Many parents today are finding out that their kids have racked up thousands in credit card debt.  Often it was to float tuition payments and associated school expenses (as it was in my case), or to survive a layoff for a stretch of time.  Either way, it’s tough for a young person to get established when most of their earnings are going towards paying off credit card debt.

As a parent, we want our kids to have it easier than it was for us – at least I do.  But that doesn’t mean kids shouldn’t be allowed to learn some lessons the hard way. After all, it is only when we face these challenges that we grow.

Still, it is hard to watch kids struggle to keep their head above the surface when drowning in debt, particularly when many of us know exactly what it feels like. The anxiety, the insomnia, and the feelings of shame associated with debt are like few others in the emotional realm.  Before you bail them out, consider the following questions to make sure you are doing the right thing.

Parents should, at the very least, have a serious discussion with their kids about how serious debt can be, and the various options available, such as debt settlement. A good talk should help them realize how deep they can get themselves in, and teach them to be more careful in the future.

A Few Things To Consider Before Providing Debt Relief For Your Kids

1. Can you afford it? If the answer is no, stop here. You simply cannot jeopardize your own financial well-being by paying off credit card debt for your kids.  It would be different if they needed money to eat, or for a medical emergency, but credit card debt alone does not qualify for this level of crisis.  So it requires a rational look at your own finances, and if you can afford to help them without harming yourself, continue with the following questions.

2. Has your child changed the habits that led them into debt? You know the old saying, “Fool me once, shame on you.  Fool me twice, shame on me?”  Well, the same applies to debt.  If your child got in over his head with debt, but seems to have learned his lesson, cut up his credit cards, and has been making an honest effort to repay his debts on his own, it might make sense to help.  However, if he still has three credit cards in his wallet, refuses to sit down and work up a budget, and spends money frivolously, then he probably doesn’t deserve your assistance.  In in the latter case, if you give it anyway, chances are he will be right back in debt in no time.

3. Will this be considered a loan or a gift? Ask yourself this question from two perspectives:  relationally and legally.  From a parent-child relationship perspective, loaning money to kids can change the dynamic between you forever (or at least until the debt is repaid, and it often is never repaid).  If you decide to declare it a gift, be sure you are under the legal gift amount per IRS regulations, or their will be tax consequences.

4. Can you meet them half way? If you decide to help your kids pay off their credit cards, I suggest meeting them half way, literally.  Match the amount they pay each month to help them work off the debt faster, while encouraging them to share the load.  If your kids are able to work and put together $400 a month towards debt payments, pitch in another $400.  No matter how much they owe, $800 a month should bring that total down quickly, saving them hundreds of dollars in interest, and shortening the time before they can get on with their lives.

How do you feel about parents contributing to their children’s debt repayment plan?

Debt Consolidation Alternative for Today’s Consumer – Reduce Credit Card Debt – Debt Free 12-36mo

With April 15th fast approaching, and a couple things lining the calendar for the next couple weekends, I thought I would bite the bullet, fire up TurboTax, and finalize my 2008 taxes.  Besides, the weather was dreary out and there wasn’t much else to do.  I ran through estimates earlier in the year, and thanks to a bit of self employment income, had already ruled out the chance of receiving a tax refund.  So I set things aside determined to revisit them in time to meet the tax filing deadline.  I learned a few painful lessons.

Self Employment Tax

Tax year 2008 was the first year I had any self employment income to speak of.  It was also my first introduction to the self employment tax.  When you work for an employer, you split the tax rate for social security and Medicare.  But when you are in business for yourself you pay both sides of the equation – 15.3% (12.4% for social security and 2.9% for Medicare).  It may not seem like much, but the self employment tax rate paid on top of your normal income tax rate can make for a large tax liability.

Estimated Tax Payments

Speaking of large tax liabilities, if you plan to have to pay more than $1,000 or so in self employment taxes, it is a good idea to make estimated tax payments on a quarterly basis to avoid underpayment penalties.  Think of this as you withholding from your own income, similar to the way companies withhold tax payments from an employee’s paycheck.

Estimated tax payments may be made free online using the EFTPS (Electronic Federal Tax Payment System).  Once your enroll at the site you are mailed a PIN to the address on record with the IRS.  The pin takes a couple weeks to arrive, so plan accordingly.  Once you have the PIN you may create an online profile/password at EFTPS and you are on your way.

To simplify things a bit, I set aside 30% of my self employment income (freelance writing, ad sales, etc.) in a sinking fund at one of our designated online banks.  When the time comes to make quarterly estimates, I simply transfer money from my “Taxes” sinking fund using the EFTPS.

*Note, 30% may be too high or too low for your specific situation.  It’s a good idea to review last year’s taxes and determine your tax liability for self employment income to come up with a starting amount due for this year.  Be sure to increase or decrease that amount based on your revenues.

Improve Your Record-Keeping System

A good record-keeping system is vital to the success of any entrepreneurial venture.  After all, without tracking profits and losses, how do you even know if what you are doing is worth the effort?  It is also a big help around tax season.  Even if all you do is create a file folder labeled “2009 Taxes” and toss all receipts and income statements there, it’s a start.

Those of us with self employment income have legitimate opportunities to deduct expenses from our income.  For instance, as a blogger I can deduct things like hosting fees, domain registration and renewal costs, graphic design fees, etc.  This is a short list of the many potential tax deductions for bloggers.  Use only those that apply to you, and be sure to keep up with your receipts throughout the year to prove the expenses were paid.

Consider Hiring a Professional

Don’t take my word for it, consider consulting a tax professional, particularly when things get complicated.  A CPA, or someone specializing in taxes for small businesses, will help guide you through filing the appropriate forms, help determine which expenses are deductible from your income, and help you avoid any potential audit red flags.  I am a do-it-yourselfer by nature, but readily admit I will pay for tax advice when necessary.  Considering the consequences of an audit, penalties, etc, it might be the most frugal thing you could do.

Since originally writing this post I picked up a copy of Quicken Home and Business to manage my business finances. It’s been a life saver!

With the month of March coming to a close (that was fast), my wife and I sat down yesterday to hold our monthly budget committee meeting.  It occurred to me that in the sixteen months or so of writing here I’ve never mentioned them before.  I’ll save you all the boring details, but will share a few of the types of things we discuss that help keep us on track going in to the next month.

Budget Committee Meeting Minutes

Balance checking account.  The first item addressed is our checking account, which by this point in the month could usually use a quick balancing and reconciliation with our online account.  We make sure all outstanding checks are accounted for before “closing out” the month’s final balance and begin tracking the new month.

Review last month’s budget.  It is also at this point that we perform a final review of our budget categories together to determine where we missed the mark, and where we were successful.  The review for March revealed I spent too much money on eating out.  My excuse was that I was on the run a lot visiting my mom (who remains hospitalized), but really that’s a poor excuse – I could have packed something to eat or waited until I got home.  Sometimes you just can’t account for everything when setting a budget a month in advance.

Update personal balance sheet.  If we have stuck to the plan this part is always something to look forward to, but if we have spent more than we should, or not saved as planned, we usually dread this review.  Take an inventory of all your debts and update their balances in whatever format you use to track your net worth.  We use a simple Microsoft Excel worksheet with a column for each month and a list of debts and assets down the side.  Looks like we are on track as our debts continue to get smaller, and our savings continue to grow.

Modify budget amounts for next month’s expenditures.  Some months we just carry forward the budget amounts from last month, but it’s rare.  There always seems to be something happening, especially when you have kids in school.  Yearbooks, camp registrations, clothing, and spring pictures were all mentioned yesterday and affected a couple categories.

When my wife and I first married I handled all of the bills by myself.  After a couple years my wife began to take a passive interest in the finances, but was never particularly interested in knowing all the gory details of debt, account balances, etc.  Basically she just wanted to know how much was in the checking account at any given time.  I recognized that to pull off our financial turnaround I would need her support, and started holding these monthly meetings to discuss our finances.

At first the budget meetings seemed like a chore, but over time my wife enjoyed having input in the process, and I certainly appreciated her input.  With us working together we were blindsided far less by unexpected expenses.

If you are not currently doing something similar with your spouse, I highly recommend sitting down tonight and reviewing finances together, even if it means missing the latest episode of Desperate Housewives.  That’s what TiVo is for!

Photo courtesy of plindberg

Tonight at 8:30pm (local time) Earth Hour organizers have asked us to turn off our lights for one hour, as a vote for our planet against global warming.  Despite how you feel about the politically-charged issue of global warming, I am convinced energy conservation is a good thing for our planet, our society, and our personal economies. Earth Hour also provides an excellent opportunity for families to enjoy one of my favorite frugal ideas.

Flipping off the light switch is nothing new to our family.  Last year I wrote about the “Frugal Family Fun Nights” we often celebrate on the weekends.  Over the last couple years we have enjoyed backyard campfires, luaus, movie nights, and my personal favorite, “Power’s Out Night.”

When the lights go out we turn to old-fashioned forms of entertainment (and lighting). We light a few candles and gather around a table to enjoy a game of scrabble, or play cards, or just sit around and tell stories.  This year the kids have sleeping bags and we’ll probably have a little camp-out in the living room, complete with a battery operated lantern and cold cereal for dinner.  The kids always enjoy the idea of “roughing it,” without having to fight the bugs, the cold and a hard spot of ground in the woods.

Instead of making this a one-time event, consider adding this to your own weekend routine.  Maybe not “Power’s Out” every weekend, but once a month or so it’s a good reminder to kids that we can survive without the creature comforts we’ve grown to expect – television, computers, air conditioning. Here are a few ideas for ways to spend tonight as a family, in the dark:

Five Family-Friendly Activities For Earth Hour

1. Open the windows in warm climates and turn off the air conditioner. A house without circulating air gets stuffy pretty quickly, so if you live in a warmer climate, consider opening up the windows for a fresh breeze.  Don’t forget to close and lock them before bedtime.

2. Play outside. In the eastern time zone it is close to dark at 8:30pm, but not quite.  Enjoy the last few minutes of daylight tonight by doing some of the same things you used to do as a kid.  Look for fireflies, play some nighttime basketball with a glow-in-the-dark ball, or maybe a little star-grazing.

3. Go for a walk around the neighborhood.  I suspect many neighbors will spend at least part of Earth Hour outside on their porches, or strolling the neighborhood.  This might be a great time to meet other families living nearby since we are normally cooped up inside our homes playing Guitar Hero or watching television.  Wear bright colors and a grab a flashlight to make things a little safer.

4. Gather in the family room and tell stories.  One of the fondest memories I have from my childhood was siting around a campsite with my grandfather listening to stories about his childhood, growing up in the Depression, etc.  He is a great story-teller, and without the distraction of television and games, he had a captive audience eager to here them.  Gather around your family room, or out on the back porch, and tell the kids how you and your spouse met, or relive a funny memory from a family vacation.

5. Work in a talk about conserving energy.  Remember the reason for “Power’s Out” fun nights, and Earth Hour – you are sacrificing an hour or two of energy to reduce both the amount of energy you consume, and to reduce your utility bill.  Explain to kids that you have to pay for the power to turn on lights, computers, televisions, hot water heaters for showers, etc.  To most kids this is a completely abstract idea – they flip the switch and expect there to be light, not realizing that someone is charging them for that bit of energy all along.

What are your plans for Earth Hour?

The following guest post if from Neal Frankle of WealthPilgrim.com.  You can read more about Neal’s inspiring story immediately following this post.

If you’re lucky enough to be a huge, multi-gazillion dollar company like AIG, you can afford to make a few tiny financial mistakes. Lose a few hundred billion here or there. No problem – the government will pick up the tab.

But if you’re a small fry like me, you have to use your own initiative.

Unlike the fat cats, we live with this simple equation; Income – Expenses = Security.

Right now, your ability to increase income might be limited but I can all but guarantee that you have opportunities galore to slash your expenses. And if your financial security is threatened, its time to take action.

There are a number of wonderful blog posts that will help you save money. Those dollars add up quickly and it’s critical that you implement as many of those tips as possible. As Benjamin Franklin once said, “Watch the pennies and the dollars take care of themselves.” While I love those tips, if you take the steps I’ve outlined below you may save lots of time and lots more money than you can imagine.

Don’t track your daily expenses at first

This may sound counter-intuitive but if you’re not already tracking your daily expenses, don’t start now. (If you do track your daily expenses…don’t stop)

Why shouldn’t you track your daily expenses first? Because if you haven’t been doing this religiously for several years, you’re probably like most people I know. They start tracking every expense for a few days or weeks but then they stop. I understand why that happens. It’s a pain in the neck to track every little expense. Let me share a much better approach.

Let the bank track your monthly spending for you

In fact, you don’t even have to ask to them to do it because they already have.

Let’s back up a bit.

At the end of the day, it really doesn’t matter if you spend your money on doughnuts or diapers. All that matters is that when you subtract total expenses from total income, the result is a positive number.

Your first goal is to determine what you spend on average every month. Lucky for you the bank sends you this information in your monthly checking account statement. It’s the number under “Total Withdrawals”. You want that one number. You don’t care about the details….at least not now.

Think about it. That “Total Withdrawals” number includes cash withdrawals, credit card payments….everything. It’s the total of what you spent last month.

(Just make sure you use one checking account to pay all your bills and you’ll have all the information at your fingertips. If you use more than one account to pay bills, you live off credit cards, or you earn and spend cash, the process is more complicated.)

That one number on your monthly checking account statement tells you what you spent.

Create a spreadsheet

Get out your checking account statements for each of the last 12 months. List the “Total Withdrawals” number on a spreadsheet. Then calculate a 12 month moving average to determine what you spend on average. The reason this is so important is that some months are more expensive than others. You want to calculate a 12 month average in order to really know what you spend. Update the spreadsheet every month and recalculate your 12 month average spending. The first time you do this exercise it will take you 45 minutes at most. From then on, it will take you 5 minutes each month to update the information. Is it worth it?

Trust me. This exercise is far more powerful than trying to track your every expense. Even if you do track your daily expenses, this is an important exercise. The results will shock you I promise…..in fact your average expenses are probably 25% higher than what you think you spend.

You know what? Let’s have some fun. Before you calculate your average monthly spending, jot down what you think you spend on average. Now, go ahead and do this exercise. Let me know what your results are. Do you spend 25% more on average than you thought? Told you.

When people list their every expense, they ingeniously find ways to leave certain expenses out. “Oh…you mean I have to add in the home mortgage?” “Oh, you want me to add in groceries?” “Property tax?” “The trip to New Jersey?”

It’s just too easy to fool yourself if you don’t calculate your average monthly spending using this method. Do this exercise and keep doing it until I tell you to stop – and I never will.

Have “The Conversation”

Once I did this exercise I showed the results to my wife. Because I’m the man and therefore always wrong, I came prepared with the facts. When we both examined the facts, there was no arguing or blaming. In fact, once she saw the numbers she became a savings zealot. We both looked for ways to cut. It became a mindset and believe it or not, it was kind of fun.

The absolute beauty of this approach is that its simple, quick, 100% accurate and there is no arguing against the facts. It’s formidable.

Include everyone in your family in this conversation.

Once you and your partner are on the same page, have the same conversation with the kids. Of course, depending on the age of your children, you will present the information differently. Just assure them that the family is fine. Explain what you are doing and why.

My wife and I explained to our kids that we were cutting expenses and the reasons for it. We explained that the family is safe and fine and that everything was going to be ok and that they should not worry. We found that the kids actually relaxed once we had the conversation. They had known something was off but they didn’t know what. As a result of hearing a straight explanation of what was going on, they realized that their worst fears were unfounded. I encourage you to have these conversations with your children too.

This will create a new focus at home. Rather than being resentful about all the items you can’t buy, you’ll be delighted about the money you’ll be saving. Have a monthly meeting with the entire family to discuss your progress.

It may not be enough

If after a few months you see that you need more fire power to slash expenses , now is the time to start tracking daily expenses. Use programs like YNAB, Quickbooks or Quicken. Why wait to do this daily tracking? Because the process I outlined above is the best way to put the spending/income equation in context. It gives everyone the big picture view of your situation and it helps you get everyone to buy-in to the solution. If you don’t have the big picture buy-in, it will be very tough to achieve your goal.

And this exercise is going to take you 5 minutes a month. It’s a very easy way to get into the habit of following your expenses. If you won’t even spend 5 minutes a month on this, what makes you think you’ll spend all the time to track each and every expense?

Be flexible

Sometimes a $5 coffee at Starbucks will save you thousands of therapy bills. Just because you’re cutting expenses doesn’t mean you have live poor. Find ways to really enjoy your life and if that means having a $5 coffee once in awhile or splurging for a dinner out, then do it. Life’s too short to live in deprivation. Just relax your rules moderately and mindfully.

These steps helped me save over $14,000 in the last 6 months alone. Do you think it would help you? Have you ever calculated your average monthly spending? What did you learn and how did it change your spending?

About the author: Neal Frankle found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement. Neal sought out a financial advisor to help him invest his nest egg so that it would help put him through college. Instead, the advisor charted a self-serving course and was on the verge of burning through the money when Neal realized what was happened and fired him just in time to avoid losing everything.

The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions. Today, with more than twenty-five years of experience in the financial services industry, Neal is an author and avid blogger. Subscribe to his blog at www.wealthpilgrim.com.

I’ve been spending some time looking for a secret hideaway where I can get more writing done. I’ve accepted a couple freelance opportunities, in addition to my writing here at Frugal Dad, in an attempt to sprint to the finish of this debt snowball plan.  In doing so, I’m finding myself needing more and more quiet time in front of the computer.

My requirements were pretty simple.  I basically needed a small room with a door somewhere in the house.  All the bedrooms are occupied, and in the summer our garage is too hot to sit in any length of time.  I decided to squeeze into our utility/laundry room, working from a laptop on a four foot folding table.  Have computer, have pen, have scratch pad, will write for food!  I’m enjoying the bit of solitude, even if it is a bit cramped.

The Fab Five

Oversaving Does Not Lead To Happiness.  This post reminded me of my mantra to live frugal, but still have a life.  While saving money is an important part of being frugal, it is also important to find balance and spend some of your hard-earned money on a few things that bring you joy.

Frugal Ways To Get A Good Night’s Sleep.  As an insomniac (and a frugal one at that), I appreciated the tips here.  No Mt. Dews after 2:00pm? No late-night snacking?  No wonder I can’t sleep!

The Dave Ramsey Budget: Budgeting TIps for Successful Savers.  An excellent overview of the process of creating and maintaining a budget (with a Dave Ramsey spin).

When “Free” Things Aren’t Free: Beware the Hidden and Indirect Costs.  Let’s face it; nothing is really 100% free in this world.  There is inevitably some exchange for “free” goods and service, whether it be time or even future dollars.

Are You Emotionally Invested In Your Credit Card? I suspect this is why so many people rush to the defense of credit cards.  They got their first card in college.  It has a picture of their beloved dog on it.  They charged their anniversary cruise on it three years ago (and are still paying for it).  Just remember, if you are starting to feel attached to your card read through the stories (including my own) of companies dropping ten-year members for no apparent reason.  In the credit card world, loyalty is definitely not a two-way street.  (Bonus, an interesting “plasectomy” video here).

The Best Of The Rest

March Madness Money Lessons

Internet Job Boards – Wasted Effort?

Getting Off the Debt Treadmill – Stop Running In Place and Start Making Progress

Emergency Funds For Losing Your Job

How To Save Money On Camping

The Purpose Of Money

How To Manage Money In Your Marriage

What You Need To Know About Early Withdrawal From Retirement Accounts

Stacey from familylifebydesign.com gave me a heads up last week on a new product being peddled by Discover. While I like the Discover More card for grown-ups, I am not fond of the new product aimed at teens, and here’s why.

The new Discover Current card is being sold as a debit card alternative for teenagers. Parents can load money on to the plastic via their own credit card (wonder if this counts as a cash advance), and can place limits on how much can be spent and where it can be spent, all the way down to individual merchants. All this for a $5.00 monthly fee.

According to the Discover website you can even “browse Teen Card designs that are way cooler than cash.” It makes for great marketing speak, but it made me stop and reflect back on my own years as a teenager and wonder, when did cash stop being cool? I can distinctly remember how it felt to get my first $20 bill. I thought I was rich!

As an early teen I spent a summer day at my great aunt’s house installing a mailbox and post, and doing general yard cleanup on her property. At the end of the day she gave me $20, and I felt like a million bucks! I resisted spending that $20 bill for quite a while simply because I liked seeing it in my wallet. She could have given me a piece of plastic with a fancy design on it and the feelings of excitement would have turned to, “What am I supposed to do with this?”

Thanks to years of Visa and Mastercard (and Discover) pushing their products down to our youth, and our youth watching their parents use and abuse the same products, kids know exactly what to do with plastic these days – swipe it! The problem is, they don’t see Mom and Dad opening the bills and the end of the month in tears wondering how they are going to come up with the minimum payment. It is a one-sided view, an incomplete picture into the world of credit.

No, I would rather my kids grow up thinking cash was still cool. I pay my kids allowance and commissions for extra jobs in cash, and will resist giving them plastic as long as paper currency is still a legal tender. Call me old-fashioned. I just don’t think kids are able to fully grasp the transactional differences in swiping plastic and watching that $20 leave their hand and receiving $0.70 in change back.

It hurts to spend cash. It is supposed to hurt. We are exchanging our money for some good or service. That is money we worked for, or saved for, or could spend on something in the future. Instead, we are trading it in for something we feel is of equal value today. These concepts are difficult for many adults to understand, and something I didn’t really “get” until my late twenties. Why do we expect young teenagers to get it before we did?

Some will make the argument that giving teens a product like the Discover Current card will help them learn budgeting concepts, and how to use plastic wisely. Maybe. But I’m not convinced. Besides, how can teens learn these concepts when parents have restricted purchases to certain merchants, or blocked ATM transactions, or only allow them to spend a certain amount each day.

One could make the argument that normalizing the use of plastic too early could be dangerous.  I would tend to agree with this argument. I read a great analogy once (I think it was from Trent at TheSimpleDollar.com) that compared credit cards to power tools.  Sure, they make things convenient, but they can be dangerous in untrained hands.

If my son wanted to cut a piece of wood at eight years old I wouldn’t mind helping him guide a handsaw, but I wouldn’t fire up the skill saw and hand it over to him, even though he will use it when he gets older and it is more convenient and “cool.”  I know, I know, kids aren’t going to lose any fingers over swiping a Discover Current card, but they just might grow up with bad habits that cost them their financial future.

I believe it is good for kids to go through a few cycles of earning money, blowing it all in an afternoon at the mall, and being broke until the next Friday when they get their allowance. Eventually, they just might learn not to blow all their money on “payday,” and will hold some back for the next week. But if parents artificially manage this for them using the card’s technology, how will kids ever learn to budget their money?

For now the only Discover credit card in our household will be the one I use to buy gas. When my kids are old enough to apply for their own card, and they are earning their own money, then maybe they can have one, too. But for now they will stick to cash for spending and handsaws for cutting.