You don't need to be told that managing your personal finances can be tough. Virtually anyone reading this will be able to say truthfully that money is tight in their household. Too many things need to be done, and there's not quite enough income to cover everything. So we all make choices. We prioritize. We postpone.
And, with embarrassing frequency, we also blunder.
In this Motley Fool Answers podcast, co-hosts Robert Brokamp and Alison Southwick have invited certified financial planner Josh Strange, the founder of Good Life Financial Advisors of Northern Virginia, to talk about the five most common money mistakes he sees his clients make, and how we can avoid them.
In this segment, the bad tactic in question masquerades as "good parenting": paying for your kids' college, even if that means putting your retirement savings on the back burner. (Or worse, taking it off the stove entirely.) They also consider that often massive outlay for college itself, and how to better weigh it as both an expense and an investment.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 03, 2019.
Robert Brokamp: So we're here to talk about mistakes. Now there are plenty of surveys that will list the most common mistakes, but I thought it would be helpful to have you in here, because you're sort of on the front lines. You're in the trenches, every day, working with actual people. I thought we'd get your input as to what you see as the top five most common mistakes. Are you ready to get into it?
Joshua Strange: Absolutely.
Brokamp: The No. 1 mistake is paying for kids' college while neglecting saving for [your] retirement.
Strange: So that's a big one. They call economics a dismal science because it's the study of infinite wants and limited means. We all want to do everything. You want to retire. You want to take care of your kids. You want to have work-life balance and all these things, but some of these are competing goals and there's just not enough money to go around. And I tell people there's really only one way to pay for retirement and that's to save and have various income streams coming in.
With college there's a lot of ways to pay, so we really need to prioritize what's the most important; otherwise, there's a good chance that people might wind up living in their children's basement.
Brokamp: I was curious at how prevalent this is. It turns out T. Rowe Price had a recent survey that asked parents [which is] the higher priority for you and your family between retirement and college. Fifty-three percent said college and 47% said retirement. So it is clear people have that priority kind of mixed up. They also asked the kids what's more important. Sixty-three percent of the kids said college is more important and 37% said mom and dad's retirement is more important. Of course.
So you can understand it. You want to help your kids and all that, but obviously if you get to retirement and you don't have any money, you can't retire. So what do you recommend to people who are in this tough spot? Their kids might be in high school or on the verge of going to college and they haven't saved enough for college. What should they do?
Strange: I think, as with any financial goal, if we could have started early, it would be good; but, I think you need to sit down and really understand what retirement looks like, what that's going to cost, and where you're going to be able to do that. It's kind of like the adage on the airplane. First put on the mask to help yourself and then help your children. We all want to help our children as parents. It's really important to help our children. But sometimes the best gift that we can give them is by actually helping ourselves, first.
And so when we think about people that maybe haven't saved enough for college, I think it's important to think, "What are my child's gifts and talents?" Maybe college isn't the right path for everybody. I think we have a problem where we think everybody needs to go to the traditional four-year university. And for some people it's just not possible from a financial perspective, as they don't have enough saved.
Looking at two-year school is a really good option. I mean, the amount of money that somebody can save by going to a community college for the first couple years while they figure things out and get their generals done is significant. There are also, obviously, student loans. Now, nobody likes student loans, but that's just the reality. When you're looking at an investment in college, sometimes you have to fund that by taking out a loan. That's something.
I would also say looking at part-time work. Helping kids actually have a stake in the game can not only help from a funding perspective but gives children that ownership of the college experience. So those are some of the things that I would certainly take a look at.
Alison BrokampSouthwick: It would be interesting to know in the research who they asked. Did they ask middle-class Americans? Wealthy Americans? Americans that don't actually make a lot of money and college isn't even on the table for them? Because it will be interesting to know who actually is going broke. If college isn't even on the table to begin with, if you're in a family that doesn't make any money and it's like, "No, college isn't even an option. What are you even talking about? We don't go to college in this family." Is it middle class and wealthier people who are actually putting their kids' education in front of their retirement?
Brokamp: The survey at the end had the demographics of it and it was a pretty widely dispersed demographic. One stat from the survey I thought was interesting asked the parents how much they were going to be able to help at all, and many said, "I'm not going to be able to contribute at all." Some a little bit. Only 12% said they were going to be able to cover the entire cost of college, which means the majority of kids will have to find some other way to pay for college. And we all know that the majority of people do graduate with debt. The average debt is around $30,000 which is manageable. It's when I hear about people who graduate with over $100,000...
Southwick: Six figures.
Brokamp: ...it's just crazy. I don't blame you when I'm saying you're crazy. If you have that kind of a loan I feel bad for you. It's a tough situation to be in.
Southwick: It's even rougher when you graduated with a degree in literature and you've got six-figure debt...
Brokamp: Like some of us did that.
Southwick: You're not paying that off anytime soon.
Strange: I'll tell you the truth. When I was 17 I thought, "Hey, I'll be a philosophy major."
Southwick: Great idea.
Brokamp: I was, too. Of course, I went into the seminary. We all had seminarians, we were philosophy majors.
Strange: And somebody said, "Well, what are you going to do to make a living with that?" And I thought, "Oh man, that's a great point."
Brokamp: Open a philosophy shop.
Strange: Well, do you want to teach? No. So that kind of narrows that down. I think it is really important, though, to try to get your child -- and at 18, a lot of us are still children, I certainly was -- to consider this as a business decision. How is this major and this debt that you're going to take on an investment in yourself?
I've [heard] your podcast where you've talked about improving your own personal capital and I think that's one of the best investments you can make, but there's got to be an expected return. So pick a major that's marketable, not just interesting. It's not just about self-actualization. At some point, when you're talking about the money that a four-year university costs, it's a business decision.
Brokamp: I totally agree.