Monday, September 29, 2008

Watch the spending more than the making

I’m sitting here watching CNN talk about the economic crisis our country is just beginning to deal with. The 700 billion dollar bailout has not received the votes and the country’s economic future is completely unknown.

Do I have answers? Absolutely not. But I do realize the significance of how important the message I’m trying to relay is to each individual’s economic survival – pay attention to what you spend more than what you make.

This country’s economic philosophy over the last 20 – 30 years has been based on borrowing to buy what you can’t afford. As long as you have assets, income, money – everything will be okay. In the midst of all the debt accumulation, most people I meet can’t tell me how much money they spend to live. However, they are very clear on how much they make, and if money’s tight they feel like the answer is to focus on making more money.

Let’s look at the loans we give out to the average American. Let’s forget about sub-prime mortgages. When we give out a credit card or a car loan or a mortgage, what questions do the banks ask? When my husband and I borrowed money to buy our house, they asked us about our income, and they asked for proof. They also asked about our other assets. They looked to see if we had debt on our credit report, and that was it. It was left up to me to determine how much I spend on groceries, car maintenance, child care and Christmas gifts. And that’s where a lot of our money goes! Banks need to ask those same questions.

Most people who get in over their head in debt have never taken out the time to add up what they spend every month. And the banks don’t bother to ask us either. I mentioned in a previous blog entry how people will make the statement, “Don’t borrow what you can’t afford,” but I’ll argue that most people don’t know what they can’t afford.

The most helpful change in our lending practices will be to insist that people who borrow money have truly calculated their actual expenses. Make that part of the application! Not just credit card debt and car loans, but everything they spend money on - food, clothes, dinners out, everything! People don't have to prove it, just calculate it. I would firmly believe that only then would many realize they can’t afford to pay back money they’ve borrowed.

Thursday, August 28, 2008

What are kids REALLY thinking about money?

"When I grow up, my bills won't be so high."
"In real life people don't spend money every day."
"When I graduate from college, I'll make a lot more than this."

After teaching 10 – 12 year old scholars through the BELL program, I gained some pretty good insight into misconceptions kids have about money.

For six weeks I had the kids manage a checking account. They received “paychecks” every other week, they had to ”spend” money every day on grocery shopping, supplies, and other incidentals, and they received utility bills that were due periodically throughout the program.

The kids loved managing the paperwork and doing the math to keep their check registers updated. Their “shopping” cards would say things like “You dropped your cell phone in the toilet. Pay $85 for a new one,” or “Buy a gift for Mother’s Day. Pay $50.”

The biggest complaint heard was that the kids didn’t want to spend their money! After receiving their $500 paycheck ($391 after taxes), they felt that it was unrealistic that they should have to spend so much of the money. They made comments like, “In real life people don’t shop and spend money every day.” Other kids couldn’t believe the amounts of the bills were realistic. “I won’t spend $87 every month on an electric bill. I’ll use less than that.” And ultimately, many kids thought they would make much more than the amount I was giving them, saying things like, “When I graduate I’ll make $80,000 a year, so I won’t have to worry about bills.”

The reality is that we are not sharing with our kids the actuality of what it costs to live when they get older. Some of us teach our kids to save and possibly how to shop for bargains, but many kids don’t understand what goes into the day to day life of living on a realistic salary.

It really comes down to teaching our kids the value of money. The only way they are really going to understand this topic is to show them what we spend on a daily basis to live. Let your kids see what’s in the checking account. Help them understand what you as parents bring home as a salary and how it is spent to run the household.

Many parents are not comfortable exposing their personal financial details to their teenagers, but I believe the information is invaluable. How else will kids understand how much money actually comes into a home and how much is spent for it to run? Yes, you can tell them that $1,000 is not really a lot of money to live on, but until they actually try to pay some bills with it, they really won’t know. Usually teens are only aware of the money needed to provide for their needs, like a car and cell phones.

However, opening up your financial world to your teens could pose other problems as well – forcing you, as a parent, to take a clear look at your own financial situation. Many parents don’t have a clear picture themselves at what’s going on with their money. Why would they want to show their 16-year-old son details on how they spend money if they don’t want to go through the math themselves? Especially when money is tight.

We have to start changing our attitudes about having money, the daily managing of it, and communicating information about it to our family. It’s a huge obstacle to overcome in allowing our economy to heal during these difficult times.

Sunday, July 6, 2008

Teaching Financial Literacy at BELL

Over the next six weeks I’ll be crazy busy teaching kids about money. There’s a program called BELL here in Boston – Building Educated Leaders for Life. Their mission is to enhance the educational achievements, self-esteem, and life opportunities of elementary school children living in low-income, urban communities.

They offer a six week summer program that teaches kids literacy and math in the morning. In the afternoon the kids take enrichment classes on topics like music and art – or any other topic that may seem interesting. I approached them about teaching financial literacy and they agreed.

I’ll be working with 10 to 12 year old kids teaching them everything about checking accounts, budgeting, paychecks, and taxes, as well as credit cards, credit reports, savings and investing. I get one hour a day, four days a week for six weeks with these kids. The classes are split up by grade level, but there are almost 50 scholars total.

I created a program where the scholars get a “paycheck” every two weeks that they have to “deposit” into their pretend checking accounts. I created personalized paychecks, designed to look as real as possible, showing all the tax deductions, calculated as realistically as possible.

The scholars will also receive pretend checkbooks with check registers where they’ll learn to write out checks and maintain their check register. Throughout the six week program they’ll go “shopping” everyday, which involves reaching in a bag and pulling out cards I’ve designed that say things like “You’ve gone shopping at Stop & Shop. Pay $64.35.” “Your TV is on the blink. Pay $41.50 to the repairman.” Every weekend I’ll gather up their folders and paperwork and check all their math to make sure they’re maintaining their checkbooks properly.

I’ve also designed realistic utility bills personalized to each scholar. They each receive five bills with different due dates. The scholar has to remember to pay their bill by the appropriate date, or they pay a late fee. They also pay fines if they lose or forget their folders or checkbooks, if they mismanage their money (don’t update their register, etc.) or if they misbehave in class (Tickets of Disrespect). Twice they’ll be given mini-tests where they can earn bonus checks based on their performance.

I’ve priced the program so that by the end of the class, if a scholar does everything perfectly, they should have $100 left in their “checking account”. Although BELL offers a small stipend for the program, it basically just covers some of the supplies. I would love it if a sponsor would step in and actually provide real dollars for a percentage of the amounts in each scholar’s checking account. I’ve suggested it to the Program Directors, but no promises yet.

Tune in for more updates on how the classes are going and how the students are responding.

Thursday, March 13, 2008

There’s no money in teaching people about money

I’ve learned another reason why there is no emphasis in our society to teach personal finance to teens or anyone, for that matter – there’s no money in it! Well, I guess this isn’t true for Suze Orman or Robert Kiyosaki – I need to get that best selling book finished! But generally teaching the basics of personal finance does not a lucrative career make.

You’ll find people out there willing to teach all about insurance and annuities so that you will, in turn, buy some insurance or put money in an annuity. You can even find banks encouraging people to learn about checking accounts. But, as I’m sure some people in the banking industry have figured out, the less people understand about all the fees involved from not managing your checking account properly, the more the bank benefits. $$$

Now who in the credit card industry really wants us to understand – really understand – all the terms and conditions of a credit card agreement? This has become a much bigger issue over the last few years as there has been more and more emphasis on encouraging people to understand what happens if you go into too much debt. However, there’s so much more to know about credit cards than “don’t get into too much debt” –
· What’s the difference between credit cards, charge cards, debit cards, pre-paids?
· Where do you look to find out about all the fees BEFORE you sign up?
· What are all the fees that may take place if I do something wrong?
· What are some of the things that may go wrong?
· What does “No Payments, No Interest” really mean?
· How can I REALLY get my credit report for free?

I have not found anyone who teaches people how to stay organized so bills get paid. I think as a culture we haven’t come to the realization that this is something we don’t know. We still believe that paying bills is a money issue instead of an organizational issue. But that’s a whole other blog topic.

What about explaining what comes out of your paycheck when you get a job? Who would benefit from this knowledge? Obviously the employee, but who else? Pre-tax deductions, how taxes work, 401(k) accounts. Why would anyone take out the time to teach this to your kids? Teachers are already busy teaching stuff that kids need to know to go to college (which unfortunately does not include these topics). People who really understand these topics usually already have a job doing something else. Are they going to quit to do this? I did. But I think I’m the only crazy one out there.

As I lay in bed at 5AM thinking about all the stuff on my schedule – several workshops, networking events, even an appearance on a local cable show – very few of these activities actually pay me anything. So I can see why others who may have considered this path, would quickly scurry over to an alternative route.

But I’m on my mission. My path has been clearly defined and all obstacles have been removed to encourage me to stay on it. And even though the money is slow in coming, I’m sure it’ll be there in time. I tell my friends all the time, “I have the perfect life! Everything is going really, really well, except that we have no money.”