Manage Your Teen’s Expectations About The Education Fund

We have some amazing mentors in the Millionaire Money Mentors forums. Some of them are even accomplished authors!

Today we have an excerpt from two of those authors.

Doug Nordman is one of the top mentors in the forums. His depth of knowledge and straight-forward and likable manner have made him a fan favorite with all of us. He’s also our resident expert in avoiding One More Year Syndrome and if there’s an especially hard case we send them to Doug!

Carol Pittner is also a mentor in the forums. She’s amazing as well! She’s a para-planner, so her financial knowledge is strong on a wide range of topics. And she just happens to be Doug’s daughter, which makes for some interesting conversations and perspectives.

A few years ago, Doug and Carol teamed up and wrote a book, Raising Your Money-Savvy Family for Next Generation Financial Independence. It’s a great read (4.7 stars on Amazon as I write this) and addresses one of the more difficult topics in managing money — how to pass along your financial savvy to your children. Add it to your Christmas list if you’re looking for great suggestions on this subject!

Today’s excerpt from their book features Doug and Carol going back and forth discussing issues related to funding education for your kids. It offers some great thoughts on the subject which I’m happy to share as I know many people struggle with this.

With that said, here are Doug and Carol…

DOUG

Manage Your Teen’s Expectations About The Education Fund

I’ll repeat an opinion from Chapter 1: the size of the education fund is your personal choice, and it depends on your values as well as your savings rate.

Whatever you decide is the appropriate amount for an education fund, you should start managing your teen’s expectations in middle school. Their teachers are already piling on the expectations, and they might be stressing your kid with their pressure.

All of these discussions about life after high school might improve the way your teen behaves during high school. By reviewing the finances of post-high school education before high school starts, your teen may find their own motivation for excelling at school.

One approach could be to tell your kids that you’re willing to pay for two years at a community college, or a certain number of semesters at a state university. The rest is their challenge. Talk with them about work-study programs, scholarships, and even student loans.

Back in 1992, while Marge and I were still on active duty with steady paychecks, we decided to contribute enough each month to the college fund to pay for at least four years at a state university. We wanted to give the fund as much compounding time as possible before we left active duty for other careers.

At first we invested our contributions very aggressively in an equity index fund (100% stocks). As the contributions and the funds compounded over the years, we realized that the fund could grow big enough to pay for most private universities. Marge and I were earning more in our careers and our high savings rate was on track for our financial independence, so we kept up our contributions. Whatever Carol didn’t use could continue to grow for graduate degrees or other certifications.

When Carol turned 13 years old, we stopped buying stock funds and started buying bonds. When she turned 15 we began cashing out a portion of the stock fund each for a ladder of three-year CDs. By the time she graduated from high school, her college fund was mostly CDs and bonds. During her college freshman year we cashed out the last of the equity fund and bought the final three-year CD.

The sooner your teens understand what the family’s finances will cover, the better they can figure out how they want to handle their education. Maybe they aren’t even interested in college in the first place, and they’ll have enough funds for a trade school leading to a professional license. Good electricians can earn even more than good plumbers, and neither one of those career can be outsourced overseas.

CAROL

Start Talking About Post-High School In Middle School

Plan more specific details for “life after high school” as early as middle school, such as what classes or interests kids want to pursue in the ramp-up to high school graduation. My parents started the discussion at the end of my seventh grade year, when I was selecting eighth grade electives. I could take “fun” electives like learning how to play an ‘ukulele (a standard option in Hawaii), or I could opt for more academic electives, like algebra. I was also pressured by my middle school into taking after-school academics, like the traveling school orchestra and competitive band. This turned into a healthy and positive debate in the Nordman household.

After weighing the pros and cons, I decided to go for the academic electives because I would get the subject practice early. If I didn’t do well in algebra in middle school, I could take it again in high school, where I would have a “second chance.” But doing well in middle school algebra actually had a bigger advantage than “trying something harder out.”

Taking advanced academic classes in middle school led to “validations” and “boosts” in high school math courses, and even time to take AP or IB courses instead of the “regular” equivalents. Those academic courses could lead to collegiate level math classes (at a local community college) while I was still finishing up high school.

In theory, I could then take the transfer credit from that community college math course to the local four year university, which meant I didn’t have to take basic math courses again. I could graduate college earlier, or add more classes towards a masters degree while still working towards my undergraduate degree.

In the long run, I spent less time repeating material while simultaneously saving tuition money.

Oh, and if I didn’t take those traveling and competitive after-school academics, then the money NOT spent on travel would compound interest in the education fund instead.

I’d known since about the age of 8 that Mom and Dad were saving enough money for me to go to college; this was a casual statement in one of many family meetings, but it stuck with me. I also knew that it was solely up to me to study, get good grades, get into college, and graduate. I personally never considered an alternative to college; I wanted a college degree.

It wasn’t until my teen years and a fateful trip to visit a Navy friend of Mom and Dad’s that I started considering joining the military after college, and specifically the Navy because I loved water and wanted to “see the world.” I spent most of high school debating the many ways to join the Navy before I decided that a Navy Reserve Officers’ Training Corps (ROTC) scholarship suited me best.

With an ROTC scholarship, my tuition and books would be paid for, I’d get a free set of uniforms (worth thousands of dollars, surprisingly), and I’d participate in a schedule of military-related training, including near-daily physical training and weekly military classes and events.

By the time I graduated college I’d earn a commission as an officer in the U.S. Navy. After graduation, I would owe the Navy eight years of service. I saw the ROTC scholarship as a fantastic way to go to college for nearly free and have a guaranteed job after graduation, with more day-to-day collegiate freedom than a military academy offers.

All that being said, my ROTC scholarship didn’t cover everything. Mom and Dad’s education fund paid for my room and board and plane tickets to school and home on breaks. There were times that I considered using education fund money for things like spring break trips or special events. But then I’d remember (or be reminded by Mom and Dad) that I’d miss out on the compounding interest and profit sharing benefits later if I spent college fund money now.

As promised, when I graduated from college, Mom and Dad paid out my half of the profit-sharing of the education fund through annual tax-free gifts (discussed in Chapter 10). Technically, I could’ve left the money in the education fund and earmarked it for graduate degrees. But at the time I wasn’t interested in earning a graduate degree. As of this writing, I’m still not interested in earning a graduate degree.

DOUG

Manage Expectations After High School And Offer Financial Incentives

When you’ve aligned your teen’s motives with your financial incentives (see Chapter 5), then you can extend this technique to life after high school.

Explain that when young adults leave home, they’ll reset their standards and have to live frugally. They’re starting out with a lot less money and lifestyle, just like when Mom and Dad were starting their careers all those years ago. (They’ve seen your pictures, right?) Your kids are not going to have the same quality of shelter (let alone entertainment) as they did while growing up in your house!

Ideally, they’d achieve the minimum living standards in a safe neighborhood with roommates and affordable public transportation (or a reliable vehicle). At the same time, when they learn to live frugally they can build a cash cushion as a solid defense against unpleasant surprises like emergency car repairs or even layoffs.

Next, you parents aren’t obligated to pay for their college degree or a trade certification. You can negotiate a compromise like work-study, or suggest that you’ll pay for two years at a community college. Remind them that student loans are a two-edged sword which can boost their income with a lucrative skill, or cripple them with five figures of debt.

Whether or not they want to go to college, let them know that any scholarships they earn are theirs to keep. (We parents were greatly surprised to learn how many alumni scholarships went begging for applications—every semester!) Students can use scholarship-search apps and visit colleges’ offices of alumni relations and financial aid to research more opportunities.

Review the costs of tuition and potential negligence: “Missing an 8:00 am class wastes $102.31 of your college fund and could delay your graduation by another semester.” Let them spend the money for their room and board, whether they hand it over to the college dorm (and eat in the cafeteria) or live off-campus (and cook for themselves). If they choose to live off-campus (with roommates) instead of in the dorm (with roommates!), then they get to keep whatever cash is left over at the end of the semester.

Regardless of their majors, encourage your young adults to take business classes. These are helpful not just for accountants and entrepreneurs but also for engineers, scientists, doctors, and lawyers—and most especially for liberal-arts majors. They’ll learn what the business majors (and marketers) are going to do to them unless they learn the techniques for their own self-defense. They might also learn that they want to run their own business.

Here’s a bold idea: consider handing over a semester of college money to your young adult. Let them manage their own education. You’ve worked for this moment for over a decade. Now you’ll really find out if they’re ready to take care of larger sums of money!

You can even offer a new financial incentive: when your student is a good steward of the education fund, then there will be profit-sharing after college. Leave it at that and let them figure out the rest.

“You’re On Your Own!”: A Parent’s Letters To An 18-Year-Old

As Carol grew up, she began to challenge our authority. We parents saw that behavior as a compliment to our parenting skills, not a confrontation. We were still the grownups, we still had the power, and we were not even really being provoked. We realized that we’d created a safe and loving home where a youngster could act out her “worst” behavior. As a teen, her rebellions helped her flex her fledgling wings of independence and get ready to leave the nest.

Marjorie Savage describes these changes in her book You’re On Your Own (But I’m Here If You Need Me). When your teen returns home after an extended absence (a college break, or travel, or the military) it might be similar to hosting a foreign exchange student in your house.

This foreign visitor would be different from you, with different hairstyles and clothing choices, and many other cultural variations. As a host, you’d be fascinated by their background and their lifestyle and by the influences which made them who they are. You’d want to get to know them better.

Then Ms. Savage points out that it’s the same with your young adult. If they show up with a spiked mohawk, piercings, tattoos, and Goth fashions… it’s not a challenge to your family values or even your parenting. It’s probably not about you at all. It’s your progeny expressing their adult independence in their own way.

If anything, your parenting has helped them feel comfortable with their new expressions. Relax and get to know this stranger a little better. It could be the beginning of a beautiful new friendship.

While my spouse and I were in college, we spent years stumbling through the minefields of our parents’ expectations. I remember being particularly confused by how often my parents expected letters and phone calls, and how I’d spend my breaks. (This was back during the Second Millennium, before the World Wide Web and smartphones, when woolly mammoths roamed the earth.) At age 18 I had a new interpretation of their old rules like “curfew” and “sleepovers.”

When our daughter left home for college in 2010, my spouse and I reflected on our college memories. We decided to seize the initiative and set out the ground rules for further discussion. We’re not control freaks—we were just trying to do for the next generation what we wish had been done for us. We clarified the confusion with our parents’ letter to an 18-year-old.

Until Carol turned 18, her checking account and her credit card were still held jointly with me. (We were both eager to end that part of our relationship!) She also had plenty of other things on her mind during her first semester of college. At the time we wrote this letter (all right, it was an e-mail) she was struggling with homework, exams, ROTC workouts, and her personal spending habits.