Mastering Money

And All You Were Worried About Was the Monthly Payment...THINK AGAIN!!!

You know, these days all consumers seem to be concerned about is how much something is going to cost them on a monthly basis.  “Yeah, I’ll buy that iphone, I’ll buy that HDTV, I’ll buy that new refrigerator…it’s not too expensive when I put it all on my credit card.”  Yeah, right!!  You may be paying for something several times over once it’s paid for and you’ve paid all that interest.

By the time you’ve paid off your 30-year mortgage, you’ve paid for your house three times!!!  Let’s talk about another expenditure we typically finance:  our car.  Not to be forgotten are the extras we put on the car.  A good salesperson (or bad, depending on which side of the fence you happen to be on) will exclaim that the options you’re adding to the cost of the car will only cost you so much per month; they really don’t tell you the cost of the option.  For that matter, they don’t even tell you the cost of the car; they simply tell you how much it will cost you per month.  Researchers say few car buyers know the actual full cost of their vehicles or stop to consider how much more it’s going to cost them by extending their loan on the vehicle.

I’m absolutely amazed at the length of some car loans.  When I was growing up in the days when cars slept up to nine people, three years was the longest one would ever consider paying off a car.  Now days, one can finance a car for eight or even nine years!!!  Jonathan Welsh writes in The Wall Street Journal, if one extends one’s car loan from five years to seven years, it will increase the average cost, or how much the buyer will pay out, by about $3,000 in interest.  The average maturity on a car loan today is 70 months, up from 62 months just a year ago, and those longer term loans carry higher interest rates.  Take a look at these figures:  a five year loan at 6.05% interest will cost about $5,700 in financing, but a seven year loan at 6.59% interest will cost about $8,850 in financing.

All I can say, that better be a trouble-free car for a contracted period of time if you plan to pay it over nine years.  Imagine if the car died after six or seven years and you still had a couple of years left on your loan.  Not fun!

As the average car loan increases, more people are trading cars in before they are paid off.  Unfortunately, at that point the owner owes more on their car than the car is worth.  In 2006 about 29% of car buyers who traded in a car to buy a new one were in this position.  This statistic is up from 20% just five years ago.  Mr. Welch further states in 1990 the average a buyer owed on the car they were trading in was $617, which increased to $1,726 in 2000 and $3,062 in 2006.  This is NOT a good trend.

One of the components of inflation is what I call “technology inflation.”  Take cars for example.  A 1987 Chevy Caprice is not the same as a 2007 Chevy Caprice due to all the technological advancements, such as satellite navigation and entertainment systems, once reserved for the premium vehicles only.  This makes new cars that much more enticing.

What’s the answer?  It’s not necessary to seek out the latest and greatest.  When one buys a new car, all one has to do is drive it home and suddenly it’s worth a lot less than what one paid only a few minutes earlier due to the fact that it’s now considered a used car, and the first payment hasn’t even been made yet!  It used to be when one purchased a used car, one was literally buying someone else’s problems.  The fact is, cars are being made better today.  My suggestion is to buy a decent “pre-owned” car and purchase an extended warranty along with it.  Let someone else depreciate it.  You’ll be a lot happier in that you didn’t pay an arm and a leg for your car and you’re not paying for the rest of your life on the car!

Summer Money For Kids

Well, here we are at summer time.  I can't believe that five months have gone by in the New Year already.  School is out for summer and this is an excellent time to teach your children about money and how it works.  What makes the learning process about money so unique is that it doesn't have to come out of a text book; the BEST money lessons come from LIFE lessons, so the "student" doesn't feel the traditional "pangs" of the typical learning process.

The first step is learning that money doesn't simply appear.  Something has to be traded for it.  Usually time and labor are the bartering tools for money.  If your children are too young to be slinging hash at the local diner, then I would suggest giving them chores to do around the house.  That may already be happening; however, in the summer, there are more things to do that don't normally occur during the rest of the year, such as mowing the lawn, tending to the flower beds, and washing windows, just to name a few.  Pay them for their labor and reward them for their level of performance.  They will learn the difference between doing a job adequately and doing a job superbly.

Young adults will begin to grasp the relationship between time and money.  Most people say "time is money;" I think differently:  money is time.  Simply put, we are trading our time for money and time is what we are sacrificing for the money we earn.  The earlier a person realizes this concept, the better prepared they will be when they get their first job outside of the home as they realize that the commodity of time is something that cannot be replaced, so that time which is given up for money is time that is gone forever.  Thus, the money earned for that time that is gone is precious and should be spent accordingly.

That brings me to the next step:  spending money.  Now that it has been earned and has an intrinsic value, the spending part will feel differently since the money has been earned by THEM.  Teach them to be charitable.  Perhaps 10% of their earnings can go to the charity of their choice; this will teach them that there are people in the world that are worse off than they are.  This is a great eye opener for the child that complains they have to work for their spending money.  The next thing is that they should save 10% of their earnings.  This will teach them that they shouldn't spend all of it and that an amount should be put away for a time when they can't earn it, such as when school starts again and they don't have the commodity of time to trade for money.

Some experts go out on a limb and suggest that children should pay for some necessities, such as toothpaste, so not only they see how much it costs, but also as a type of "tax" on their money.  After all, as an adult, we don't take home EVERYTHING we make since some of our earnings go to Uncle Sam.

This leads into setting priorities.  As children learn about the choices they have to make with their money, they will begin to set priorities since they have only so much to spend, they will realize they can't buy everything they want.  A great way to exemplify this would be on vacation.  Let your children decide whether they want to stay in a posh hotel or participate in a unique activity while traveling.  Let them see the cost of transportation on a trip, the cost of food and accommodations, and the cost of riding a llama in the Peruvian countryside.

The earlier we teach young folks about money and how it works, the better off they will be for life.  Understanding how money works is not just on the spending side, but getting a handle on how it's earned is of paramount importance.  Eventually the young person will see that they are merely trading their time for the things they buy, just like adults.

How to Lower Your Credit Card Interest Rate

Since June, 2004 the Federal Reserve has been increasing interest rates which has been a windfall for credit card companies and a hardship for consumers who keep balances on their credit cards.  The average American adult carries three bank credit cards.  Most issuers prefer we use variable-rate cards, which carry an average rate of 16.6% as of December, 2006, which is up from 12.5% from December, 2004.  The Government Accountability Office found that 11% of U.S. cardholders incurred interest rates of at least 25% in 2005, compared with only 5% in 2003.

Along with the increase in interest rates, there has been an increase in competition among credit card issuers.  As in most industries, it's much easier to hold on to current customers than to attract new ones; this is also true for the credit card industry.  They want your interest payments, so they are willing to relinquish some revenue so they can at least have a part of it.  It's far better to have some than none at all.

My theory, and it works in this case, is that it doesn't hurt to ask.  All they can do is say "No," in which case you can simply transfer your balance to a card that is offering 0% interest.  Keep in mind this great rate won't last forever.

Bank of America cardholders who call asking for a lower rate are transferred to a "retention specialist."  The key word here is retention.  These "retention specialists" are trained in what the bank calls "judgmental lending," which allows them to consider much more than payment records.  In an article in The Wall Street Journal dated January 9, 2007, success in lowering rates varies on factors ranging from payment history to balance size.  Since balances are what generate the income in the form of interest to the credit card company, someone who carries a balance from month to month is more likely to have their rate lowered.  However, I don't advocate carrying a balance from month to month; interest payments are only making life more expensive for you.

If you are in the situation where you'd like to have your rate lowered, here's a suggested script to follow according to the U.S. Public Interest Research Group:

First of all, be polite and don't lose your temper.  Say, "Hi.  My name is __________.  I am a good customer, but I have received several offers in the mail from other credit card companies with lower APR's.  I want a lower rate on my card, or I will cancel my card and switch companies."

Good luck.  All they can do is say "No."

Credit Card Caveats

I'm not one of those money guys who hates credit cards.  I think they're a good thing, as a matter of fact, I have two of them.  One is a MasterCard that gives me miles for every dollar I spend, and the other is a Neiman's card, because my late mother always told me every man should have one.  My late mother was late in more ways than one...she never wore a watch...

You see, used wisely, a credit card saves you from writing a bunch of checks all over town and avoids carrying a lot of cash.  However, studies do show that you will spend 20% less if you use cash.  Why?  My thoughts are that when you hand a salesperson your credit card, they swipe it, then give it back to you.  Psychologically, you haven't given anything up; whereas with cash, you're now deprived of spending that money...forever.

My philosophy that I try and engender into young folks as well as "mature" people is that it's okay to make purchases with a credit card, as long as you have the money in the bank to pay for the charge.  That being said, there are some things to look out for when using a credit card:

1. Late fees.  Did you know the credit card industry made $13 Billion last year on late fees alone?  Folks, we're not talking interest charges, just late fees.  If your payment is as little as five minutes late, you get zapped with a late fee.  The best way to avoid late fees, of course is to pay on time.  Make sure your check is legible, write the amount paid in the box on the stub, write the last four digits of you account number on the check in case it gets separated from the stub, and always send in the stub.  If you call your credit card company, they may take the late fee off, if you ask them nicely.
2. The roaming PO Box.  Another reason to make sure you're using the stub that comes with your bill.  The credit card company wants to take full advantage of your cash, so they may change the PO Box where you mail your payments so they can get to your cash faster.
3. Disappearing rewards.  Aren't rewards great???  Because we're using our credit cards in places like supermarkets and gas stations, credit card companies have started to pare down their offers.  As a matter of fact, American Express eliminated double points for everyday purchases.
4. Disappearing low rates. This is part of the old bait-and-switch.  Credit card companies will entice you with low rates, and then when you have a ton charged on the card, they increase your rate.  This includes the fixed rate that isn't.  We all prefer to pay a fixed rate, but sometimes when you think you have a fixed rate, the credit card company changes it to a rate that varies with something you've never heard of, such as the Ukrainian prime rate.
5. Rate increase for no reason.  The credit card company is only liable to give you 15 days notice when they raise your rate.  That's it...they don't even have to give you a reason for it.
6. Pay by wave.  VERY DANGEROUS!!!  With technology advancing the way it is, you can actually wave your card in front of the scanner as opposed to swiping it.  This simply makes purchases that much easier.  When something is easier to accomplish, you'll do more of it!
7. Fees on cash advances.  First of all, the rate on a cash advance from your credit card is higher than the rate for purchases, and you will pay that higher rate until you pay your card off in TOTAL!!  Yes, the credit card company assumes the LAST thing you pay off is that cash advance, so you'll always be paying the higher rate until the entire balance is paid.  If you have money in your checking account, and you have an ATM card, get cash that way.
8. Rate increase on how you pay your other creditors. Yep, you guessed it; if you pay your electricity company late, the credit card companies will know about it, and guess what?  You're now a greater risk.  Guess what that means?  YOU PAY HIGHER RATES!!!!
9. Getting your kids addicted. Bad idea anyway, to let your kids get a card.  There are new products, Visa's UpSide Card and MasterCard's Allow Card will tell you they teach your kids about money...beware!  Actually, these aren't credit cards at all, but prepaid cards.  What you need to look out for are the fees:  the Allow Card has a $20 activation fee, along with a $3.50 monthly maintenance fee, and oh yeah, reload fees (when the card gets low, it needs to be filled up, just like the gas tank in your car) that range from 75 cents if you use your checking account to as much as $50 if you use your credit card.
10. Setting low minimum payments.  The average American has $10,000 on their credit card.  Did you know how long it would take to pay off a credit card if you had a $10,000 balance, made no other purchases, and paid just the minimum?  34 YEARS!!!
11. Balance transfer fees.  When you receive those great offers in the mail for a zero interest rate card, you may be over anxious to transfer the balance from your 24% card to the new one.  Just beware the new card is paying off your old balance for you and they will consider that a favor to you.  Guess what?  Just like when you were growing up, there was no such thing as a free favor.  Some cards may even charge a balance transfer fee that's a percentage of the balance transferred, which can indeed be costly.  Also note that if the balance isn't paid off by a certain amount of time, you may owe interest retroactively.
12. Charges that aren't yours.  Yes, you guess it!  Make sure you audit your credit card statement when it comes.  You may be paying for someone else's clothes!!  Tell the credit card company the charge isn't yours; they'll investigate, and if it truly isn't they'll remove the charge.

Again, credit cards aren't a bad thing as long as they're used properly.  Just make sure you're aware of all the "hidden costs."

Refrigerator Reflections

I got this idea from Wall Street Journal columnist Jonathan Clements who suggests it's best to learn your lessons the old-fashioned way, which is through constant repetition and public humiliation.  No, this has absolutely NOTHING to do with New Year's resolutions and eating habits, but it does have a lot to do with beginning a New Year, your personal finances and your refrigerator. Okay, so you're thinking:  what do my personal finances have to do with my refrigerator?  EVERYTHING! 

Here's how it works:  Your refrigerator serves as your family bulletin board, which is visited not only by the entire family multiple times a day, but also since most social gatherings end up in the kitchen, it is visited at numerous times by extended family, and "highly motivated" neighbors, friends and guests.  That being said, what if you were to allow all of the aforementioned to know your progress for the financial goals you set for yourself?  Do you think you would make greater progress on those goals if you were to face them several times daily?  I think so, for public humiliation can go a long way to achieving those goals.

I've come up with a few examples you can display on your refrigerator.  These are areas we can reflect on improving in the coming year.  Once they begin to take shape, I bet you'll have a desire to make them even better and better so you can prove to your family, friends and neighbors that you not only reached your financial goals, but you also surpassed them.

1. As the saying goes, "Pay your self first," so let's start with this one.  Keep track of how much you're putting into savings.  Start a chart, and add every amount you're putting into savings and your 401(k) at work.  When I was in second grade we had a book contest at school to see who could read the most books by the end of the year.  Everyone had a space on the chart, and we all became very competitive, so we read more and more.  Could this possibly be the beginning to saving more and more?  Hmmm...
2. List all your credit card debt.  This will be a tough one for some folks.  Letting everyone know what you have on your credit cards can come with trepidation.  It may be a great way to embarrass you in to paying them down.  If the refrigerator isn't the right place, perhaps putting the list in a less public place, such as your nightstand would be better.  You'll see it at least twice a day and thus, it will serve as a great reminder.  Either venue, you'll have the reminder and perhaps the motivation to get rid of it.
3. Mr. Clements suggests putting a list of all your financial blunders.  It's not a bad idea, but the way I look at it, no one really makes financial blunders because we're not taught financial literacy to begin with, so how are we supposed to know this stuff?  If you look at what you think are your financial errors, armed with the thought of knowing they really aren't our fault, then you'll be able to face them with confidence and a sense of humor.  As long as you learned from those errors, you'll be constantly reminded of what you learned.  Reward yourself for the learning process by getting a scoop of ice cream.  Ooops...
4. Post a list of all your purchases each day.  Keep them up for a week, and each week take them down and begin posting those week's purchases.  See if patterns begin to develop.  Start to notice those things you really don't need.  This is the area your "concerned" friends and neighbors can help.  They'll be quick to offer suggestions and hints..."Ewww...you spend your money on that????"  Some people are rather insensitive, but they'll at least give you some things to think about.
5. If there is something you wish you could spend less on each month, give yourself a budget.  Say this item is soft drinks.  Give yourself $40 for the month, post it on the refrigerator and subtract your expenditures from the $40; at the end of the month, see how much you have left.  You may have spent more than the $40; if so, plan to do a better job next month.  If you spent less than the $40, see if you can improve the following month, or pick something else out in the following month for which you wish you could cut back.  Make it a game for yourself and you'll have fun.
6. Check your credit report and put up your score.  You can get a credit report for free at Equifax, Experian and TransUnion once a year, so I suggest getting one every four months, that way in a year you'll get your free report from each.  Strive to increase your credit score with each report.  This will also allow you to see if your identity has been compromised; if someone has obtained a credit report for you, which will show up on the report, and you didn't authorize it, perhaps someone is stealing your identity.

Have some fun with your refrigerator reflections.  Get the whole family involved.  You'll create better spending habits and hopefully have some fun at the same time.

Here's to a happy, healthy and prosperous New Year!!!

Tips for Holiday Shopping

Now that Thanksgiving is over, it's time for the holiday rush.  As if office parties, family get-togethers and trips to the airport to pick up loved ones flying in from Norway weren't enough, there's also the prospect of shopping for the holidays.  Shopping means spending.  Spending means overspending.  Overspending means debt.  Or does it?

Here's some advice for holiday shopping, whether it's for Hanukkah, Christmas or Kwanzaa:

• Create a budget and stick to it!  I know you've heard this before, but it truly works; just make sure to track your spending so you're sure to stick to it.  Start with the total you wish to spend, then create a list of all those to whom you wish to give.  From the total, parse out the amount you wish to spend on each person on your list without going over your total.  Oops...I knew it...you went over.  Nope, you can't increase the total!  Keep the total the same, simply "fine-tune" each of the amounts you wish to spend.  If you're still struggling to economize, read further...
• Don't try to "one-up" your friends.  If they sent you movie passes last year, don't reciprocate by sending them tickets to the hockey game.  Then they send you on a trip to Tahiti, and, well, you get the picture.
• Join a wholesale club.  I think they are great!  Not only can you experience year-round savings on paper towels and cheese, you will find great novelty items at the holiday season that you don't find any other time of the year.  The problem for me is that I tend to treat myself to a bag of the chocolate covered almonds I buy for my friends.  This is a great place to pick up items for friends at the office, the person who delivers your paper, or the person who always waits on you at the cleaners.
• Buy for children only.  After all, the holiday season is for kids.  I know, some of us are still kids at the age of 50.
• If you have a huge family, draw names.  That way everyone won't have to buy for everyone.  Think about it...if there are 12 people in a family, and everyone is buying for everyone else, then there will be 132 gifts to buy (12 people will buy 11 gifts.)
• Shop early, especially if you're buying for out-of-town people and have to ship the gift to them.  If you wait too long, you may pay more for the shipping than the shopping.
• Cut down on the impulse spending.  I mention this no matter what time of the year it is.  Snakes are mere reptiles that have a simple nervous system:  stimulus and response.  Is that not what we're doing when we see something, don't think about it, and buy it?  We have brains that allow us to judge...use that brain!!!  If you think little Betsy will love that $2,000 doll, rest on the thought.  Think about it over night, or better yet, over a week.  Or perhaps, don't even think about it at all...simply walk away from it!
• The most overpriced items are the easiest to find.  This is true in the grocery store, and it is true elsewhere.  The items with the least markup are ones you have to bend over for, or reach for.  (I'm short, so I have to reach for everything.)  Chest-level items are usually the most expensive.
• Sometimes your employer may have discounts on movie passes.  These make excellent gifts and there is usually no policy that a company employee has to use the pass.
• Charitable contributions are another great idea, and you receive a tax deduction at the same time.  I remember when I graduated from high school, I received a donation from the lady who drove carpool on Tuesdays.  Yes, I even remembered what day she drove.  I didn't know her very well, other than "The Tuesday Lady," and she wanted to remember me at graduation.  It would have been awkward receiving a gift of material from her, so this was the PERFECT gift.  So great, I've remembered it over all these years...too many years to want to count them.
• Remember the rebound.  A gift you received in the past and never used because it was a lousy gift for you may make that perfect gift for someone else.  Just make sure you're not giving it back to the person who gave it to you.
• Cookies!!!!!  Yes, I said cookies.  You don't have to spend a lot on gifts.  It's not the law.  Sometimes homemade gifts are the best.  Personally, the only cookies I give would be Oreo's because I can't make anything better that that.  When you go to the trouble to prepare the gift, it truly comes from the heart, and that really means a lot to the recipient...or it should anyway.  Think about this idea the next time you go out and buy something expensive for someone; they may appreciate the homemade stuff more!

Here's to a wonderful holiday shopping season.  May the season and the New Year bring joy and happiness to all!!!

College and the Student Debt Trap

In October I had the distinct opportunity to speak to fourth year students at my alma mater, The University of Virginia.  The university was founded by Thomas Jefferson in 1819 and is steeped in tradition.  You just witnessed one of those traditions:  there are no freshmen, sophomores, juniors or seniors, they are first-year students, second-year students, well, you get the idea.

Speaking in the very room where I learned Business Law, I was amazed at the 100 or so eager faces at 8:00 a. m. (I know I wasn't that eager at that time of the day at that point in my life.)  I used to believe that college students would be fun to teach because they wanted to be there.  Today, that is truly an understatement.  Yes, teaching is fun, and more than ever, students are going into debt in order to receive a higher education, so they definitely want to be there!  They are concerned about the debt they are facing; they definitely wanted to hear what I had to say!

Suze Orman states that college debt is good debt.  I don't believe that any debt is good; my philosophy is to save for something before you make the purchase, including college.  However, here's something to consider:  students who graduate with a bachelor's degree, not even a masters or a doctorate, but simply an undergraduate degree, will earn 83% more than those with only a high school diploma. 

Not everyone can save before attending college and here are some statistics:

• Since 1989, tuition inflation has been running at 6%, twice the 3% rate of general inflation
• College students graduate with an average of $19,200 in tuition debt; graduate students can have upwards of $100,000 in tuition debt
• 25% of all students are putting their tuition on their credit cards
• 75% of all students have a credit card, and 40% of all students have more than four credit cards

For those who aren't fortunate enough to save for college first, or who don't receive a grant or scholarship (grants and scholarships are gifts, and thus don't have to be repaid), here are some tips to weather the student debt storm:

• Apply for financial aid at:  www.fafsa.ed.gov.
• Pay interest on your tuition debt while you are in school; this will help in a two-fold manner: 1) your debt will be lower when you graduate, as you'll only be paying the principal, and, 2) you'll get in the habit of making monthly payments.
• Only take out loans for tuition; don't be financing pizzas with debt.
• Once you graduate, always pay your loan on time, and consider having the payments debited automatically from your checking account.  In both instances your lender may give you a break on the interest rate, or perhaps even forgive some of the balance.
• Ask your lender if you can make smaller payments when you graduate and larger payments as you advance in your career and command more salary.  Lenders are usually willing to work out payment plans such as the accelerated plan mentioned above.
• Lenders may forgive your entire loan, based on your profession, such as teaching and emergency services.

Unfortunately, student debt is a fact of life today, with state tuitions averaging $16,000 per year and private universities averaging $32,000 per year.  An Ivy League education is approaching $50,000 per year.  Stay the course, and stay in school, as your earning power will be much greater. 

Teaching Children Personal Finance

On August 28th I wrote a blog about setting up an allowance for children as a tool to teach them how to handle money.  At the age of eight, through a life-changing event, I embarked on a journey of learning about money and how to properly use it because it was no longer plentiful.  Financial literacy is not taught in homes, and only recently has it began to emerge as part of the school curriculum.  If we don't teach our children, they will become tomorrow's bankruptcy statistics.

Here are some suggestions on starting down the avenue of teaching personal finances at home:

1. Begin by giving your child an allowance.  Your child should earn their allowance; this is NOT something that should be doled out indifferently.  For suggestions on how much to give, please check out my blog, Allowances as a Teaching Tool.  This will allow your child to handle their money; when it's theirs, they will tend to protect it.  Once your child realizes the allowance isn't an infinite amount, they will learn how to prioritize. 
2. A budget is the best way to learn how to prioritize.  First, your child should set a certain percentage of their allowance for charity and savings.  I suggest 10% of their allowance for each.  The remaining 80% is for them to spend in any way they wish; this will allow them to keep track of their spending as they are spending.
3. Running errands is the best way to show your children how much things cost.  Take them to the grocery store and let them see the price of common items.  Give them challenges, suggest they only have a certain amount to spend, and they have to put dinner on the table.  Let them figure out how they are going to purchase all the items, including ingredients.  Will this allow them to get other items, such as potato chips and Oreos (my favorite)??  Let them see the price of dry cleaning.  Let them see how much it takes to fill up the car, SUV, or whatever you drive, with gas. That should be a real eye-opener.  This will allow them to see how much it costs just to keep a household running.
4. While at the grocery store, make them compare prices.  What is the best buy?  Is it the best nutrition for the money?  What is the cost per ounce for the dishwasher detergent?  Is the cheaper brand the better of the choices?
5. Teach them about credit cards and what happens if you don't pay the balance.  Teach them about interest, what it can do to you and what it can do for you.  They will realize if they purchase things for which they don't have the funds, they have to pay more for them in the form of interest charges; if they have funds saved, they will earn interest on those funds.  Great lessons!!!
6. Explain the difference between needs, wants and desires.  They example I always give is:  One needs transportation, one wants a car and one desires a Porsche.  In America we tend to mow the lawn with a 747; we tend to over-buy our needs.  Teach your children perspective and to keep that perspective.  Congressman Sam Johnson said, "If we don't teach our kids the difference between an 'need' and a 'want' - Madison Avenue will."

I believe financial literacy is a life skill, just like reading, writing, good manners, and communication skills.  Teaching our children about the proper use of money will:

• Prepare them for unexpected events
• Prepare them for retirement
• Foster discipline
• Create more sense of delayed gratification in our instant gratification society
• Engender responsibility

Let me hear from you as your journey of teaching your children unfolds.

Allowances as a Teaching Tool

There was an interesting article in the Weekend Journal (the Saturday, Sunday edition of The Wall Street Journal) about all the decisions that go into setting up an allowance and for what items it should be used.

Many agree its best to pay an allowance as soon as the child understands that money is the vehicle that buys things, say around the age of three or four.  In many workshops I've conducted, the general rule-of-thumb is to give $1 per week for every year of age, so if the child is five, they receive $5 per week.

Now, one must decide what the child has to give up for the allowance?  Is it time?  How much time should that be?  Is the allowance for chores around the house?  Is the allowance for doing homework?

The next issue is just exactly what is the allowance for?  Should the child learn to give to charity?  If so, how much should that be as a percentage of the allowance?  Should the child save?  What about clothes?

Personally, I like the idea of $1 per week for each year of age.  I guess I've heard it often enough that it makes sense.  In a few years, we may have to worry about inflation; that $5 for the five-year-old may not be enough.  I also feel that the child needs to do some sacrificing in order to receive the allowance.  It shouldn't be given gratis.  However, it should NOT be for doing homework, as that is expected.  The allowance has to be earned in the sense the child has to sacrifice their time in order to receive it; that way they equate what they're giving up in terms of time in exchange for the dollars.

As the child gets older, their responsibilities grow, and so should their allowance.  Perhaps when they reach the age of seven and are invited to birthday parties, they can pay for the gift out of their allowance.  When they get to be teenagers they can start receiving an additional clothing allowance from which they can buy their own clothes, and learn to make decisions on those purchases.

I'd love to hear your thoughts and comments on allowances for children.  What worked in your household???

Look Through The Windshield

When Wayne Gretzky retired, commentators asked him what made him a great hockey player.  He stated that he does not skate to the puck, but rather, he skates to where the puck is going.  Interesting perspective.  I use this analogy in my workshops about money and how to spend it wisely.  Information in my workshops is something that is neither taught in school , nor taught in the home.

With that in mind, I'm excited that after five years and three months, the US Patent Office responded to my patent application for my spending management tool.  Although there are some modifications I must make, I'm thrilled they didn't decline my application.  For years I've taught this tool to participants in my workshops and they've asked, "What is the difference between Intuit's Quicken or Microsoft's Money, and The Financial Fuel Gauge TM [my product].  I tell them  that Quicken or Money only allow you to look through the rear view mirror of your car, while my product allows you to look through the windshield, and see where you're going.  I then add Wayne Gretzky's quote about skating to where the puck is going, so they can see that my tool does the same thing by allowing the user to look through the windshield and see where they are going.

In Sarah Kerner's article in the August 7th Dallas Morning News entitled "Real-World Frugality", she states several interesting and helpful observations on saving money.  The article is outlined so that she states the concept (the strategy), then talks about the reality, and concludes with a better way to perform the strategy, all of which I agree.  Kudos to Ms. Kerner.  When she wrote the better way to use Personal-financial software, Sarah quoted CFP Frannie Gardner, who stated the software doesn't do any good unless we step back and analyze the information we've input.  While I totally agree with that, I would like to add my thoughts.

Having worked with numerous clients (and their offspring) about how money works and the best way to use it, so it works best, I believe it's too late to look back and see where we've spent our money.  When we do that, aren't we really looking in the rear view mirror?  I believe what works best when we're driving the vehicle is to look through the windshield.  (Some Dallas drivers aren't fully aware of this concept.)  Thus, we can see if we're getting ready to make a mistake; in the case of my software, that mistake would be overspending.  It does no one any good to have a budget of $600 for groceries for the month, only to end the month and find out we've spent $743.  Well, I guess it does the grocer some good.

Let me ask you.  If you bought an airline ticket to let's say, Maui, got on the plane, watched it pull away from the gate, anticipated your arrival throughout the flight, and got really excited as the plane touched down, only to hear the pilot get on the PA system and say he'd made a mistake, that the plane had really just landed in Boise, Idaho, wouldn't you be more than mildly upset?

Folks, this is what we do each and every day.  We spend, spend, spend, and don't really know where we end up until it's too late and the plane has landed.  This means if we land at the end of each month in a place we didn't intend, we'll land at the end of our careers in a place nowhere near where we intended.

It's important that your personal-financial software allows you to see where you're going and make adjustments along the way, just as the airline pilot.  The only way to invest in your future is to first get out of debt.  The only way to get out of debt is to save money.  And, the only way to save money is to keep track of what you spend, as you are spending it.