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.