Your Kid in the Driver's Seat

Question of the week:Our teenager has been after us to buy him a car. We think car ownership could be a good way for him to start thinking about how he spends his money. What's the best way for us to help him get a car? And do you think car ownership is a useful tool for teaching children valuable financial lessons? --J. and P.

Dear J. and P.,

The combination of parents, kids and cars never fails to bring out the emotions. For teens, owning a car means freedom. For their parents, it means the welcome end of chauffeuring duties, but also new concerns about their how to be responsible parents and teach their children responsibility, too.

There is a whole range of ways to addresses this issue. When we asked members of the Armchair Millionaire community for their advice on kids and car ownership, we heard every possible perspective. Here are three:

Spring for the car yourself. "I bought my daughter a good used vehicle when she was eighteen and about to graduate high school. I also pay for her insurance. I did this so she could focus more on her college studies. When she was growing up, we agreed that she was to study hard and get good grades and I would provide these luxury items for her in return." --Steve

Go half and half. "I matched my son and daughter's savings for their first car. They had to pay their own insurance. This way they had their own investment in the car and, I feel, took better care of it. They both originally wanted new cars, but when they had saved up about $1,000 they decided a used car was the economical way to go." --William

Let them earn it. "I think that buying your first car is one of the developmental milestones in a kid's life. Plus, you treat something with more respect if you had to earn it. It's the first thing that teaches a kid the value of money." --Sarah

The right answer really depends on you and your teen. You'll first have to decide if car ownership is right for your son at all. Does he need a car to get to a job or school activities, or does he just want one for cruising around town? Is he a good driver? How responsible is he in general?

If you do decide to give him permission to own a car, my guide can help you with the questions you should discuss with him before buying.

The Armchair Millionaire Guide To Teen Car Ownership

• Who will pay for it? There's an argument that if your child earns their own money to buy a car that they'll be more responsible with the car than if it is simply given to them. On the other hand, if you pay for some or all of it, you'll likely have a greater say in the kind of car your teen ends up with and how it gets used. You'll need to strike a balance that works for everyone.
• Should it be new or used? If your teen is putting up the money, consider that buying new will probably not be an option--unless you agree to finance the car or co-sign a loan. If you choose the used car route, you'll want to balance out concerns of economy (older cars are less expensive) with concerns about safely (older cars also have fewer safety features).
• What will it really cost? It's easy for teens to focus only on a car's purchase price, but that's only the beginning of the expense of owning a car. Help your teen run the numbers on exactly what it will cost to fuel, maintain and insure their new wheels every month. Pay particular attention to insurance--both of you may be shocked at the cost of insuring a teenage driver, so check out what it will cost to insure a car before you buy it.
• What about other priorities? There's more to teen finances than cars. In particular, talk about your expectations for your child's contribution to their college expenses.

THE BOTTOM LINE: For most teens, owning a car is their first significant financial responsibility. By taking a balanced, common sense approach, you'll help them move on to adulthood with their finances intact.

Putting Your Money Where Your Mouth Is

Question of the week:I'm just starting to invest and feel very strongly that I want to invest in line with my own personal values. I've recently heard about socially responsible investing. Can you tell me what that's all about? --Maria H.

Dear Maria,

The Social Investment Forum, a trade group for the social investment industry, says that there are more than one hundred socially or environmentally responsible funds today, and that they include every type, from growth and value funds to bond funds and money market funds.

So you're clearly not alone in giving some thought to the impact your dollars have on the companies where you invest. When we asked members of the Armchair Millionaire community recently about their thoughts on the subject, we heard two very different angles:

Go socially irresponsible. "Even though I invest in the Vice Fund and Invesco Leisure fund, which both invest in gambling, alcohol and other sinful causes, I am not at all embarrassed. I feel as I am doing my part to get the economy back on track. I also look at it from the standpoint that people are going to smoke, drink and gamble whether I invest in it or not." --JP

Go socially responsible. "I have to believe that in some small way that the way you invest makes a difference ultimately. It's like voting--your one vote might not make a difference, but all together they do. At the end of the day, business only listens to one thing: money." --Jen

At the heart of it, socially responsible investing is making your investment decisions not just with a financial goal in mind, but a social or environmental one, as well. The easiest way to do this is by investing in socially responsible mutual funds, which use screens to either exclude or include particular types of companies. A "negative screen" will exclude companies for practices or products considered negative (for example, the sale of tobacco products), while a "positive screen" will include companies that are seen as taking positive actions, such as friendly environmental practices.

And while some believe that you have to give up performance to invest in a socially responsible manner, this isn't always the case. According to the Social Investment Forum, three-quarters of the socially responsible funds with at least $100 million in assets earned top marks from fund analysts Morningstar and Lipper for the one- and/or three-year periods ending June 30, 2003.

If you decide that mutual funds are the route you want to take to be a socially responsible investor, my guide will get you started.

The Armchair Millionaire Guide to Choosing Socially Responsible Mutual Funds

• How does it fit with your portfolio? Just because a fund invests according to your values does not make it an automatic choice for your portfolio. It still must fit into an asset allocation that is suitable for your goals, time horizon and risk tolerance.
• How does it screen? Some funds might use many screens, others only one. You'll need to choose according to what is most important to you. A fund that only invests in companies known for excellent labor relations for example, might still allow investment in other companies involved in activities you object to--for instance, animal testing. Bear in mind that when a fund has more stringent screening, the fund manager has fewer investments to choose from, potentially making it more difficult to deliver good performance.
• How long has it been around? Many socially responsible funds are relatively new on the scene, so check on how long it's been in business. Also, find out how long the current manager has been running the fund.
• If you need it, get expert advice. Some financial advisors specialize in socially responsible investments. You can find a directory of these advisors at www.socialfunds.com.

THE BOTTOM LINE: If you want to put your investing dollars to work at more than just achieving your financial goals, socially responsible investing is absolutely worth investigating further.

Saying "I Do" with a Prenup in Hand

Question of the week:Our daughter recently got engaged and will be married this winter. We have been wondering about when a prenuptial agreement might be called for. Any guidance on this issue? --Miami Dad

Dear Miami,

A prenuptial agreement defines the financial obligations and responsibilities of two people about to get married. Its primary intent is to reduce heartache and conflict later on if the marriage doesn't work out. Given that, according to the Census Bureau, about half of all marriages end in divorce, a prenuptial agreement can definitely be useful for many couples.

When we asked members of the Armchair Millionaire community their thoughts about prenups, the comments we heard showed how much it depends on each couple:

Burned once. "I did not have one but would have been more than willing to sign one if my husband wanted. He had been in a bad divorce before I met him which consumed his assets, including an inheritance from his grandmother." --Jennifer

Just common sense. "We didn't have a prenup when we got married--we were young and had nothing to fight over, except a little debt. I think prenups make sense for people who go into their marriage with sizeable assets, or for second or third marriages. It might take away the romance, but it's common sense!" --Gina

People most often think that prenuptial agreements are needed when one party has substantially greater assets than the other. While that certainly the case, there are actually many other circumstances when a prenup might be in order. Here are some examples:

• If one or both parties have children from a prior marriage. In this case, a prenuptial agreement can ensure that certain assets go to the children in the event of their parent's death.
• If one or both parties own their own businesses, and don't want the business assets to be part of any divorce proceeding.
• If one party will be giving up their career once married, or will be supporting the other through graduate school. In such a case, a prenup can define the spousal support (alimony) this partner would receive in the event of divorce.

If you think your daughter might benefit from having a prenuptial agreement going into her marriage, my guide will help her get started.

The Armchair Millionaire Guide to Drafting Prenuptial Agreements

• Ensure that it's needed. Sit down with your spouse-to-be and outline exactly what each of you would want to accomplish with a prenuptial agreement. State laws already cover how property is divided during divorce, so it usually only makes sense to have a prenuptial when both parties want a different outcome.
• Get legal assistance. Prenuptial agreements are legal, enforceable contracts and the laws governing them vary from state to state, so this is one time you should not try to do it yourself. To ensure an agreement that addresses your particular needs and is fair to everyone, each party should consult with their own family lawyer.
• Make full disclosure. Both sides need to disclose all of the assets and liabilities they are bringing to the marriage. Failing to so will usually void the agreement.
• Keep it strictly financial. Courts will only uphold agreements that are monetary in nature. So don't try to sneak in anything about requiring your future spouse to take out the trash every week.
• Plan ahead. While there's nothing to stop you from drafting this kind of agreement after you're already married, I recommend doing it before--when you're madly in love and have your partner's best interests at heart.

THE BOTTOM LINE: Drafting a prenuptial agreement certainly isn't romantic, but in some cases it can be very wise and extremely practical.

Keeping Your Good Name from Going Bad

Question of the week:My sister was the victim of identity theft and went through months of hassle getting everything straightened out. What are your suggestions for safeguarding your identity? --Ramona

Dear Ramona,

Identity theft--whenever someone uses your personal information such as Social Security, credit card or driver's license numbers to make purchases or open accounts--is definitely on the rise. While it's impossible to put exact numbers on it, a report last year by the General Accounting Office said that up to 750,000 Americans are victims of identity theft each year.

There's certainly plenty of anecdotal evidence within the Armchair Millionaire community. When we asked members about identity theft, we heard from several people who had been victimized. This story was typical:

Mysterious credit card user. "I had credit cards that I had not used for some time suddenly appear with balances. I canceled the cards and was not penalized and also asked the credit bureaus to put a fraud alert on my Social Security number. I am also checking my charges on the Internet almost daily as this will probably happen again." --Steve

As your sister experienced, the hardest thing about having your identity stolen is clearing out the illegal activities from your credit report. It's certainly far easier to keep it from happening in the first place. My guide provides the steps everyone should take to protect their identity.

The Armchair Millionaire Guide to Preventing Identity Theft

• Careful with your checks. Never have your Social Security or driver's license numbers printed on your checks. Put your work phone number instead of your home number on your checks. If you have a P.O. box, use that instead of your home address.
• Careful with your credit cards. When you pay your credit card bills, don't write your full account number on your checks, but just the last four digits. This prevents everyone who has access to your check as it is processed from capturing your account number. When you get a new credit card in the mail, sign it immediately. And when you mail your credit card bill payments, put them into a U.S. Postal Service collection box--don't leave them in your home mail box for your letter carrier to pick up.
• Careful with what's in your wallet. Minimize the amount of ID and credit cards that you carry to what you actually need. If you have credit cards you never use, leave them at home. (Or better yet, cancel the accounts.) Don't carry your Social Security card or birth certificate except when absolutely necessary. Memorize your credit card and ATM card PIN numbers--absolutely never carry that information around with you.
• Careful with the Internet. Don't transmit credit card numbers or account information to any Web site that does not offer a secure data transaction. Look for an icon of a lock in at the bottom of your browser, or for the URL of the page at which you input your data to begin with "https." Never give out personal information unless you initiated the transaction and you trust the merchant, and never email your Social Security or credit card numbers.
• Careful with your records. Invest in a good paper shredder and use it often. Old credit card receipts and bills, bank statements you no longer need--anything with your account information on it--should go through the shredder before you toss them. Same goes for all those credit card offers you get in the mail.

THE BOTTOM LINE: With all the tools available on the Internet, you no longer need to rely solely on your financial advisor to get your questions answered. While it will never replace that human touch, it can absolutely make you a better, more-informed manager of your own money.