Financial independence training is a short-term pain, for a long term gain. Because “untrained” college students are sitting ducks for unscrupulous financial service companies and their own lack of financial sense.

So, with that in mind, here are some off-the-cuff guardrails to consider for your son or daughter entering, or continuing on through college…

1. Make a definite plan to leave college with no consumer debt. And I’m talking a real PLAN. Credit cards, car loans — college kids are ripe for the plucking. Consumer debt is a real killer, simply because it depreciates so much. In a short matter of time, these items lose their value, but the payments and interest continue to inexorably pile up. So set up a clear budget for travel, late-night snacks, and other miscellaneous lifestyle expenses (heck, going through the process might even prompt some lifestyle evaluation!). Tell your child: “You should have an exact answer if I ask about your weekly spending limit.” And have them try to earn enough over the summer that they can afford to skip the part-time job during the spring and fall semester.

2. ATM bank fees are killer. Moving to a new city often means the local debit card will likely be charged from $1.50 to $3.00 for every withdrawal from a foreign ATM. Consider an online bank account like Charles Schwab Bank that reimburses all ATM fees or a local bank with easy ATM access (locally, here in Newport Beach, First Bank offers this also).

3. Overdraft fees are as common as hangovers for the college kid — avoid both. A recent Pew Foundation study found that the median overdraft penalty fee is $35; an additional $25 accrues if this overdraft is not repaid in seven business days. The average bank allows up to four of these overdrafts to occur in one day for a total fee of $140 or more per day. However, if you open a savings account in addition to your checking account, you can apply for overdraft transfer protection. You might even set up a situation where the college student controls the checking account — but you control the savings.

4. One cell phone bill gone awry can swamp you. New routines in college will likely mean that calling and texting habits will change. Or just one call to that high school sweetie who is spending the semester abroad might necessitate a different plan. If your child doesn’t have an unlimited plan, have them make it a habit to review the account online in the middle of each billing cycle. By the way, this is a very good expense to NOT pay for as a parent.

5. Avoid gimmicky credit card offers. Often the first credit card is awarded at a football game where so-called “free” T-shirts are being handed out. Again, college kids are ripe targets. Shop online for the best rates and terms and purchase a dozen dress shirts with the money saved by finding a card with less onerous terms for interest rates and late fees. Focusing on the so-called “rewards” which credit card companies give you is a distraction in your financial life. Like a casino, credit card companies win most of the time — which is why they stay in business.

And, of course, having children enter into adulthood changes your estate considerations. Let us know if this applies to you — we’re here to help!

Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value of well over $500,000.00! So, despite the fact that it seems like an easy decision, you need to consider all your Social Security options carefully to avoid making a costly mistake.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have been piled onto it, and have thereby added to the complexity. So to make the best decision about how to file for it, you’ll need to consider four things: 1) health 2) income before retirement and 3) income during retirement and 4) taxes.

Retirees cannot rely on conventional wisdom! Simplistic “rules” such as “Always file for early benefits” or “You need to stop working to receive benefits” are NOT always true. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

At least four methods are used when electing how to take Social Security. And if you’re married, the two of you can mix and match these in more than 16 different ways (!). Each choice results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will offer you the best maximum value.

So these methods differ significantly… they depend on your historical earnings, marital or divorce status, continued work in retirement, life-longevity and rates of return. The choice alone could be worth $250,000 of income or more. Filing options include “early filing,” “standard filing,” “delayed filing,” “file and suspend,” and many combinations of these options for married couples. It is DEFINITELY worth careful study and analysis of each option… yet a majority of Americans make their choice impulsively and emotionally.

The decision is even more crucial for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus, planning for retirement is usually much easier for men (who statistically tend to have more assets and die younger). Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared with just 5% for retired couples.

So couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that a husband’s benefits are often higher and the wife’s life expectancy longer, each case needs to be analyzed carefully.

Unfortunately, many people file after considering only one or two options in isolation. Even worse–the Social Security Administration’s new online filing system enables quick decision-making. People can easily submit their request without any professional advice or planning.

Before filing, then, you obviously should be informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of “Retirement Benefits” (Publication No. 05-10035) online.

Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well-off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.

So, … there’s obviously a lot to consider here. I recommend you sit down with somebody you trust that can walk you through your different options. It could make a BIG difference in your lifestyle!

Earthquakes, hurricanes, and … homeownership?

Well, the first two have left us in a mixture of annoyance, grief (there has been real tragedy in the wake of Irene, I must say), and a growing cynicism over crisis alarms.

And well, the last issue — perhaps I threw it in so I could segue into what I want to write about this morning :). Though, in fact, it’s a topic which has continued to be thrown into real debate. The mortgage deduction is under fire from politicians and the housing market still looks shaky.

However, I’m really not interested in getting into debates with clients or friends over this issue. Because despite what I will write here, every situation is different. There are real tax implications for whatever you decide — and it’s always important to consult with an expert for any financial plan (ahem).

But it’s en vogue now to be “anti-homeownership” given the recent crash in home prices and all the shenanigans the mortgage companies, banks and Wall Street firms pulled over the past several years. People tend to use the “recency effect” (considering the most recent dynamics over any others, simply because they’re closest to mind) and confirmation bias (whereby we naturally gravitate to arguments which confirm our own) to formulate their opinions.

I’d like to enter the fray for you. No, this has very little to do with estate planning or legal work which we might do on your behalf. I mostly want to stir up your thinking, and show you how the planning decisions we help our clients make require multi-variable thinking.

Because these arguments dictate important lifestyle and financial decisions for you and your family. So, before I receive any quick-tempered emails for this thesis ;), let me clarify a few things:

* Many people CAN’T own — that’s a fact of life. If owning a home isn’t an option for you, for numerous reasons ranging from finances to career, then making a choice between renting and owning isn’t something that mandates weighing the options.
* Many people SHOULDN’T own — perhaps during the days of easy credit or even today, you have the funds to buy a home, but there might be some factors that would make this a poor choice. Perhaps you need to relocate every couple years due to your line of work, perhaps you’re in the middle of a divorce or child custody battle, or perhaps your income is quite variable. It might make sense for you to rent until there’s more stability in your financial situation.
* Many people COULD own, but don’t. That’s my target audience here.

Read on … and remember that we are here for YOU.

Is It Really Cheaper To Rent?

Long-time renters often cite all the negatives of home ownership, and there are some to be sure. But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:

Current Conception #1: It’s More Expensive to Own Than to Rent — This is probably the biggest myth out there that many proponents of renting continue to propagate. Primarily, at this point in time, with home prices having crashed and interest rates at record lows, the rent-to-buy ratio is favoring “buy” in many parts of the country, more so than at any point in recent history.

Now this isn’t just a rah-rah “buy a home” Note, and I would concede that it is entirely plausible that home prices continue to decline for several more years. But if you’re not buying to sell, but rather buying to live, it can be MUCH more economically efficient to own over rent, especially at this time.

Here is the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm

Let me repeat: It is becoming cheaper to own and it is becoming more expensive to rent.

In my analysis, this trend will continue for years.

Why? First off, the Fed’s policy has been to reward debt holders and punish savers with the unprecedented a) zero interest rate policy and b) projecting out through 2013 that rates will stay low. This in turn, is pushing up gold prices and equities prices, and investors are pricing in future inflation. This bodes well for landlords, and poorly for renters. See, this interest rate/inflation phenomena mixed with the new ratio of renters over owners is flooding the market with renters and starving the market for buyers. This makes homes more affordable, while landlords are embarking on higher annual rent increases.

Current Conception #2: Homeowners Have to Pay to Maintain a Home Instead of the Landlord. Put aside the premium you might pay if you got in a bidding war over a home or made some upgrades to your home that weren’t necessary. Simply baseline the same property and look at renting versus owning it. Everything you pay for as a homeowner, the landlord has to pay for as well. Who do you think pays for that? Do you think the landlord pays for snow removal, replacing carpets, fixing leaks and a new roof every 15 years out of the goodness of their heart? No — you pay for it! It’s all priced in over long-term rent trends. Landlords are in this business to make money and if they weren’t making money they wouldn’t be landlords. You are paying to put their kids through college and for their Caribbean vacations.

Basic economics dictate that over a long period of time, you are losing money by renting, not just because you’re not building any equity, getting a mortgage tax deduction, etc., but because you are paying for the upkeep, depreciation expense and maintenance of the home in your rent — PLUS a tidy profit to the landlord.

Many renters are convinced they’re “beating the system” because they don’t have to pay for these things, but they are — it’s just not itemized out in tidy fashion for them. It’s all in the rent. This is logic — and reality.

Current Conception #3: Renting Provides for Much More Flexibility to Move. This is a major (and legitimate) reason NOT to own. After all, closing costs, transfer taxes, realtor fees and such are nothing to sneeze at. However, what a lot of renters end up doing is deciding to rent instead of own, but then they never move! They end up renting for years on end when they could have owned.

And that flexibility? Well, the landlord also has the flexibility to keep increasing prices year over year at whatever rate they so choose — which then requires a calculus on your end as to how much of an increase makes it worth moving out, in order to just rent somewhere else. Additionally, you’re often locked into an annual lease (which isn’t very flexible), they can sell the home or put new tenants in each lease cycle (which isn’t very flexible), and you can’t do many things to the place you live in without their permission or perhaps not at all (not very flexible). So, you’re trading the slight mobility flexibility for a lack of flexibility in virtually everything else that the landlord controls.

To reiterate, if you’re a current renter, you may feel this Note is critical of your situation. It’s not. It’s an economic reality that many Americans never have had, or never will have the economic means to be a homeowner. This is a mathematical certainty. The point here is to get my clients and friends thinking who DO have the means to save for a down payment, and who may be better off financially as owners than renters … but who continue to muddle along in complacency because they’ve convinced themselves that homeowners get hosed and renters have all the perks.

If you’re especially interested in math, here’s a helpful exercise for you to consider.

http://www.khanacademy.org/video/renting-vs–buying-a-home?playlist=Finance

Lastly, I’m here to HELP you, only and always. When we make plans and advice on financial decisions in your life, it requires taking a holistic view of ALL of the costs.

And that’s what we always do.

Warmly,

Brian Mandel