Raising Financially Savvy Kids-Part 1

April 6, 2011

Some of the inherent responsibilities of parents include protecting their children and preparing them to be responsible adults in our society. Teaching children the proper management of their financial resources helps to accomplish both of these goals.

If the children in your family are similar to my own (and I would bet there are far more similarities than there are differences), they probably do not enjoy being lectured by their parents, nor do they learn much thereby. So how else are they supposed to learn to be financially fluent if they don’t listen to what we tell them? Well, we show them.

Further suggestions will follow today’s blog, but here’s an easy, fun and effective way to teach children that money does NOT grow on trees and that it must be properly managed and controlled:

  1. Pull out the game of Monopoly or any other board game that has play money in real denominations. If you don’t have such a game, you can print some play money from www.printableplaymoney.net.
  2. Gather the kids around the table to “play” a game. Count on spending anywhere between 15 and 45 minutes for this activity. This game is best for children 8 or 9 years old or older, since they’re getting to the point of being able to grasp abstract concepts. You can tell them you’re going to play a game to show them how Mom and/or Dad makes and spends money every month.
  3. Explain the rules, such as, “We’re going to count out how much money Mom and/or Dad make every month and put it in the middle of the table. Our goal is to spend it on everything we need and then on things we want without running out of money.”
    At this point, you may choose to explain your feelings that you are sharing information that is only meant for your family, and that you are trusting the children not to talk to their friends or to extended family about how much money Mom and/or Dad make.
  4. Teaching children the realities and the value of household budgetingEnthusiastically and dramatically count out of the bills how much money your household makes every month. This should be gross income (before taxes and other deductions). Enjoy the look of astonishment on the children’s faces while it lasts. For many, any amount over $100 might lead them to think that the family is RICH!!!
  5. Explain that the first thing that comes out of the monthly income is Taxes. Remove from the pile of money in the middle of the table the amount of taxes you pay each month. To raise a financially responsible child, you should explain the benefits that come from paying taxes, including security provided internationally by our armed forces, security provided locally by the police and/or sheriff,  transportation infrastructure, schools, laws, health and human services, public transportation, and more. Avoid complaining bitterly about taxes, though it may be educational to explain how we have the right and responsibility to vote for representatives in our government who we hope feel the same way we do about how taxes should or should not be used.
  6. Next, explain that other amounts come out of your paycheck before you receive any money, including Medicare and Social Security (FICA), in addition, possibly, to insurance premiums and retirement account contributions. Remove the amount of your monthly deductions from the pile of money in the middle of the table.
  7. Teach children the importance of committing to saving for emergenciesNext, explain to the children that you have committed to paying yourself first, in case of emergencies, so that there is a specific amount that you put into your savings plan right off the bat. Let them know that this amount is non-negotiable, and that as they grow up, you expect them to do the same. Many children, even fairly young ones, may take comfort in knowing that their parents have a plan in place in case anything unexpected happens. Remove your monthly savings contributions from the pile.
  8. Then, ask the children if they think you should next pay for things you need or want? Explain what your survival needs are and remove that money from the pile. Typically, needs include shelter and security (rent/mortgage and their corresponding insurance and utilities), food and water (NOT including dining out), protective clothing (the very basics), and possibly medications or medical procedures.
  9. The next expenses to come out usually include things that make life comfortable and convenient, like transportation costs, child care, additional clothing, school activities, air conditioning in the summer,  etc. You may also include other obligations and loan repayments (credit card, student loan, signature loan, etc.).
  10. Continue to remove money from the pile until you’re left with “extra” money (usually pretty scarce). Remember to calculate the monthly amounts to set aside in order to take care of periodic expenses like vacations, car and home repair, holiday and birthday gift giving, etc. You may also consider including the children’s allowance or amounts they can earn through chores.

Going through this exercise every couple of years or so will help your children to realize that money is not an infinite resource, that it doesn’t grow on trees, and that their parents are in control of their finances. It generally has the added benefit of stemming the continual flow of the “gimmees” and the “buymees.” “Give me this” and “buy me that.”

Finally, letting our children “see” how important budgeting is to us will lead them to value it as well.

Have fun with this activity, and let me know how it goes.

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Reality Check-Credit is Used for More than Just Loans

September 22, 2010

Cut credit cards from your budget

Put foot down on credit cards

The titles of articles such as these are clever, intriguing and seemingly sensible, so why do I have a problem with financial experts (even if he or she is nationally recognized) who preach total abstinence from credit cards across the board?

At a class I taught this past week for individuals going through bankruptcy, I fielded a question that touches upon this very subject. A couple attending the class had been pushed into bankruptcy for several reasons, some of which were somewhat out of their control and others which were within their control. To get a grip on those issues within their control, they had decided to pay $100 to take a financial education course at their church. The creator of these classes preaches life without credit cards.

National Financial Education Center Explains Ups and Downs of Going Cash OnlyAt first glance, the concept seems completely financially responsible: get rid of credit cards, especially if they have been a past temptation to overspend and live above one’s means. So how do you answer someone, like the couple in my class who accepted that principle but are also hoping to purchase a home in the next couple of years, who asks me, “so how can we build our credit without credit cards?”

You see, they want to buy a home in the next few years, and they realize that they’re going to need a decent credit rating in order to qualify for an affordable mortgage. So I ask again, how can they build their credit without credit cards? After all, FICO estimates that about 50,000,000 adults in the US don’t have enough information on their credit reports to generate a credit score.

Here’s my answer, without giving an oversimplified “yes” or “no” answer: you can build your credit rating without credit cards, but you must remember that your credit score is based upon credit-related information on your credit report, and your credit report only contains information relevant to your credit usage and debts. Your credit is NOT based upon your income, your checking or savings account balances, or your debit card usage.

In other words, if you don’t use credit, you won’t have a credit history. I’m sorry to say it, but it’s true. You cannot build credit without using credit in some form.

Here are the types of credit that exist:

  1. National Financial Education Center Explains Ups and Downs of Going Cash OnlyRevolving Credit: Accounts like credit cards that allow you to make charges, pay some off each month, make more charges, etc. These are the most influential types of credit accounts on your credit report.
  2. Installment Credit: Accounts with fixed pay-off dates and generally fixed monthly payments, such as car loans and student loans.
  3. Mortgage Credit: Accounts that look like installment loans but that are tied to real estate.
  4. Home Equity Credit: Accounts that function like revolving lines of credit but  are tied to real estate, like mortgage credit.
  5. Service Credit: Accounts for services such as electricity, gas, or other utilities where weNational Financial Education Center Explains Ups and Downs of Going Cash Onlyreceive the service and are then billed for our usage. Note: phone accounts that are paid in advance are not considered service credit accounts. Also, most service credit accounts are not automatically reported to the credit bureaus that keep track of your credit history.

That’s it! If you don’t have any of these accounts listed on your credit report, you have “no file.” That means that FICO can’t find enough information to generate a standard credit score for you.

You have two options:

  1. Build your credit report wisely, starting with retail (think department stores), gas, or tire store cards or lines of credit that are generally easier to qualify for. However, using credit wisely means you pay off any balance IN FULL EVERY MONTH. After a period of time (perhaps 12 months or so), you might consider applying for a major credit card through your bank or credit union. If you’re tempted to use the card inappropriately (not paying it off in full every month), then cut it up.
  2. Ask your potential lender if they subscribe to the FICO Expanded Score. FICO is able to create a “credit score” on a large percentage of those with no traditional FICO score by accessing information on bank accounts, purchase payment plans, and property and public records. However, you will likely find it much more difficult (if not impossible) to qualify for a mortgage loan through most lenders based solely upon the Expanded FICO.

In the end, credit is about personal financial responsibility. Living without credit may be the financially responsible thing to do. However, it leaves no record or proof for potential lenders to convince them that you are likely to repay their loan to you.

And I haven’t even mentioned yet (since each would be a topic for another day) that your credit report and score are used for various reasons other than just qualifying for a loan. Here are some of the more prominent among those who are using your credit score to make decisions:

  • Many auto, home and life insurance companies (your score affects your premium)
  • Property management companies and many landlords
  • More and more employers (during the hiring process)
  • Utility companies (determining your security deposit)
  • Cell phone companies

So while I am, in theory, a fan of the “credit card-less” household, I don’t see it as practical for many if not most households. Since it takes two or three years of responsible credit usage to build a strong credit history, you may particularly want to focus on building your credit if you’re looking at buying a home, applying for a job, getting a cell phone account, or renting a home or apartment any time soon.

Otherwise, by all means, go cash only!

I may be opening up a can a worms, but I’d be happy to hear other opinions on this.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney