Reminder: Today is National Money Night Talk

In case you haven't scheduled this yet, I suggest you stay home for dinner tonight, cook a healthy meal and sit down with your children to talk about money, stressing the importance of savings and living within your means.

Cooking a meal at home, rather than going out to eat would be the perfect initiation to bring up the topic.  It's also a good point, mid-way through the month of September, to assess how much the family has spent on eating out (use your judgment how detailed that discussion should be, depending on your children’s ages). 

As a family, list down all the days you went out to eat (lunches and dinners) and record the total the family has spent so far this month on just eating out.  Take that number multiply it by two and you have a rough estimate of a whole month's worth of expenses on eating out.

I am sure the family will be surprised (if not shocked) when they see the total amount spent.  The discussion could now turn towards establishing a sensible budget for eating out hopefully leading to the common goal of decreasing the number of days/nights eating out and making the few nights you’re going out more special.

There are additional benefits you could sort of squeeze in.  Learning how to cook is one tremendous upside, the more you cook the better you get at it and that might also rub off on your children.  Yet another benefit is the fact that you might end up eating a lot healthier.

Most importantly though, you are spending quality time with your family and you can have discussions about money, budgeting and savings a lot more often - hopefully more than just once a year…

The Rule of 72 in a different light

We previously discussed the the Rule of 72 as a simplified way to find out how long an investment will take to double at a given interest rate. Here’s how it goes:

Divide 72 by the given interest rate and you can find out how many years it will take double your money.

The Rule of 72 also works in another way;  you can find out the exact interest rate or rate of return needed if you wanted to double your money within a certain number of years. You can rework the Rule of 72 like this:

72 ÷ # of years = the rate needed to double your money

Here is an example:

Roger is 16 and he’s saved up $5,000 so far. He figures, he can easily double that amount 6 years, by the time he finishes college.  But  Roger is not sure what type of investment or interest would be needed to achieve that goal. Let’s plug in the numbers to see how this could work...

      72 ÷ 6 (years) = 12 (%)

Solution: In order to double $5,000 in 6 years time, Roger will need to find an investment giving him a compounded annual return of 12%.

Sounds like simple stuff in terms of calculations but we all should consider using this as a gauge when talking with your kids about financial planning. If their time horizon is say 10 years (e.g. until they get out of college) remind them that they will need about 7% of compounded annual return to double their money.   A nice side effect of using the Rule of 72 in conjunction with certain milestones, i.e. Graduating from Middle School, High School or College, is that it gives the kids an objective and a time horizon that they can grasp.  This is possibly more effective than telling them they should save for retirement in 50 years, which is a time frame, even most of us parents are unable to grasp.

Real Estate Financial Myths Exposed

The Federal Reserve Bank of St. Louis has some very useful educational resources for kids in Elementary, Middle and High School at: http://www.stlouisfed.org/education_resources/ 

Browsing through their website, I came across a good article which, at the time, should have been heeded by everyone who got caught up in the real-estate frenzy.  This is good reading material for High School Students.  The article could open up some additional discussions in a sense that some areas in the country are showing signs of house flipping trends once more.

Please consider: Just Sign Here: Bottom-Line Personal Finance Myths

The article goes on to dispel the following 3 Myths:

Myth #1: "All that matters is your monthly payment."
Myth #2: "Rising house prices make us all richer."
Myth #3: "It's always better to buy than to rent."

Reviewing these 3 myths with your children would be a good way to start a discussion on how to improve their financial IQ.  As the table below shows, statistics indicate that US households do a rather poor job at demonstrating basic financial literacy skills.  Hopefully the ongoing discussion with your kids will make an improvement for future statistics.

Resisting The Lure Of “On Sale” Items

We have all been there - Browsing through your favorite store and you see that big red tag:

 
Sometimes you see a huge sign right in front of the store inviting you to come in and “save”

Who wouldn’t want to save money and get some new gadgets at the same time?

As luck would have it, that gizmo you previously looked at with a bit of disdain looks a whole lot better now with the “20% Off Sticker” attached to it.  Isn’t it strange how a “soso”, “just ok”, “maybe yes” item now becomes more like a must have item?  And the only difference being the advertized sale price?

Try the following discussion with your kids - and the mental exercise might do us parents good too:

Understand that the word “savings” is a complete misnomer in the context of advertising.  The only way for you to “save money” is to not spend it.  Put your money in a piggy bank or open a savings account – that is saving.  When you go shopping, you may pay a lower price on a sale item, but you are definitely not saving.

Next, appreciate that prices always change buying behavior, there’s simply no way around it. But instead of letting your impulses give in, ask yourself this:  Would you still buy the this gadget or the new dress if it wasn’t on sale? 

If the answer is yes, then you might have a legitimate reason that the item is something you really need.

If the answer is no, go back home and look around the house to find similar items you bought on sale.  Evaluate for yourself if those items are still as desirable as they once were when you fell prey to that big red sale tag.  Are you still using any of these items today, and would you buy them again at the full retail price?

Resisting the shopping impulse is harder when items are on sale but it is an excellent way of learning how to handle money.  Your kids may come out of a store with an itch but it will be a great lesson on how to save money.

 

As always, comments and suggestions are much appreciated.
For questions, please email: clemens.kownatzki@fxistrategies.com

A Spending Diary

Many of us are familiar with Weight Watchers through commercials or actually having tried one of their weight loss programs.  It's a great concept that works on a simple principle: "Watch what you eat".

How about using the same premise to "Watch what you spend"?

We have an easy one-page work sheet that you can use as a budgeting tool to track where your child's money is going. Your kids are far more likely to save money when they see how fast the small things they buy here and there can add up. 

Click on the image below to see the full-size work sheet...

Your kids might need some help in the beginning. You can practice filling out our worksheet together with your kids the first time through and let them handle it from the 2nd week on.

Help them write down what they spent their money on each day.  They should include everything even the dimes and nickels! After a couple of weeks or so, go over the completed sheets and help them figure out where they can save money by evaluating each expense.

A couple of spot checks each week might help just as reminders...

Depending on your child’s age, using different colors for different categories might make the exercise more fun.  That also helps them see how to use categorization as a budgeting tool.

If you would like a printable version (PDF file) of our work sheet please email: clemens.kownatzki@fxistrategies.com

Credit cards and “Savings”

As you may know, credit card companies have to display the following warning on your credit card statement:

Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

While this is a very good development raising some awareness about the dangers of borrowing too much debt, notice the subtle word “Savings” in the last column.  Very clever marketing which draws attention away from the better choice:  You should always pay off your credit card debt in full every month! 

Yes, paying off slightly more than the minimum amount is better than paying only the bare minimum but it is still making the credit card companies far too much and far too easy money and it’s costing You the credit card holder a fortune in interest expenses.

Instead, one should consider to either pay the full amount of $564 now or pay a total of $816 within 5 years.  You DO NOT save by paying anything less than the full payment but you may make the credit card company a little less money by paying a slightly higher amount than the minimum payment.  Still, the credit card companies would rather you pay them in incremental amounts. As attractive as it may sound (Savings), you are better off facing the music now than later.

Let’s look at this from another angle, using the rule of 72 that we mentioned in our previous discussion:

At a typical rate of 20% for finance charges, credit card companies (not you) can double their money they make from you every 3.6 years and here’s how...

72 / 20(%) = 3.6 (years)

Sounds like a real good business to be in...and a bad deal if you don’t pay your credit card balance in full.

Learning the Rule of 72

Karen Hodgens of Kidnexions put together a nice video presentation to understand the rule of 72.

The rule of 72 is widely known as a quick way to compute the doubling time of an investment. As Karen explains:  Take the number 72 divide it by the interest rate to find out the number of years it takes to double your initial investment at that given rate.   The formula looks like this:

72 / i (interest rate) = y (years)

The rule of 72 also works in another way.  If you want to know how much of a return you need to double your investment in say 10 years, the calculation works like this:

72 /  10 (years) = 7.2 (%)

Great example - thanks Karen!

How To Get $1 Million

The task seems daunting, almost unreachable for many of us.  "If you could only have a Million Dollars what would you spend it on?" that is the sort of mind games most of us have been playing at some point in our lives.  How realistic is the goal of becoming a millionaire?

If you start saving and investing early and you plan wisely, it does not appear such an unrealistic goal after all.  Using this neat online calculator, you can go through a number of scenarios that suit your personal situation.  Let's use a generic example to show you and your kids that the illusive $1Million mark is not all that unattainable.

Your goal: $1,000,000

If you had an investment or savings of say $10,000 and you could invest another $6,000 each year at a compounded interest of 7%, it would take you 36 years to reach your goal.

Sounds unreal?  Use the calculator on the right side of this blog to verify the numbers and check as many different scenarios as you wish.  The idea is to make your kids understand that goals are attainable but that it takes time, discipline and planning to reach those goals.

Start early and you might see that $1 Million before you know it.

Assessment Tool For Your Child's Allowance

There are a number of new online tools helping parents to give their children a greater awareness of all things related to money. http://www.practicalmoneyskills.com has some very useful online tools some of which we will feature in this and in upcoming blog posts.


To kick-off this series of presenting online resources, here is a neat Allowance Comparison Tool. You can see it on the right side of this Blog. 

Try it out and send us your feedback and comments: info@fxistrategies.com 




















Thanks!

Four Easy Tips For An Allowance System

Suzanne Cramer suggests an easy to implement money management system when it comes  to allowances for kids – especially the younger ones.  Please consider her article:  Money Management 101: For Kids

Suzanne recommends the following steps when implementing an allowance system:

Keep it fair.  I have talked before about being fair, and it applies to allowance as well. In my blended family, my two kids are not always home at the same time or even the same amount of time. So how can I make allowance fair? I chose to create a chart that is housed on the fridge; we all know everyone will see it there as the fridge door is always opening. There is a list of 6 weekly chores that can be selected. Each chore is worth $1. Each child can choose to pick 3 or have their brother do the other 3 for them, hence forfeiting the $1 for that chore.

Learning to say NO. This was the hardest for me as I have a hard time saying no to their angelic faces as they ask, "Please may I have this Mommy?"  My response is now a firm, "How much allowance do you have saved?" By remaining firm and consistent your kids will learn that if they want something they have to earn it, and sometimes it might take awhile for that to happen. This is also a good rule of thumb for adults trying to save. Consider giving yourself a weekly allowance for non-essentials. Say, $20/week use it as you see fit. Daily coffee, new lipstick, or maybe save up for the month and buy that pair of $80 boots you saw on clearance.

Set the rules. Allowance can be confusing for kids as they may not understand what they are expected to pay for from their allowance. You can't tell them what do with their money, remember they are learning a valuable lesson here, but you can point them in the right direction. Explain how their allowance can be used for Sharing (donations, gifts), Spending (toys, candy), and Saving (lets face it some things they want are going to cost more than $3, so it may take a few weeks or months of saving).

Help them keep track. Get them a piggy bank. This can be a jar, coffee can, or pot; it doesn't need to actually be a piggy. Explain the money is kept here until it is ready to be spent. Then if they are old enough, teach them the value of each coin/bill and make this a learning experience as well. If your kids are older consider a local bank to house your child's savings. There are several banks who offer "kids accounts" where as little as a dollar can be deposited without monthly fees and the child receives a bank book where they can keep track of their savings. How powerful is that! My local bank actually offers this; and in addition, they have a free change counter in their lobby the kids love to use. Make visiting the bank a "family" affair and teach your kids the value of money and the power of saving.

As always, welcoming your comments and additional suggestions to get our kids to understand all things related to money 101.

New Credit Card Rules & The Time Value Of Money

Every now and then, governments implement useful new regulations.  It was the case when Tobacco companies were required to put health risk warnings on all their products and advertisements and here is another one which has been long overdue IMHO. The Federal Reserve's new rules for credit card companies mean greater protections for consumers.  On their Website, the Federal Reserve lists some key changes you should expect from your credit card company beginning on February 22, 2010.

There are various new rules which all make sense in terms of limiting the shark-like behaviour of some of the more notorious credit card companies.  Perhaps the most important part in terms of a financial literacy aspect are the new rules for late payments and minimum payments.

Have you looked at your credit card statement recently? The first page should now look something like this:

The prominent displays of late payment and minimum payment warnings should provide some deterrent credit hungry consumers. 

As an exercise, hopefully creating some form of an “aha” effect with your kids, use the example given to show the difference of paying something today versus delaying payment. A perfect example of teaching the time value of money.  You could go over several different credit card statements to emphasize the impact of compound interest over time.  For older kids, take out the calculators and run through the calculations.  Have fun with it!

Funny Money, the fun site to learn about money

This is an excellent concept I just came across: Funny Money is a website based in Canada using cartoons and interactive tools to teach kids about basic concepts of money.  As they put it: North America's #1 fun-ancial seminar.

Please check out this excellent cartoon: Get it on Credit
The cartoon teaches kids about credit cards. While being entertained they also learning about credit cards, payment terms, compound interest and credit scores. Enjoy!

 

Click here to watch the video

Using A Cell Phone As A Learning Tool For Money 101

Karyn Hodgens discusses a novel approach to teach some money 101 lessons to kids in her article:  The Cell Phone: A Powerful Learning Tool

Teenagers love their cell phones (iPhones in case they are of the trendy kind). What better way to make your kids really appreciate those "vital" gadgets than by making them understand there's a cost associated with being hip and keeping up with the "in-crowd". 

Consider that your kids should pay for these luxuries or that they should make payments in-kind by mowing the lawn, doing the dishes, pulling weeds (my personal favorite).  As Karyn suggests:

Now comes the fun part. Kids learn to manage their money in the context of something they love…their cell phone! Upgrades? They pay. Overages? They pay. New phone? They pay. Lost phone? They pay. Unpaid bill? No phone. See how simple it is? Okay, so it’s going to take a few months before everyone understands how the whole thing works, but when that happens, it’s a thing of beauty. Kids are happy; as long as they pay the bill, they stay connected to friends. Parents are happy; their kids are learning real life skills. It’s another win/win.

It sure sounds like a good proposition for kids and parents alike.

The Concept Of Value For Money

Karen Payne Sledge,CFO at SledgeCraft, Inc., came up with a wonderful idea in terms of teaching kids some basic money management concepts. Please consider the following guest blog to see how Karen brings some aspects of "value for money" into the discussion:

One aspect of teaching kids about money is teaching them how to spend money, or how to shop wisely. One concept I've taught my daughter is to estimate a cost-per-wearing for clothes or a cost-per-use for other items. For example, if she is shopping for a pair of jeans, she needs to ask herself if she is looking for a "basic, wear 3-4 times a week all year around" pair, or a "these are kind of faddish, can only wear with my heels with certain tops twice a month in only the summer" pair.

Say she found a basic pair for $75, which would work out, conservatively, at 3*52=156 wearings for a year, divided into $75 = $0.48 per wear. Then say the faddish jeans were on sale (also taught her to be wary of buying stuff you don't need, just because it is on sale, but that's a lesson for another day) for "only" $25. This would work out to 2*3=6 wearings for a year (summer), divided into $25 = $4.17 per wear. So in this example, the more expensive jeans are the better buy.

I'm happy to say that I've seen her put something back that she tried on from the sale rack that was only maybe $10 or $12, but it was late in the season, she thought she could only wear it a couple of times before putting it up for the season, and thought it was too faddish to still be in style by the same time the next year, making it $5 or $6 per wearing.

The point is that sometimes paying more money is the better buy and sometimes the lesser price is better. It depends on the level of quality required for the expected number of wearings and how lasting is the style.

What are you doing in celebration of the national financial literacy month: April?

April is the national financial literacy month. This time of year, the dreaded April-15 deadline looming, sounds like a good opportunity to have some discussions with your kids about money and taxes.

Here's one thing you can do:

http://www.financialliteracymonth.com has a neat ebook with tips submitted by financially savvy consumers. It's an easy read and very useful to start some discussions about alternatives to spending. Recommended for both parents and kids.

Free download is here: http://www.financialliteracymonth.com/ebook/MMI-Tips-for-Change-03-09.pdf 

What are some of the talks and experiences you had with your kids? Are there any topics or exercises you can suggest?  Welcoming comments and tips from all readers.

KPCC's Airtalk: How to teach kids about money

Please consider this very insightful and rather timely discussion about money and kids at KPCC's Airtalk.

http://www.scpr.org/programs/airtalk/2010/04/08/how-to-teach-your-kids-about-money/

Personal finance columnist Kathy Kristoff joins David Lazarus in a discussion on how to teach kids about money. There are a number of good ideas and recommendations that you can easily implement in your family.

My personal favorite is the idea of setting up a Family 401K Plan.  Kathy suggests a simple savings matching plan.  Whatever amount your kids save at the end of the year will be matched by an equal parent contribution which sounds like an excellent incentive to save.

In closing, Kathy reveals that her number one money lesson for your kids:

"Balance: Use money as a tool, make it make your life better; realize that you don't work for money, money works for you."

Sounds like the perfect money mantra for parents as well...

Good money habits that work for kids (and for parents): Living Below Your Means

As any seasoned investor or entrepreneur can tell you: There is no single formula or recipe to become rich. Most successful people will tell you that it takes a lot of hard work to arrive at a point where you are financially on sound footing. There is however one way to increase your financial net worth over time by simply living below your means. Spend less than you earn and you will increase your wealth over time.

To meet some role models for the notion of living well within your means, please consider this insightful article: Five Billionaires Who Live Below Their Means.

Topping the list is Warren Buffett, one of the wealthiest self-made billionaires and also one of the most successful investors of our time.  Mr. Buffett is the most un-assuming, low profile person you could ever meet.  As legend goes, he still lives in the same house he bought decades ago for only $31,500.  How is that for an example of dealing with real-estate bubbles. 

Mr. Buffet may be the epitome of the "living below your means" school of thought and he may have taken things to an extreme.  But the lesson is clear: Spending less than you earn could be the single most important habit ensuring a sound financial future.

April: The National Financial Literacy Month

The month of April is recognized in the United States as National Financial Literacy Month. This month is chosen to stress the importance of financial literacy and teach Americans how to establish and maintain healthy financial habits. In light of continued economic challenges sound money management skills are needed more than ever to cope with increased uncertainty, dealing with debt and possibly facing lay-offs, foreclosure or personal bankruptcy.

What better way to make an impact than by practicing some of those sound money skills with your children?

Karyn Hodgens of http://www.kidnexions.com  is an expert in teaching basic financial skills to kids.  To celebrate the Financial Literacy Month April, her site is doing a 15-day online challenge called Beyond-the-Piggy-Bank which starts Monday, April 5. She describes it as a way for parents to set up a money "system" with their kids and also learn how to teach money as a part of every day life.

The challenge is free and you can sign up here:
http://www.kidnexions.com/BeyondthePiggyBank.htm

Oh and sorry, this is not an April Fool's moment...

Best of luck with the challenge and here's to a frugal month of April.

Money 101 For Kids - A New Site Is Born

Hi Everyone!

This is the start of a new endeavor to promote financial literacy among kids (and parents).

Calling on all Finance Professionals (CPA's, CFA's, CFP's, Investment Advisors etc.) as well as educators and parents to share insights, give tips and recommendations on how to give our kids a better understanding of all things related to money and personal finance.

Currently, there are only three States (Utah, Missouri, Tennessee) that require at least a one-semester course devoted to personal finance in order to graduate High School.  California and 28 other states have no state requirements whatsoever.  A very sad state of affairs... 

Then again, with a debt load of over $12 trillion and ongoing fiscal budget deficits with no end in sight, we are best served not to look to the US government in terms establishing sensible educational standards. It is also not in the best interest of the major financial institutions, credit card companies topping that list, to have customers who really understand personal finance and are financially responsible.  Instead, they prefer the easy prey of naive and financially unaware teenagers for some of their best profit margins. 

The trend of an over-indebted society can obviously not continue.  First signs of that have begun to emerge with the onset of the Great Recession in 2008.

I see the only realistic chance in getting things back in order and enjoying sustainable long-term growth and sustainable finance via an educated and financially savvy youth.  After all, it is our children we will depend upon to fund our retirement one day. 

This site is devoted to promoting financial literacy among kids and also serves as a sounding board for programs, projects, tools, resources.  We welcome an open discussion and are looking for contributors to share insights and information.  The site works in conjunction with a LinkedIn Group - Money 101 which is actively looking for group members who can help spread the word and promote financial literacy.

For questions, comments and suggestions, please feel free to use the commentary section or email: clemens.kownatzki@fxistrategies.com