How to Make Sure Your Kids Live Better Than You
by George Mannes

October 2005

Strategy no. 4
REACH HIGHER FOR EDUCATION
For past generations, graduating from a good college was an almost surefire means to success. With degrees increasingly commonplace, however, future generations may need to kick it up a notch to get the same higher-education advantage. According to the College Board, the median income of someone who graduates with a master's degree was $59,500 in 2003--nearly 20% more than the $49,900 earned by those with a four-year degree. A professional degree was worth $95,700, or 92% more.

And, yes, quality counts. A 2005 Cornell University study reports that students who attend better-rated colleges do indeed end up earning more than their counterparts at lesser institutions--and that the boost to income from attending higher-quality schools is big enough to compensate for their typically higher cost.

So try bumping up those contributions to your 529 plan (or get started now), and steel yourself to the idea of paying those tuition bills somewhat longer than you'd planned. The ultimate price tag, though, may be smaller than you think if you send your child to a top-rated public institution. In fact, the same study found that attending highly rated public colleges packed the same earnings punch as comparable private schools, making them the better investment, in the researcher's estimation.

Strategy no. 5
GIVE BIG KIDS A HAND TOO
Your role as a financial mentor doesn't necessarily end once your child is an adult. According to a University of Michigan study, people ages 25 to 34 who live on their own typically receive more than $14,000 in assistance from their parents. As the economic climate gets tougher, odds are your adult child could probably use a hand from you too.

Giving money to your kids can reduce the taxes your heirs may ultimately owe on your estate. (Only estates worth more than $1.5 million will be taxed this year, and that amount is due to rise over the next few years. The estate tax is scheduled to be eliminated in 2010, and then, unless the law is changed, it will be reinstated with an exemption of $1 million in 2011.) You can give as much as $11,000 to each child this year without paying a gift tax; couples can give up to $22,000. If you're like most families, though, you're probably less concerned about estate planning than you are with simply providing the help your child needs now. To make sure a gift of money has the most impact, consider targeting it for a particular purpose--say, chipping in for the down payment on a first home or paying off the balance on a high-interest credit card. If you're attaching conditions, however, make your expectations clear. If you intend that the money be used for graduate school and you'd be unhappy if it were spent on a new car instead, say so in advance to avoid hard feelings, and give your child an opportunity to decline the gift.

Also consider that, however well intentioned your gifts may be, too much of a good thing can hurt your kids in the long run. Regular gifts may encourage a lifestyle your son can't really afford or send the message to your daughter that she can't take care of herself. "Parents should use their money to help their kids become independent," says Jon Gallo, co-author of Silver Spoon Kids: How Successful Parents Raise Responsible Children, "not to maintain their dependence."

In fact, the single best step you can take to help your kids prosper as adults won't cost you a dime: Be a good role model. After all, children learn most of what they know by observation. So if you rely on plastic to keep up with the Joneses and never manage to save a dime, don't be surprised if your children grow up to do the same, no matter how much you preach to them about living within their means. "It's like parents telling their kids not to smoke and then lighting up a pack a day," says financial planner Kevin McKinley, author of Make Your Kid a Millionaire. In the end, there's no substitute for setting the right example. If you haven't exactly been a paragon of financial virtue lately, there's no time like the present to start.

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