Monday, June 1, 2009

An Allowance is Not Free Money

Giving your kids an allowance is not a bad thing. We’ve just lost sight of what it’s supposed to be about. Allowances are not free money for your kids. Allowances are not a birthright. An allowance will not spoil your child. Allowances are necessary to teach your child how to manage money. We’ve raised a whole generation of people that did not receive allowances or were not given allowances for the right reasons, which is why we have a whole generation of adults who don’t know how to manage money.

What’s the appropriate age for kids to receive an allowance? As soon as your child starts asking you for money, and you start giving them money to buy things. That’s when they should start keeping track of their own money (with your guidance) so they’ll have enough for the stuff they need. The goal is not to control what they have and don’t have. The goal is for them to be able to make decisions about what they can and can’t afford based on their income. Pay attention to what you spend on your child. If it’s something they can buy on their own, let them.

Should we make kids work for the money? Absolutely. I’m a big fan of working for any money you receive. But please understand – this is not the point! I truly believe that making kids work for their money doesn’t really teach them to manage their money any better than kids who get it handed to them for nothing. They may appreciate it a little more, but they won’t necessarily manage it any better. We have a whole country of adults who work for their money every day and they don’t necessarily manage their money well.

How do we teach kids the value of money? I don’t believe allowances will really teach children the value of money. Allowances should be given to teach kids how to manage money. The only way a child will grow up understanding the value of money is if they see what it takes for them to live. And the only way they’re going to see that, is if you show them your bills. This is a whole other sensitive topic for many parents. I believe you should show kids what it takes for your household to run financially. Let them see the amount of money that comes in and goes out. Let them see the bills and understand that your “big paycheck” doesn’t all just go in your pocket. Once they understand what you need to do to keep the house running financially, then they’ll understand what it means when they ask for an $80 video game or a $100 pair of shoes.

How much money should we give our kids? First figure out what you already spend on your kids from day to day. How much do you give them for lunches, snacks, treats, mall trips, toys, clothes, special school events, sports, dances, etc. Then decide what you think they can handle paying for themselves. Total up the cost and give that to them weekly, bi-weekly, monthly, whatever frequency you prefer. Don’t be scared to make them responsible for even the big things like school supplies. The more they’re able manage the more you’re preparing them for the future. The trick is you being able to come up with a realistic dollar amount.

How do we teach kids to manage money? Now this is the whole point of an allowance so make sure you approach it with this mindset. You give them income and teach them how to manage that income so they can cover their expenses.

Budget Reports - One of the best ways to do this is insist on a ‘budget report’ before you give them their allowance. Make them write out how they plan to spend their money before you give it to them. If they haven’t thought about it and don’t know what to write, don’t give them their allowance. Too many people get money everyday from their employer without thinking about what their going to do with it. This is a great time to talk to them about buying needs vs. wants, saving and giving to charities based on your families personal beliefs. And then later, before you give them their next allowance payment, talk with them about how they did compared to their budget.

Let them Pay for Big Things – Many parents think that allowances should be for the little things that kids want and that the parents should manage the big things like prom dresses, sports equipment, summer camp. Let your kids handle paying for those things too. If you know you’re willing to spend $200 on a prom dress for your daughter in May, then price out her allowance to include that expense as early as the previous Fall. Remind your child that they will be responsible for this purchase and it’s up to them to save for that expense. Throughout the months they’ll be tempted to spend the money on other things, but they’ll have to learn to set some money aside for that big expense coming up. This should all be part of their budget. And if they spend all their money and don’t have enough for the dress, they’re out of luck and have to find another option.

Going through this process will teach them what they really need to know about managing money when they get older. In fact, I’ll bet that most parents need help with these same money management skills themselves.

Friday, May 1, 2009

How Do I Know What I Can Afford

Don’t buy stuff you can’t afford…sounds pretty simple, right? Have you seen the Saturday Night Live skit? “If you don’t have any money, you should not buy anything… mmmm.” If this concept is so simple, why do we have millions of Americans in millions of dollars of debt? Are we all just greedy? lazy? stupid? I don’t think so. I think most people have no idea what they can and cannot afford.

How do you determine what you can and cannot afford? Here are some answers I’ve heard:
  • I call the bank. If the money’s in there, I can afford it. If its not, I can’t.
  • People with good salaries can afford whatever they want. People with bad salaries can’t.
  • I buy everything on sale.
  • I look to see if I have room on my credit card.
  • People who have nice things – a nice car, live in a nice neighborhood, have a good education – they can afford expensive stuff.
The truth is all these answers are completely wrong.

One of the biggest money myths we have in our society is the belief that people with more money can afford things and people with less money cannot. Think about it. If you make 100K a year, drive a fancy car and live in a nice house, your money will probably be going to pay for the car and the house. Realistically you can have less money in your pocket after paying all your bills than someone who makes $10 an hour, takes the subway to work and lives with his parents.

However, most of us don’t look at all our expenses when trying to figure out what we can afford. We look at our income, our assets, the item we want to buy, the amount of money we can borrow, our mood or feeling at the time, and other things that have nothing to do with issue.

How do you determine what you can afford? You do the math! You add up all the money you plan to make and subtract all the money you plan to spend. The amount left is what you can afford to spend. Does that sound simple? It is, but most people I know have no interest in doing this. In fact, a lot of people are downright terrified to do this.

Many of us have a pretty good idea what we plan to make, but how are you supposed to know what you plan to spend? Well, keeping track of what you’ve spent in the past is a huge indicator in determining what you’ll spend in the future. But many people not only don’t like to track their spending, they don’t want to. But if you’re ever going to know what you can afford, you have to know what you’re going to make and what you’re going to spend. Some people call this process creating a budget (aaarrgh, I said a scary word!).

Our society is pretty much designed to not encourage people to think this way. Most of the money we loan to people is loaned without asking anything about their expenses. We ask people what they make, what they have, we look at their credit, and then we give them more money and stuff. Whether they can afford to pay us back is assumed. We assume if someone has a lot of money, they can afford to have more stuff.

This is exactly why we're in the economic crisis we are in today. We need to stop looking at income and assets as a basis for what we can afford. We need to teach people not to be scared to track their expenses. Only then can we expect to get out of this crisis and not return!

Wednesday, April 1, 2009

Are Credit Cards for Emergencies Only?

What is the correct answer to this question?
Credit cards should only be used…
1. in case of an emergency.
2. for large purchases that you really need.
3. to prove that you know how to pay bills.

In case of an emergency – NO! I used to firmly believe this. Why build up a savings account if you have room on a credit card? If our water heater breaks or I have to make an emergency trip to see a sick relative, I can just put it on a credit card. I used to believe that it was responsible to not use my credit card for frivolous things like eating out or new shoes, and to always keep room on it for important emergencies.

The onset of this Economic Crisis has taught many of us the mistake of this belief. For many people, the emergency was losing their job! Does it make sense to add ‘being in debt’ to ‘not having income’? Of course not. Credit cards are not to be used for emergencies. That’s what savings accounts are for. You build up a savings account so you can use that money in case there’s an emergency.

For large purchases – NO! I heard a financial writer provide this logic: as long as you were buying something important that you would be using for a long time then it was okay to put it on a credit card. For example, major appliances and furniture for a new apartment. I guess the logic behind this was that it was okay to pay interest on something as long as you get some use out of it.

Yes, there are some reasons where debt makes sense. Home ownership, student loans, even auto ownership, to a point (people don’t need a new car every three years). Any other purchases, in my opinion, don’t justify going into debt. If you need something and you can’t afford it right now, you live with out it, until you can save your money to buy it. This is a radical concept nowadays in the age of I want what I want now without having to pay for it. And since most banks and stores benefit from consumers going into debt, we, as a culture, encourage it.

So if you don’t have the cash for a sofa for your new apartment – sit on the floor. If you don’t have the cash for the latest electronic gadget, use the old gadget. If you don’t have the cash to eat out a restaurant, defrost something that’s in your freezer.

To prove that you know how to pay bills – That’s it! That’s the only reason to have a credit card. If you ever want to borrow money, rent an apartment or apply for a job, there’s a good chance someone will ask you for proof that you know how to pay your bills on time. What’s the proof? Good credit. So how do you get good credit? Not from being rich. Good credit has nothing to do with how much money you have. Not from being smart, or popular, or handsome – good credit comes from showing that you can pay your bills on time every month. That means you should create a bill that you can pay every month.

Credit cards are great for that. Only charge on your credit card what you KNOW you can pay off when the bill becomes due. In my mind, groceries and gas work perfectly. Charge groceries and/or gasoline throughout the month and then pay the bill off, on time, by the due date. You will establish and maintain good credit. Someone who charges these minor things on a credit card is not irresponsible. What’s irresponsible is assuming you’re supposed to maintain a balance on a credit card.

We need to change our mentality about credit cards and debt in our society. Only then can we make it out of this economic crisis and hopefully not find ourselves repeating these mistakes!

Tuesday, March 10, 2009

What Are We Teaching??

There are two main issues that I noticed when I got into this financial education world, 1) there is already a TON of educational material out there on personal finance, and 2) most people don’t read it. It’s a shame really, because there is a lot of good information out there. But the truth is, if you’re sitting down reading about how to “Pay More Attention to Your Financial Life” you’re probably already paying attention to your financial life.

How do we reach all the people that don’t want to think about their finances? Those are the people that don’t save, go shopping instead of paying a bill, or use money as a way to stroke their ego. How do you get them to open a book on paying bills and budgeting?

Keep it short
Would you read a 200 page text book on how to budget and pay bills? I wouldn’t either. When someone hands me a book I’ve already determined in my mind if this is something that’s going to take me awhile to read or if this is something I can flip through quickly. If it’s going to take me awhile, I better want to read it. Most people do not want to read about how to manage their money. You have to make the book short, easy-to-read, and to the point.

Add a lot of pictures
Sounds juvenile, right? But studies have been done showing how visual learning impacts retention. And many people will agree that if someone’s not going to read the text portions of a book, they’ll flip through and look at the pictures. So I think you should make sure the pictures tell a great story.

Comic strips are a great tool for capturing visual interest as well as telling a story. Do comic strips have room in the financial education world? Absolutely! I hear stories everyday about people with money who make decisions with their checkbook or their credit cards that would make a great comic strip. The goal with my book is to capture the reader’s attention with a comic strip and then add text that will explain the details.

Relevant topics
Now this is one significant problem with a lot of the education material out there that teaches personal finance. The topics are horrible! “How the Banking System Works”, “What is Discretionary Income”, “How to Calculate Your Net Worth”. Many people can go their whole lives, managing their personal finances just fine without knowing the answers to these questions. Now, I’m not saying we shouldn’t teach these things, but somehow we’ve missed teaching topics people really need to know, “The Difference between Debit and Credit”, “How to Stay Organized so Bills Get Paid”, “Which Credit Card Should I Pay Off First?”.

When we make materials that address the basics of personal finance and insist that we teach everyone – students, parents, immigrants, adults of all socio-economic classes – then people will really have the information they need to make good financial decisions in their life.

Check out my latest book Paying Bills is NOT a Money Issue. Available through our website

Wednesday, February 4, 2009

Living in the Dark

If I told you there was a room that you had to enter – you had no choice – you must enter this room. And I told you that what is in this room would scare you – no avoiding the fear – you will get scared. Would you rather have the lights on or the lights off when you enter that room?

If you said “lights on”, why? Why would you want to see something that you know is going to scare you? Since you’re going to be scared anyway, wouldn’t it be better to not know or see anything? Or would it be better to get a clear picture of what’s causing the fear so you can prepare for it and deal with it?

I meet people every week that are choosing to keep the lights off in their financial life. There’s no avoiding going into the room, but they’d rather not see the cause of their fear. They choose to sit in the dark, afraid.

There’s the doctor who frequently goes on vacation whenever he gets stressed about the drop in patients, and therefore income for his practice, knowing that the vacation trips cost him even more money.

There’s the single mother of three who finally has a good paying job and can afford to get out of debt, but is scared to take that step because that may mean she’ll have to grow up and really plan for her financial future. No more handouts.

There’s the professional man, ten years away from retirement, forced to spend all of his savings after he was laid off from his job two years ago. But now that he has a new job, he doesn’t see the point in trying to build up his savings again, so he goes on shopping sprees buying clothes and gifts for his girlfriend.

Even if these true stories don’t sound like somebody you know, there are plenty of people that decide not to open mail, not to think about saving, not to return a bill collector’s phone call, not to sit down and make a list of their bills – because they don’t want to see what will scare them. They rather enter the scary room with the lights off. You have the option to turn the lights on.

So how do you do it? How do you start the process of dealing with something that you know will scare you? Well, when it comes to financial matters the actual actions you have to take are much simpler than expected.

1) Gather up all your bills
2) Make a list of all your expenses
3) Do the arithmetic

Now, stop right there...don't move...does it sound too easy? This is an incredibly difficult process that most people don’t do. Many people can’t even see the benefit in doing these things. But every time I sit with a client and help them go through this process they always feel better about their financial life afterwards. It’s amazing. Just taking the time to look at it. Face the fear.

Sunday, January 4, 2009

A Real Solution to the Economic Crisis

We’ve entered the New Year with a lot of unknowns. Will we be able to end this sticky war? Will we help not to prevent more violence in the future? Will we get out of this economic mess? Will our neighbors be able to keep their homes? Will our kids learn from our financial mistakes? How can we teach them?

I’m also excited about the prospects of what President-Elect Obama can do for our country, but I’ll admit, I’m more cautiously optimistic. What is the best out-of-the-box idea for getting us out of the economic hole we’ve dug for ourselves? I won’t pretend to be smart enough to come up with an idea to rival the top economists in the world. And I don’t think just one solution can solve such a mammoth problem. But I do feel that there is very little talk about the individual’s personal responsibility in all of this and we must address that part of this problem if we expect to resolve such a big issue.

What did YOU and I do to add to this crisis?
The politicians spent too much money on the war; the banks sold bad mortgages; the credit card companies loaned too much money; the big corporations paid too much compensation; the auto dealerships sold too many gas-guzzling SUV’s, and on and on. However, what did you and I do to contribute to the economic mess? Are we all just victims of a greedy system? Were we all forced to buy new cars every three years, remodel our kitchens based on a line of credit, and put a new flat screen TV on the Visa knowing that the bonus we hope to receive from our “secure” job next year will pay the bill?

I’ve heard no talk about what the new administration will make individuals do to help heal this economic wound. And each of us needs to take responsibility in helping to resolve our country’s economic crisis. We can’t just sit back and wait for some magical bail-out that will save our house or pay off our Mastercard. I have an idea to encourage every citizen to face their own financial responsibility to themselves and this country, which will in turn address some of the long-term concepts Americans have developed regarding the way we manage and understand money.

Don’t just send us money for nothing
I believe part of the current plan is to send out additional stimulus checks to the people hoping that this money will cause us all to spend, thus jump-starting our economy. Instead of just sending out free checks for nothing, insist that we learn something for this money the government’s giving us. Every American needs to take a financial education course and when complete they will receive a stimulus check. The cost of a nationwide financial education program will be just a fraction of what the whole stimulus program would cost.

Force every American to take a financial education course – every single one us regardless of age, education level, job title or economic status. From the upper class, wealthy, educated with trust funds, to the struggling working-class living paycheck to paycheck, we all lack many of the fundamentals needed to manage our money on a day-to-day basis.

If a program like this is going to work, we can’t continue to teach on topics like “What’s a good interest rate for an investment?” or “What’s the difference between a fixed mortgage and a variable-rate mortgage?” The key to this program is to make sure the financial education topics covered in this course are specifically related to budgeting, bill paying and managing money on a day-to day basis. These are topics not typically covered whenever anyone talks about personal finance, and the lack of knowledge in these areas, across all economic classes, is astounding.

Do the math and stay organized
There’s a lot of talk about how bad mortgages got us into the economic crisis we’re in today. But I believe there was a lot more going on then individuals being swindled by bad brokers.

Many people bought houses with mortgages they probably could afford, but then went out and used credit cards to re-carpet, furnish and remodel the homes, not realizing how the payments on the additional debt may cause problems when their adjustable rate mortgages increased. They never did the math to see what they could afford in the future.

Others believe that if they live in a certain kind of house in a certain kind of neighborhood they should automatically be able to afford a certain kind of lifestyle. So they buy the car, the flat screen TV, they eat in certain restaurants, buy certain brands of clothes and they’ve never sat down to actually do the math to figure out if they can afford everything they have.

And many others still just became overwhelmed with all the paperwork involved in managing all this new debt. If you buy or own a house the amount of mail alone that comes in on a weekly basis can be a chore to deal with. And if ignored you can believe there’s a water bill mixed in with all the credit card offers and junk mail that can get forgotten. How many people were prepared to be organized to handle paying their bills?

A different kind of financial education
There are many financial education programs that already exist, but most don’t even come close to teaching what the average American needs to know. Yes, it would be great to teach people how to understand the best investment for their 401(k)’s or the benefits of saving young for retirement years, but that’s not what people need to learn right now.

A financial education course should address forcing individuals to actually do the math to know what is going on in their personal financial life. It should teach topics like keeping all paperwork in one place and setting aside time each week (day?) to look at your bank balance and your bills due. It should address the skills needed to keep track of what’s going on in a checking account and to review your debt and have a clear picture of what’s owed and when.

A nationwide financial education program can be implemented through the internet, over the phone, through the mail, or in person. Similar programs have already been created through our bankruptcy program where people are required to take a credit course before filing. State’s Departments of Motor Vehicles have implemented nationwide driving tests that people have to take before getting a license. We could implement a nationwide financial education test that people can take, upon passing they would receive a $500 check, for example.

Most of the clients I deal with have money, good jobs and education and do not want to deal with looking at their daily financial situation until a crisis happens and they are forced to. Force them to take a course on how to budget and pay bills before they really need it.

Start Money Smart, Inc. has designed programs that address these exact issues and is prepared to teach them to adults as well as teens. For more information, go to

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.