stays.
Don't forget the child tax credit. For each child under age 17, you will get a credit of $1,000 for 2007. The credit phases out as your income exceeds $110,000 ($75,000 if single or head of household).
Education: Set up an education IRA or invest with various state prepaid tuition plans where the income is either tax deferred or completely excluded.
Alternatively, or in addition, invest some dollars under your children's names. The income will be taxed to them at their lower rates.
Once they enter college, the Hope Credit and the Lifetime Learning Credit will reduce your taxes further. The Hope Credit, for the first two years of college (freshman and sophomore years), is 100% of the first $1,100 in qualified expenses and 50% of the next $1,100, or $1,650 out of the first $2,000 paid. The Lifetime Learning Credit, which covers the last two years of undergraduate studies plus any graduate courses, is 20% of the first $10,000 paid. (See "Tax breaks to get your youngster through Yale.")
When they graduate, interest on any student loans may be deductible -- even if you don't itemize. You can deduct up to $2,500 in student-loan interest above the line.
Miscellaneous Cost through age 17: $13,890 to $33,690
This last category takes in 10% to 12% of the total cost and includes things such as personal-care items, entertainment and reading materials.
What to do
Stock up on personal-care items at bulk warehouses where the cost is cheaper per item. To trim the expense of fun, check out entertainment clubs where, for a flat fee, you get significant discounts at restaurants, movie theaters, fast food joints and theme parks. To cut down on the expense of books, rely on your local library or used-book stores. Likewise, if you're in the mood to rent a movie, many libraries have substantial tape collections.
If your children are interested in summer camps, check out local community organizations rather than sending them off to two-week camps that can run into the thousands of dollars. Music? Rent the instrument to begin, with a purchase option if your child sticks with it. Don't forget about pawnshops and used equipment, either. And, as with other sorts of more discretionary expenses, expect older children earning part-time income to contribute something.
Tax tips
Instead of paying strangers to mow your lawn or clean your pool, pay your children. If you are self-employed, hire your children to work for you. The IRS has validated children as young as age 7 to work for their parents' unincorporated businesses. For 2007, you can employ and pay your children as much as $5,350 (plus another $4,000 if they opt for a deductible IRA) each, tax-free to them and deductible to you. If your business is not incorporated, and your children are under age 18, you don't have to pay Social Security, Medicare, state unemployment or disability, either.
Let them use these dollars, tax-deductible to you, to pay for these miscellaneous expenses. Then smile and think about how much you are going to cost them when you get older.
By MSN Money staff
Transportation can eat 13% to 14% of the total. This includes the purchase and finance charges of vehicles, repair and fuel expenses and insurance.
What you can do
Avoid buying a new car. Estimates hold that the value of a new car drops by as much as 40% in the first two years of ownership. Instead, look into a used car such as a relatively new model that's coming off of a one- or two-year lease. It's likely to be in good shape, may have some of its original warranty in place and, best of all, should be available at a huge discount off its original price.
After you've found the car, don't forget to shop for the best insurance rates. The cost of auto insurance can vary by several hundred dollars for the exact same level of coverage. Use our auto insurance planner to find the best deal. Here's how to cut the costs of insuring a teen driver.
Tax tips
If your children work for you and use your car for business purposes, then the business percentage (business miles over total miles) of your gas, insurance, repairs, interest, maintenance, registration, depreciation, tolls and parking are all deductible. Alternatively, you can deduct your business miles at 48.5 cents for 2007, plus tolls, parking and interest expense for your car.
Put your children's cars in your name. It reduces the insurance you have to pay (multiple-vehicle discount) and allows you to deduct any business expenses incurred on your return. The downside is that you may be liable for any accidents. That's why you have auto insurance . . . which is deductible to the extent the car is used in business.
Clothing Cost through age 17: $8,430 to $12,720
Clothing accounts for about 6% of the total costs at higher incomes and 4% at lower incomes.
What to do
New parents quickly discover the cottage industry of saving and sharing newborn and toddler clothes, so take full advantage to skirt the outlandish expense of buying clothes for your little one(s). Also, seek out some of the thousands of manufacturer outlets across the country where you can buy perfectly good clothes at upward of 50% off their original price.
The Internet also offers outlet-shopping opportunities -- at Bluefly, for example, shoppers can choose from dozens of designer labels at discounts as large as 75%.
Buy neutral-colored clothing that can be shared easily among siblings, regardless of gender. Shop sales, and shop at the end of season, so you're not paying a premium for your children's clothes. Finally, as your children get older and start generating some sort of income -- baby-sitting, shoveling snow, perhaps a part-time job -- make it clear to them that, should they want a designer-label piece of clothing, they'll have to cough up at least part of the cost, if not all of it.
Clothing is not deductible. However, advertising is deductible if you are self-employed. If you are an employee, remember that you can be self-employed with a second job. Schnepper had shirts made for his children to promote his book, with "Ask My Dad How to Pay Zero Taxes" printed on the front. That's tax-deductible advertising. Think Century 21 and their gold jackets.
How does your baby measure up?A dietitian from Childrens Hospital Los Angeles explains how to gauge your baby's growth and weight gain.
Health care Cost through age 17: $11,520 to $17,250.
Health care represents 6% to 8% of the total costs, but those numbers are misleading. For some families, it's a nonissue; for others, the numbers can be mind-boggling.
What to do
Because much of this expense comes from health insurance premiums, it pays to shop around if you have the option of choosing your insurance carrier. Monthly premiums can vary a lot. Sites such as eHealthInsurance.comalso offer information on health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
From there, you can trim your health-care expenses by going with the largest deductible you can handle. Also, check to see if your premiums are lower if you pay semiannually or annually instead of more frequently. If the cost of prescription drugs seems off the chart, check to see if Internet-based drugstores can supply you for less -- two are Drugstore.com and Rx.com. If you can't afford health insurance, you can find free care.
If you work for a large company, make certain you use your employer's cafeteria plan if one is available. This lets you set aside pretax dollars for expenses such as deductibles, copayments and noncovered items such as dentistry and eyeglasses. It doesn't reduce the cost of health care directly, but it shaves money off the taxes you pay on money that does go toward medical bills.
Tax tips
Medical expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income. Such expenses include not only doctors and hospitals, but also dentists, prescription drugs, medical insurance and any necessary medical equipment.
If you are self-employed, 100% of your health-insurance costs can be deducted, without any reduction, even if you don't itemize.
Anything you pay for the diagnosis, cure, relief, treatment or prevention of any disease is deductible.
Child care/education Cost through age 17: $13,710 to $38,220
These expenses account for 10% to 13% of the overall cost -- up several percent from last year. Big caveat: The figures do NOT include college.
What to do
If staying at home full time isn't feasible, look into forming a cooperative with other parents. For instance, each parent could agree to look after all of the children in the group for a certain number of hours a week. However, this may require a potential investment in day-care equipment and local licensing if enough children are involved. Alternatively, if you have a parent of your own nearby, see if he or she would be willing to do some baby-sitting.
Tax tips
Child care: If you and your spouse both work (or one is disabled or a full-time student), then you qualify for the child-care credit. That credit, a dollar-for-dollar reduction in your tax, ranges from a minimum of 20% to a maximum of 35% of the first $3,000 you pay for a child under age 13. For two or more children, the credit tops out at $6,000. That could mean, if you have two children in care, an additional $2,100 in your pocket.
Here's where it gets to be fun. Not only does the credit apply to child care and baby-sitting, but it counts any home care necessary for you both to work. Therefore, if you hire a maid to clean your house because you work, the cost of that maid counts toward the credit! The cost of a day camp can be deducted too, but not if it includes overnight stays.
Don't forget the child tax credit. For each child under age 17, you will get a credit of $1,000 for 2007. The credit phases out as your income exceeds $110,000 ($75,000 if single or head of household).
Education: Set up an education IRA or invest with various state prepaid tuition plans where the income is either tax deferred or completely excluded.
Alternatively, or in addition, invest some dollars under your children's names. The income will be taxed to them at their lower rates.
Once they enter college, the Hope Credit and the Lifetime Learning Credit will reduce your taxes further. The Hope Credit, for the first two years of college (freshman and sophomore years), is 100% of the first $1,100 in qualified expenses and 50% of the next $1,100, or $1,650 out of the first $2,000 paid. The Lifetime Learning Credit, which covers the last two years of undergraduate studies plus any graduate courses, is 20% of the first $10,000 paid. (See "Tax breaks to get your youngster through Yale.")
When they graduate, interest on any student loans may be deductible -- even if you don't itemize. You can deduct up to $2,500 in student-loan interest above the line.
Miscellaneous Cost through age 17: $13,890 to $33,690
This last category takes in 10% to 12% of the total cost and includes things such as personal-care items, entertainment and reading materials.
What to do
Stock up on personal-care items at bulk warehouses where the cost is cheaper per item. To trim the expense of fun, check out entertainment clubs where, for a flat fee, you get significant discounts at restaurants, movie theaters, fast food joints and theme parks. To cut down on the expense of books, rely on your local library or used-book stores. Likewise, if you're in the mood to rent a movie, many libraries have substantial tape collections.
If your children are interested in summer camps, check out local community organizations rather than sending them off to two-week camps that can run into the thousands of dollars. Music? Rent the instrument to begin, with a purchase option if your child sticks with it. Don't forget about pawnshops and used equipment, either. And, as with other sorts of more discretionary expenses, expect older children earning part-time income to contribute something.
Tax tips
Instead of paying strangers to mow your lawn or clean your pool, pay your children. If you are self-employed, hire your children to work for you. The IRS has validated children as young as age 7 to work for their parents' unincorporated businesses. For 2007, you can employ and pay your children as much as $5,350 (plus another $4,000 if they opt for a deductible IRA) each, tax-free to them and deductible to you. If your business is not incorporated, and your children are under age 18, you don't have to pay Social Security, Medicare, state unemployment or disability, either.
Let them use these dollars, tax-deductible to you, to pay for these miscellaneous expenses. Then smile and think about how much you are going to cost them when you get older.
By MSN Money staff
Raising your $290,000 Baby part 1
Raising your $290,000 baby
Children are priceless, but raising them is one of the most expensive things you'll ever do. Here's how much it costs, along with some strategies for lowering expenses.
By MSN Money staff
Every newborn child is a bundle of joy. But you'd better have a bundle of cash on hand if you want to raise one.
Families making more than $74,900 a year will spend a whopping $289,380 to raise a second child born in 2006 through age 17, estimates the Center for Nutrition Policy and Promotion, a division of the U.S. Department of Agriculture. Higher-income families in urban areas in the West will spend the most, $304,740.
Though not as steep, the figures for lower-income families are just as unsettling: $197,700 for families earning $44,500 to $74,900 and $143,790 for families making less than that. That breaks down to nearly $15,800 a year from birth to age 2 for families in the $74,900-plus income bracket. This is no back-of-the-envelope guesstimate. The survey involves interviews with about 5,000 households, four times a year.
Talk back: Add it up . . . how much will you spend on your children this year?
The cost per child goes down for larger families. A child with no siblings costs 24% more than one with a sibling, for example. As a percentage of household expenditures, an average couple will spend 26% on an only child, 42% on two children and 48% on three children. As the child ages, costs rise through age 5, fall slightly between ages 6 and 11, and then top out at $16,970 a year from ages 15 to 17.
How much will your family spend?*
Income/ age
Total
Housing
Food
Trans.
Clothes
Health
Care/ school
Misc.
*Estimates of expenditures on the younger child in a two-child, two-parent family. To estimate expenses for an only child, multiply the figure by 1.24. To estimate expenses for each of three children, multiply by 0.77.
Sobering? No doubt. Misleading? Yes. The study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average, and, by definition, that means your numbers will be a little (possibly a lot) higher or lower. And because the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. In 2020, you'll need nearly $225,000 for a private college or $105,000 for an in-state public university. (Run the numbers with our tuition calculator.)
The study also doesn't consider lost income that occurs when one parent stops working or takes off several years to raise the children during the early years -- or takes a lesser-paying job with more-predictable hours.
Before you take a vow of celibacy, look on the bright side: There are ways to trim the expenses.
The study breaks down overall expenditures into various categories and subsections. (The information is used by state agencies and court systems to determine child-support guidelines and foster-care payments, among other things.) We'll go through each of the major categories, give the total expense for families from the low to high ends, and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper.
Housing Cost through age 17: $47,820 to $107,340
Housing is the single biggest expense of raising children, comprising 33% to 37% of the overall annual expense.
What you can do
You could ignore one of the basic assumptions used in calculating additional housing costs. You could decide not to move into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're going to either renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got.
For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan. You can get an idea about current rates and offers at MSN Money's Mortgage & Refinance page.
Challenge your property tax bill if you think it's too high. (See "Are you paying too much in property tax?") The National Taxpayers Union estimates that as much as 60% of taxable property in the United States is over-assessed.
Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation.
Finally, give some thought to moving to a less-expensive place to live. That could mean a smaller house across town -- or in a completely different part of the country. What with median home prices in some areas topping $600,000, look into parts of the country where housing prices (and property taxes) may be a bit more manageable. Realtor.org regularly releases statistics on existing-home sales by state.
Tax tips
Make as much as possible of your housing costs tax-deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax deductible. It doesn't matter what you use the money for.
Consider a home office. Now, you can qualify for a home office even if you do only managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job.
If you have a home office, you can deduct the percentage you use for business of all your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office. For more about claiming those deductions, see "The tax traps of working at home."
Food Cost through age 17: $27,750 to $41,490
This accounts for 14% to 19% of the overall expense (families at lower incomes spend a higher percentage on food).
What you can do
Set strict limits on the more discretionary forms of food spending. For example, tell your children they can spend no more than $7 a week on fast food. That alone may save a couple hundred of dollars a year.
Use the Web to shop for bargains.
There are -- literally -- thousands of shopping-related Web sites, and many of them now allow you to compare costs among similar items. Here's a simple trick that really works: When you're searching for a specific item, go to one of the search engines and type in that item and the word "discount." You'll be amazed at what you'll find. Or, you can go to extremes like the "Web's best shoppers" do.
Consider joining a warehouse club such as Costco, BJ's or Sam's Club. They're not suited to everyday shopping, but they let you stock up on certain items in quantity, often at substantial savings. Look to these places for items such as soda, canned and dried goods, and other sorts of nonperishables. If you lack adequate storage space, divide your bulk goodies among neighbors and friends.
Wholesale food services, which sell meat, noodles, fish and other groceries in bulk, will deliver to your door. Not only can you plan meals well in advance, but shoppers also can save close to 50% off conventional grocery store prices, although you still have to go to the store to buy fruits, vegetables and other items.
For other tips on supermarket savings, see "Take a big bite out of grocery bills."
Tax tips
If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.
If self-employed, you also can deduct the cost of food for a business party. Make a separate shopping trip and keep records of your business guests and the business discussed.
If your children are old enough to work for you and are required to be on the business premises and available for work during lunch, then the cost of that lunch (if available to all employees) is deductible to you and tax-free to your children! Again, proper record-keeping is paramount here, as is the rule of reason.
Children are priceless, but raising them is one of the most expensive things you'll ever do. Here's how much it costs, along with some strategies for lowering expenses.
By MSN Money staff
Every newborn child is a bundle of joy. But you'd better have a bundle of cash on hand if you want to raise one.
Families making more than $74,900 a year will spend a whopping $289,380 to raise a second child born in 2006 through age 17, estimates the Center for Nutrition Policy and Promotion, a division of the U.S. Department of Agriculture. Higher-income families in urban areas in the West will spend the most, $304,740.
Though not as steep, the figures for lower-income families are just as unsettling: $197,700 for families earning $44,500 to $74,900 and $143,790 for families making less than that. That breaks down to nearly $15,800 a year from birth to age 2 for families in the $74,900-plus income bracket. This is no back-of-the-envelope guesstimate. The survey involves interviews with about 5,000 households, four times a year.
Talk back: Add it up . . . how much will you spend on your children this year?
The cost per child goes down for larger families. A child with no siblings costs 24% more than one with a sibling, for example. As a percentage of household expenditures, an average couple will spend 26% on an only child, 42% on two children and 48% on three children. As the child ages, costs rise through age 5, fall slightly between ages 6 and 11, and then top out at $16,970 a year from ages 15 to 17.
How much will your family spend?*
Income/ age
Total
Housing
Food
Trans.
Clothes
Health
Care/ school
Misc.
*Estimates of expenditures on the younger child in a two-child, two-parent family. To estimate expenses for an only child, multiply the figure by 1.24. To estimate expenses for each of three children, multiply by 0.77.
Sobering? No doubt. Misleading? Yes. The study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average, and, by definition, that means your numbers will be a little (possibly a lot) higher or lower. And because the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. In 2020, you'll need nearly $225,000 for a private college or $105,000 for an in-state public university. (Run the numbers with our tuition calculator.)
The study also doesn't consider lost income that occurs when one parent stops working or takes off several years to raise the children during the early years -- or takes a lesser-paying job with more-predictable hours.
Before you take a vow of celibacy, look on the bright side: There are ways to trim the expenses.
The study breaks down overall expenditures into various categories and subsections. (The information is used by state agencies and court systems to determine child-support guidelines and foster-care payments, among other things.) We'll go through each of the major categories, give the total expense for families from the low to high ends, and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper.
Housing Cost through age 17: $47,820 to $107,340
Housing is the single biggest expense of raising children, comprising 33% to 37% of the overall annual expense.
What you can do
You could ignore one of the basic assumptions used in calculating additional housing costs. You could decide not to move into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're going to either renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got.
For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan. You can get an idea about current rates and offers at MSN Money's Mortgage & Refinance page.
Challenge your property tax bill if you think it's too high. (See "Are you paying too much in property tax?") The National Taxpayers Union estimates that as much as 60% of taxable property in the United States is over-assessed.
Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation.
Finally, give some thought to moving to a less-expensive place to live. That could mean a smaller house across town -- or in a completely different part of the country. What with median home prices in some areas topping $600,000, look into parts of the country where housing prices (and property taxes) may be a bit more manageable. Realtor.org regularly releases statistics on existing-home sales by state.
Tax tips
Make as much as possible of your housing costs tax-deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax deductible. It doesn't matter what you use the money for.
Consider a home office. Now, you can qualify for a home office even if you do only managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job.
If you have a home office, you can deduct the percentage you use for business of all your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office. For more about claiming those deductions, see "The tax traps of working at home."
Food Cost through age 17: $27,750 to $41,490
This accounts for 14% to 19% of the overall expense (families at lower incomes spend a higher percentage on food).
What you can do
Set strict limits on the more discretionary forms of food spending. For example, tell your children they can spend no more than $7 a week on fast food. That alone may save a couple hundred of dollars a year.
Use the Web to shop for bargains.
There are -- literally -- thousands of shopping-related Web sites, and many of them now allow you to compare costs among similar items. Here's a simple trick that really works: When you're searching for a specific item, go to one of the search engines and type in that item and the word "discount." You'll be amazed at what you'll find. Or, you can go to extremes like the "Web's best shoppers" do.
Consider joining a warehouse club such as Costco, BJ's or Sam's Club. They're not suited to everyday shopping, but they let you stock up on certain items in quantity, often at substantial savings. Look to these places for items such as soda, canned and dried goods, and other sorts of nonperishables. If you lack adequate storage space, divide your bulk goodies among neighbors and friends.
Wholesale food services, which sell meat, noodles, fish and other groceries in bulk, will deliver to your door. Not only can you plan meals well in advance, but shoppers also can save close to 50% off conventional grocery store prices, although you still have to go to the store to buy fruits, vegetables and other items.
For other tips on supermarket savings, see "Take a big bite out of grocery bills."
Tax tips
If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.
If self-employed, you also can deduct the cost of food for a business party. Make a separate shopping trip and keep records of your business guests and the business discussed.
If your children are old enough to work for you and are required to be on the business premises and available for work during lunch, then the cost of that lunch (if available to all employees) is deductible to you and tax-free to your children! Again, proper record-keeping is paramount here, as is the rule of reason.
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