Raising Cash Smart Kids

It is sometimes really difficult being a parent.

Who am I kidding? It’s OFTEN very hard being a parent.

We had one of those difficult situations at our place last week. My oldest, who has been quite sick and unable to work on her business for the past few months, is basically trying to keep up with her friends and their lifestyle on her “sickness benefit”, aka her allowance of $20 per month.

This weekend was a three-day weekend, and her group of friends has planned two trips to the movies and a shopping trip to the city. She didn’t have any money, and she asked if she could borrow some.

Now, as you know, we don’t do loans. And especially since this loan would have been an advance of three months worth of allowance!

I explained to her that she has to live within her income, even when it’s small.

We have a close friend who came down with chronic fatigue a couple of years ago, and Sam is well aware that we give this friend money each month because the government sickness benefit is not enough to cover her basic rent and food needs, let alone pay for medical treatment.

I pointed out that Sam is in the same situation, and her friends need to understand that she simply can’t afford to do these things. The real friends will understand.

This developed into an interesting conversation about another girl in her group of friends who is getting a job because her parents won’t just keep giving her money any more. This girl would rather not be doing the expensive stuff, either.

It seems that there is a whole group of kids doing expensive things like going to the movies and ice skating, spending money they don’t have, all because they don’t want to be “left out” of the group. I suggested that it might be a simple thing to turn the whole group around to low-cost activities, if my daughter and the other girl just took a stand.

Of course, at fifteen, that’s a scary prospect. Being accepted is everything.

But, to her credit, she went off to talk to this other girl, and in the end three of them opted out of the movies and did something low-cost instead. Along the way, they stopped on at a local indoor playground and filled in job applications.

She has wisely decided that working for someone else is lower-energy and more manageable for her than being entrepreneurial right now. I think it’s the right decision, and an enjoyable job is a good stepping-stone to bridge the gap until she is fully well again.

It would have been so easy to lend her the money.

I mean, she has been sick, poor kid.

But what a benefit she gained because I didn’t – she has taken steps to change the culture of her group of friends from pointless spending and keeping-up-with-the-Joneses to being on the lookout for low-cost fun. The benefits will not only flow to her, but to all her friends who get the message.

In the long run, she will have a group of friends who are much more supportive of her goal of financial responsibility, and the confidence which comes from challenging a group norm and shifting it. For the rest of her life, she will know that she doesn’t have to do what everyone else is doing, just so they won’t reject her. She has learned that if she leads, others do come with her.

Absolutely priceless lessons.

And if I had lent her the money, she would have had none of those lessons.

It was emotionally very difficult at the time, but she and I are both glad now that I stuck to my guns and didn’t lend her the money.

Companies are always on the lookout for new customers, and they know that the younger they can get a consumer, the more likely they are to keep them for a long time. Particularly worrying for parents these days is the way cell phone and credit card providers are targeting teens.

Even debit cards can cause problems – my fourteen-year-old saves half of her earnings religiously into a high interest account. Once she had a debit card, though, and was being paid by direct deposit, she found that she had overspent her budget without realising, and didn’t have the full amount left that she had meant to transfer into her savings account.

Cell phones just chew through money, a few cents here and a few cents there for text messages or listening to voicemails, and suddenly the bill is enormous, or the prepaid card runs out long before the end of the month.

Credit cards are the worst of all, because it is so easy to build up a debt that you can’t repay all at once, and the interest rates on those things are so high it’s amazing they are legal. Once you get behind, you just get further and further behind.

Load up a high school or college kid with a cell phone and a credit card or two, and you can undermine the foundations of their financial life completely.

Student loans are bad enough, but many kids just shrug and add a bit of credit card debt on top, figuring “in for a penny, in for a pound”. We live in an instant gratification society.

Credit cards have become a fact of life on college campuses. With a reported $13 billion in discretionary income, college students represent a huge market for credit card companies (Kara, Kaynak, & Kucukemiroglu, 1994). Students often receive incentives, such as t-shirts or mugs, to apply for cards, and requirements, such as previous credit history, are often waived (Kara et al, 1994). Due in large part to these marketing efforts, a recent study reported that approximately 70 percent of college students possess at least one credit card–a number much higher than previously thought (Manning, 1999), while another study reported that 93 percent of college seniors have acquired at least one card (Markovich & DeVaney, 1997).

With companies lining up to seduce our kids into debt, the only protection we can offer them is a good, solid financial education, and a grounding in good money habits.

Images by PT, The Consumerist and B Francina.

Most of us have heard about the longitudinal study of Yale graduates conducted in the late 1900s. Researchers followed a graduating class through their entire working lives to age 65, and generated the following statistics.

By age 65, 36 out of 100 people had died. Now these days, with modern medicine, and extended life expectancies, that number may well be lower, but we can expect the proportions among the rest of the categories to be about the same.

Just 1% (one in a hundred) people were wealthy at age 65. Just one in a hundred Yale graduates – what would the statistic be for those who didn’t have a university education, I wonder?

Another 4% were financially independent. That is, they had passive income (income they didn’t have to work for) which was enough to comfortably cover their living expenses.

That accounts for 41% of the total sample.

The other 59% were in financial trouble. Some just had to keep working, because they couldn’t afford to stop. Others were dependent on government hand-outs or the charity of relatives.

More than half!

Do you think those fresh-faced young graduates believed that more than half of them would be struggling financially at age 65? Do you think any of them, through their working lives, planned to be broke, or dependent on others, in their retirement?

Of course not. They were as optimistic as we all are today. We all confidently expect to be financially OK, just like they did. We’re all working hard, paying off mortgages, and saving for retirement, like they did. And we are headed for the same kind of statistics as a result.

The situation for today’s workforce is no easier than it was for the Yale class of ‘32. If anything, times are tougher. Fuel prices are higher, work is harder to come by, and less secure, and financial traps like credit cards and upside-down mortgages have come into existence.

While it’s daunting to think that we, who are of working age now, are likely to find ourselves facing similar statistics – or being similar statistics – when we reach the age of 65, have you ever stopped to think about the other impact of lengthening life expectancy?

Not only will we have to come to terms with our own successes and failures in financial management sooner than we think, we will also live to see the effects of our parenting in the financial successes and failures of our children. We will, many of us, live to see our children reach the age of 65 – financially independent, or still struggling.

What are you doing, right now, to ensure that your child is one of the successful few?

(Photo by pedrosimoes7)

My daughters will probably hate me for this in the end, but I have to keep talking about the things they say!

As they get older, they are encountering money situations more often, so I get more opportunities to hear how they think about money. I have to admit, sometimes I am just blown away by what comes out of their mouths.

Our oldest quit her job at McDonald a few months ago, in favor of a career in internet marketing. Her current ambition is to be a copywriter. But she has had a few health challenges, which have slowed her down from acting on most of her grand plans, and as a result, her cash flow has been dramatically reduced.

A friend of mine was asking her how she’s coping with her financial situation, and she came out with the following profound observation.

“I’m poor,” she said. “But I’m not really poor. I’m only poor in the sense that I don’t have any money. I’m not poor in the sense that I have no way to get money.”

How good is that?

It is such a profound statement that I am still impressed, two days later.

She is completely un-stressed, even though she can’t do the things all her employed friends are doing. She knows that money is available, if she really wants it. The sense of security in that awareness is absolutely priceless.

Whatever she does with the rest of her life, it will not be shaped by a sense of powerlessness and desperation. She has enough entrepreneurial attitude to find ways to make money, wherever she is in life. If she is not making money, she knows that is her own choice, and not the tyranny of an uncaring Universe.

This sense of self-reliance is something that most adults lack, let alone kids of fifteen.

Hearing this quiet confidence makes us realise that the effort we have put in over the years, teaching her about money, has all been worthwhile.

At the age of 18, Jake Lindemann already has a nice start on his lifelong dreams.

He hopes to one day own a nationwide chain of skateboard stores, and he’s got every intention of being involved with stocks. And with a successful run as a Manitowoc businessman already under his belt and money invested in the market, he’s well on his way.

One thing obstructing his path to success was financing a college education. But thanks to a whole lot of determination, this Manitowoc Lutheran High School senior will be attending the University of Wisconsin-Milwaukee next year at the expense of the McKelvey Foundation.

He was awarded a $40,000, four-year scholarship last month by the New York-based organization, which gave 100 entrepreneurial scholarships this year to students across the country.

Read more about Jake Lindemann in the Manitowoc Herald Times.

Here’s another bright light – another young entrepreneur whose business activities have earned him a college scholarship. Jake Lindemann and his younger brother opened a retail store in Manitowoc back in 2006, when they were sixteen and fourteen years old. Sales and inventory have tripled at the skateboard store since it opened, but Jake and his brother have wisely been re-investing their profits into the business.

The McElvey Foundation awards 100 entrepreneurial scholarships each year, and receives over 1000 applications. Now, those are pretty good odds, aren’t they? One in ten!

All the more reason to get your kids thinking in business terms from a young age. To qualify for a McElvey entrepreneurial scholarship, the young entrepreneur’s business must be more than a year old, and have at least one employee, so there is no point trying to cobble something together during your senior year in high school. This has to be a real business, which means having a solid business plan in place by the age of fourteen or fifteen.

I am looking forward to tracking down the other winners of the McElvey entrepreneurial scholarships – they are such great stories, aren’t they?

I have been thinking this week about all those parents who write to me (and I am sure for every one who sends an email there are hundreds who don’t) to say “I know I should be teaching my kids more about money, but I just don’t have time.” How does this “don’t have time” belief system get such a grip on people?

When you think about it, it’s not an unusual feeling to have.

Who here knows they need to shed a few pounds? Or could do with being a little fitter? That’s most of us, isn’t it? So how many of us are actually doing something about it? I know I am guilty of saying “one day, when I have time,” when it comes to exercising daily.

Dieting and exercise are two of the most procrastinated activities. In fact, there are very few things that are more put off, avoided, ignored, and denied, than the need to eat right and exercise.

But one of those few things that are just as much put off is managing money effectively. Why is that?

Those who borrow to buy things they can’t afford, or just make the minimum payment on their credit cards, or let late fees be applied to bills, library books, and DVDs, are all living dangerously, whether they know it or not.

Everyone knows we shouldn’t do these things, and everyone means to do a better budget sometime soon, and make some positive changes to the way they manage money, probably in the next year …

Now, I take the attitude that adults are entitled to procrastinate on anything they choose to. After all, when you’re 65, you have a heart condition and diabetes, and all you can afford is a tin of baked beans for supper, you will only have yourself to blame, right?

We all shrug off the long-term consequences of putting off dieting, exercising, or sharpening our money habits.

You can do it to yourself, sure enough.

But would you do it to your kids?

Would you feed your kids junk food and soda pop for supper every night? Would you let them watch TV all day and never send them out to run around? Would you put off buying any bats, balls, bikes, scooters, basketball hoops … and leave them sitting in a room too small to run across?

Of course you wouldn’t.

And yet, when it comes to money skills, many parents are doing the equivalent of exactly that to their kids. Cutting them off from any way to exercise those skills, to learn and grow in that area.

Many parents don’t talk to their kids about money at all, other than to say “no, I’m not buying that for you, now shut up about it”. Maybe because they don’t feel they have the time, or because they think they aren’t doing so well financially themselves, or because they don’t know how to explain things in a child’s terms. Some parents even think that kids have no business thinking about money”.

Do you think your kids are going to wake up the morning they turn 18, and somebody downloaded the Wikipedia entry for “money management” into them while they slept?

Of course not!

Good money habits, just like healthy eating and healthy exercise habits, are the product of years of practice and reinforcement.

If your kids don’t have money of their own to manage, they are like the kid in the tiny room – unable to exercise those muscles and practice their skills.

Regardless of the state of your own money situation, don’t deprive your kids of the chance to learn what they need to know. If you don’t know how to teach them, get help. You are the only thing that stands between your kids and a lifetime of financial struggle. If your parents let you down, that is even more reason to make sure that your kids get started in life the right way.

I found some nifty tools on a financial education website made by the Australian Government today. You can take a Financial Health Quiz (I scored 86 out of 100 on my first try, but the cute part is you get to do it over until you get all the answers right if you want to – great for kids!) or use a range of calculators for Savings with compound interest and Loans with reducible interest. There is also a nice little Financial Basics handbook you can download in .pdf form.

These are all neat tools that you can use with your kids to start them thinking and talking about money ideas.

Remember, though, that thinking and talking are only a small part of the puzzle – you need to make sure they follow through by taking ACTION.

Are your kids earning their own money?

Are they saving at least half of it – divided equally between short-term savings (for the iPod or Playstation game) and long-term savings (to invest)?

Do they understand compound interest? A couple of weeks ago I shared an easy exercise you can do with you kids over the period of one week to completely cement for them the notion of compound interest. Check out my post titled How To Teach Your Kids About Compound Interest. (I know this is a big topic of interest for parents, because that post has had a stream of search engine traffic ever since I wrote it!)

Of course, if you are one of our Cash-Smart Kids members, you already know all this, don’t you?

We had another one of those “feel good” moments this week – you know, the ones where you sit back and marvel to yourself “they actually WERE listening, after all …”

In this part of the world, interest rates have been going up steadily. The twins came home from school the other day a bit confused because one of their friends had “gone off” at another of their friends for buying something from the canteen.

“You’re not supposed to buy anything,” this 13-year-old yelled at her friend, “Don’t you know interest rates are going up?”

“What’s that got to do with anything?” asked the confused ‘villain’.

“You can’t spend money at the canteen or our mortgage will cost more,” railed her accuser, “and then I won’t get new jeans for my birthday!”

This girl has been getting some messages about money from her parents, clearly, but she seems to have things a little muddled.

“Do you think her parents told her she couldn’t spend money at the canteen because their mortgage payments were going up?” one of my twins asked me.

“Probably,” I grinned.

At this point the older one, aged fourteen, who had been playing The Sims and apparently ignoring the whole interchange, suddenly piped up with “That’s silly. They should just get a fixed interest rate and then it wouldn’t matter.”

The twins nodded in agreement, and that’s when I realised that the whole thing has been worthwhile …

Step 1 – Seeing How Your Past Holds The Key To Your Financial Future

“Messages about money are passed down from generation to generation, worn and chipped like family dishes.” Suze Orman

It is important to spend time understanding your family’s stories about money – and the ones you created yourself, as you were growing up. Financial freedom begins with freeing ourselves from the burden of the past.

Step 2 – Facing Your Fears And Creating New Truths

“The trouble with fears is that when we keep them inside and refuse to deal with them, they grow, like weeds left alone in a garden. Take the fear of not having enough to cover the bills this month and let it wander around by itself, unchecked. Where will it go? It will become the fear of not having enough in general.” Suze Orman

New financial realities can only grow once you have faced your fears and replaced them with new, more empowering beliefs.

Step 3 – Being Honest With Yourself

“Most of us believe, or deceive ourselves into believing, that we need about $1,000 to $1,500 a month less than we actually do need to go on living the exact same way we live right now.” Suze Orman

It is very important to go back through your records and establish exactly how much you have really spent. Guessing won’t get you free!

Step 4 – Being Responsible To Those You Love

“It’s not OK when you get sick, or when you die, to leave financial chaos behind you for everyone else to clean up.” Suze Orman

Make sure you have a will, including a testamentary trust, adequate life insurance, income protection insurance, and health insurance. If you are not sure what any of these are, or how to get them, consult a financial planner.

Step 5 – Being Respectful Of Yourself And Your Money

“If you’re respectful of your money, and do what needs to be done with it, you will become like a magnet, attracting more and more money to yourself.” Suze Orman

The most powerful and respectful way to make money is to invest wisely. Plan for your future, take advantage of the superannuation plans that are available to you, face your debt, and stand guard over your money, ensuring that every penny you spend is a penny that must be spent.

Step 6 – Trusting Yourself More Than You Trust Others

“When it comes to every financial decision you will make for the rest of your life, you will choose correctly if you go with the answer that reflects your instinctual response.” Suze Orman

Your financial freedom is your responsibility, and it can only be planned and brought about by you. There is no “expert” or “insider” who knows better than you what you should do.

Step 7 – Being Open To Receive All That You Are Meant To Have

“Money is a living entity, and responds to energy, including yours, and to how you feel about yourself.” Suze Orman

Thoughts of poverty are the chains which bind – to release them, give money to a charity you feel stongly about.

Step 8 – Understanding The Ebb And Flow Of The Money Cycle

“How often have you heard, for example, of someone who is devastated by being fired, only to land a much better job and end up happier?”

To be at peace with the ebb and flow of money, remember two things. Always take the long view of your financial future, and believe that everything that happens is positive, if you are willing to let it be.

Step 9 – Recognising True Wealth

“True financial freedom lies in defining ourselves by who and what we are, not by what we do or do not have.”

You cannot put a price tag on your life. No matter what financial ups and downs happen in your life, you will be truly wealthy when you understand that none of that stuff matters. Not really.

“Money itself cannot make you financially free. Only you can make yourself financially free, and you can do it – and so much more. You have that power.” Suze Orman

I had one of those “why am I doing this?” moments the other day.

You know how it is, you’re talking to someone who just totally doesn’t comprehend why anyone would be interested in the thing you have devoted your life to doing.

And you stop and think “so why is this a good idea, again?”

It’s so easy to get caught up in what we’re doing that we forget the why.

So why teach kids about money?

I would have to say that one of the main motivators for me was working with a large number of frustrated, struggling, always broke adults. I remember thinking “they should be teaching this in schools, not leaving it to people to figure out on their own – or not – as adults”.

We teach kids healthy eating – why not healthy money habits, too?

But it’s not enough to say “why NOT teach them about money?”

There are lots of reasons why not – schools don’t do it, so it falls to parents, along with everything else that falls to parents these days. Between working two or more jobs themselves, and running the kids around to sport, church, scouts, extra-curricular school activities, music lessons, and playdates, not to mention squeezing in the housework somewhere in there, where are parents supposed to find time for yet another educational activity?

And that, right there, is actually the greatest reason why you MUST teach your kids about money.

Because if you don’t, they are going to end up just as stressed and frantic as you are, with just as little time for the truly important things in life.

If you had learned a bit about money in school, say you had studied and understood Robert Kiyosaki’s “Rich Dad, Poor Dad”, you would have enough passive income by the time your kids went to school that you wouldn’t have to work so many hours between you.

You would probably have set up a source of income that enabled you to work from home, or close to home, at the times you choose to work.

Now, you might not have that in place yet – although I hope you’re working on it, because it’s better late than never, and if your kids don’t master money you may find yourselves doing Granny day-care for ten years or so because your kids and their co-parents are working, and childcare is unaffordable.

But even if you aren’t there yet, you can still teach your kids about the journey and the ultimate goal.

Give them the life choices that you never had – give them the knowledge they need.

Maybe they will act on it, and maybe they won’t, but at least, as a parent, you will have given them the ability to choose.