There are awkward money questions, and then there's asking your parents about their posthumous financial plans. Talk about a tricky opener. Still, for many of us, the conversation is as uncomfortable as it is necessary.
According to a recent Charles Schwab survey, 53 percent of millennials believe are betting on an inheritance as part of their retirement plans. However, the same survey found that only one in five people actually receive an inheritance from their parents as expected. Grasping the reality of what to expect is one of many reasons to bite the bullet and address this sensitive financial issue. For some, gaining clarity is a way to better understand a parent's wishes, or prevent confusion down the road. For others, it might be more about present needs rather than future planning.
Whatever the reason, the important thing to remember is that your questions are just as important as their answers. So do yourself a favor and consider the following advice, courtesy of both financial and etiquette experts, before you broach the conversation.
How to Start the Talk
When approaching your folks, it's important to lay the groundwork so they have some time to consider how much they're comfortable sharing. "A good way to start this conversation is to reference a resource, such as a book or an article you read about the importance of estate planning," writes GoBankingRates's Cameron Huddleston. "You could share what you've learned or offer to let them read the resource themselves."
Another approach is to be more direct without catching them too off-guard. Suggest setting up a time to talk about the 'I' word and let your folks decide when and where to have the conversation. If they ask why you're broaching the subject, your best bet is to answer with a measure of practicality.
"My clients often say, 'My financial planner has been asking me this question, and I thought it would be relevant to you, too,'" certified financial planner and Brunch & Budget founder Pam Capalad tells The Week. If that's not an option, Huddleston suggests telling them you're looking into your own estate planning and wondering if they've done the same. This opens the door to a larger conversation without putting them too much on the spot.
Make Sure You're Not Creating Disharmony Within the Family
One concern your folks may have is betraying your siblings by only discussing the matter with you. "Do some one-on-one talks first, perhaps among siblings, or the parents with each child," Peggy Post, director of the Emily Post Institute, tells AARP. "But it's also good to get everyone together whenever possible, to make sure everything's out on the table and everyone is on the same wavelength. Even if families don't live close to each other, you can do a video (phone) call on FaceTime or Skype, or at the very least do a conference phone call. It's really good to talk individually and as a group."
The Questions to Consider
You might want to start with a broad ask: "Do you have an estate plan?" If they say yes, you might ask about how it works, rather than digging into the exact numbers. Another question you might ask is: "Are there any documents or resources I should know about in case of an emergency?" Specifically, ask about whether or not your parents have created a will, healthcare directive or power of attorney document that you might need to access, worst case scenario. If you really want to get in depth without touching too much on the actual numbers, check out this "inheritance checklist" containing a list of documents you may need to access one day. When asking your parents about such specifics, make sure you explain that you're just looking to protect their wishes first and foremost.
If You're Asking For an An Advance
It may seem like a long shot, but according to a recent Merrill Lynch retirement study, 77% of retirees now say it's better to pass on inheritances while still alive. Of course this all depends on your parents' financial situation as well as how you plan to use the money. Perhaps you're starting a business, looking to purchase a home, or helping to pay for college for a child of your own. Make sure the money you're asking for is intended to be used soundly and in a way that makes your parents feel secure and satisfied. While your parents might be happy to gift you with a portion of your inheritance, don't guilt them into it. "If you are sure that they are still competent to make this decision and can afford it, ask for a loan," suggests Philip Galanes of the New York Times' Social Qs column. "Let them decide whether to make it a gift." You should also consider asking for a small portion, rather than the entire sum—and if you have siblings, make sure you put any agreement writing so your parents don't have worry about potential disputes in the future. Remember, this isn't just about your needs but theirs as well.
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.