Wednesday, August 31, 2011
Navigating Your Parents' Finances
Financial educators recommend that the first step is to track their cash flow. This may be difficult because parents often hide money from their children, may not remember where they've put their money, or may not have kept records. Typically, income exceeds expenses until age 70, after which savings are usually needed to meet expenses.
Once you've determined where the money is coming from and how it's spent, check your parents' bills and expenditures to identify errors. If you find transactions that aren't clear, you can request information in accordance with the Fair Credit Reporting Act. And if you discover any suspected fraud or financial abuse, you should also report it to appropriate authorities immediately.
Finally, if they haven't already done so, prepare a net worth statement. This will help you determine how long your parents' savings will last. Identify ratios that will help you in planning their finances. For example, you should set a goal that for each dollar of debt, they should have $25 of assets. For retirees, no more than 10% of their income should be going to debt, and they should have 70 to 90% of their net worth in investment assets, although that ratio can be lower for homeowners. If necessary, seek the help of a qualified and trusted financial professional to help you navigate what's best for your parents.