Prepping Kids (Part 4)
Posted by John Draper | Filed under Kids & Money, Life Lessons, Money Management
Essential Money Skill #6: Credit is NOT disposable income.
Yup, I know it flies in the face of everything everyone else has been saying, but credit is NOT disposable income. Student loans should not be used to go pub-crawling. Credit cards aren’t an “entertainment fund.” And a line of credit is not an emergency fund.
Debt has become so pervasive that it seems like everyone’s in it. You may think this is “normal.” So might your children. But it’s not normal for someone who is financially healthy. And if you bought into the lie that making your minimum payment is good enough, rest assured that your kids did too. After all, if you can have a fab new laptop that cost $1100 for a mere $34 a month, it seems like an easy choice.
If you haven’t already done so, go and read Student Debt Legacy, and make sure your college or university bound kid reads it too.
TO DO:
Once your child is 12 or older, teach her about credit, how it works and the costs involved. Give a young child a credit card on the Bank of Mom so she can learn how to use it.
Older teenagers can apply for a credit card with your co-signature. Make sure the limit is low … no more than $300. Have your child learn to use and repay the credit card, keeping track of purchases and making payments on time until the habit is established.
Here’s the best way to keep track of money.
- In a small notebook, write the current balance in your bank account at the top of the page.
- Each time you use your credit or debit card, write a cheque, or take a cash withdrawal, write down the amount spent and subtract it from the balance. Don’t forget to debit the automatic withdrawals that come out of your account every month for things like car insurance or loans.
- Every time you make a deposit, add it to your balance.
- You now have a real-time balance that shows how much money is available to spend. And you can’t spend money you’ve already used elsewhere (like on a cheque that hasn’t cleared, or on a credit card transaction that hasn’t come due).
- When your credit card bill comes in, check the transactions against the list in your notebook. If there’s something on your statement that’s not your doing, call the credit card company right away and identify the wayward transaction.
Tell your young’un about his credit score, what it is, how it works and how to make it suck! Ask him what he thinks would happen if he got a bad credit rating and a low credit score. Explain that with a low score, interest rates go up and the likelihood of getting a loan you really need goes down.
Essential Money Skill #7: Keep Money in Perspective
This is one of the most important lessons you can teach. I was at a small party a while ago when a teacher-artist-mom started telling me that her son was at university. He is a wonderful artist, but has decided to not follow his true love because he wants to be able to make lots of money. She was a little sad.
I have to be honest, I’m of two minds on this: first, I commend the young lad for being practical and recognizing that the life of a starving artist isn’t easy. Second, like his mom, I’m a little sad for him. If he has to give up what feeds his soul so he can have loads of stuff, I wonder just how happy that stuff will make him.
He’s young yet and with a business degree may find a way to make both work together. Here’s hoping.
Money, in and of itself, doesn’t mean anything. It’s what you do with the money. Money is a tool, a means to an end. If you don’t know the end you want to achieve, you’re likely spinning your wheels.
People exhaust themselves trying to maintain lifestyles they can’t afford. Whether it is the social pressure to conform or our a sense of entitlement, so many people are willing to put their futures at risk so they can make the right impression. They MUST drive the right car, watch a high-definition television, eat out three or four times a week, drink the best Bourbon, take the right vacation. And many people are willing to spend money they haven’t yet earned to maintain the illusion. Keeping Up With The Joneses is a dangerous game. It will not only sap your bank accounts, it will sap your life’s energy.
One way to help your child gain some perspective is to talk about what it is she really wants in life. I often talk to my Alex about how important it is to live a worthwhile life: A life that brings challenge and love, that allows you to share, to laugh, and to be happy. So, what makes your life worthwhile? And what are the things that your child thinks will make her life worthwhile? And what is she doing to put more of those things into life?
It can’t just be about money, or more money. According to Dr. Tim Kasser, associate psychology professor at Knox College, and Dr. Richard Ryan, psychology professor at the University of Rochester, people who rate making money as a primary goal score lower for mental health. They are at a greater risk of depression, are more anxious and suffer lower self-esteem, and have more relationship problems.
TO DO:
Talk with your kids, using questions like these as a spring-board (not all at once… over time):
- What jobs would you NOT do for money?
- If someone offered you $50,000 to do something that might end up being a bad thing (you’re not sure right now), would you do it? Why or why not?
- If a cashier gave you the wrong change, what would you do?
- A friend asks you to lend her $500 for a couple of days. You have $500 in the bank to pay your rent next month. Would you lend her the money?
- Your boss didn’t pay you last week. He was short the cash and said he’d make it up this week. When you show up for work, he’s not there. Neither is your pay. What would you do?
- What would happen if money grew on trees?
- How much money is “enough”?
- What makes you happy?
- How can you work at something you love while taking care of yourself financially?
If there are areas you think your kids are a little wobbly on when it comes to either their money or their life skills, it’s not too late. It’s never too late. I got some of my most important money lessons from my mom long after I left home. It was at her urging that I took out disability insurance while I was young and healthy and could afford the premiums.
In December my 15-year-old Alex got notice of the auto-renewal of her GIC. The interest rate the bank had renewed at was a pathetic 1.5%. I coached her on what to say when she went in to negotiate a better rate.
“I’d like you to cancel this GIC and credit the money to my savings account,” said Alex with all the confidence she could muster. “If you’re only going to give me 1.5%, I’ll move the money somewhere I can earn more.”
The CIBC rep was respectful and brought up her file. “If you want to go for a longer term, I can offer you a better rate.”
Alex looked at me with huge question marks in her eyes. I stayed quiet. The rep continued, “If you’ll lock in for two years, I can offer you 4.25%.” I nodded slightly and smiled.
“I’ll take it,” said Alex.
And thus begins a young customer’s self-advocacy and lifelong focus on making things happen the way she wants them to. Small steps, coaching and practice build skills. The next time, it will be easier.
January 8, 2009 at 9:03 am
It is so true about using credit for the pub crawls, etc… that is what I remember most about nights out in University, friends getting a couple of hundred cash advanced so they could put back pitchers of beer and pizza while I had a “measly” $20.
It’s weird how they justify it to themselves but like you said it is ubiquitous. I remember when checking out mortgages one banker we talked to mentioned that we could get one of those home LOC (tied to the mortgage) and noted it was a great resource for when we wanted to do renovations or get furniture! ha!
January 8, 2009 at 10:06 am
I can’t lie, when I opened a line of credit as a student, I definitely used it for things like groceries, going out for lunches, and everything really…and it was the best feeling. Not a great feeling once you realize you have to pay it all back…but it was fun at the time!
January 8, 2009 at 10:12 am
I actually think that a lot of these questions and concepts are good for adults too! Especially ‘how much money is enough,’ ‘what makes you happy?’ and ‘how can you do something you love while taking care of yourself financially?’ I think putting more thought into these questions can help guide our financial practices.
January 8, 2009 at 10:20 am
It’s been a few years (almost 9 to be grossly exact) since I graduated from university, but from what I remember my student loan was made out to the school, and not me. I didn’t have the option to spend it on anything else. I didn’t have a line of credit then, but I did have a visa. I tried to use it wisely, and did at first, but then my mom told me that I could do a cash withdrawal from it (which surprises me about my mom because she is ALL about not paying interest at all). I wish I could impart these values and advice to the grads that come into my store. I just wish I was armed with all this knowledge a long time ago. I made a comment to my mom a few days ago about this site and how it breaks everything down and makes it painfully simple, and she said that she thought she had taught me that stuff. I had to tell her that all she told me was to live within my means, but that she had never sat down with me and showed me how to budget a paycheck. I felt better after I told her that…It was something that had been on my mind.
Gail, I have been curious to find out if you ever do guest speaking out-of-province. We have a women in business breakfast once a month, and I think some of your advice would be so helpful…any ideas?
January 8, 2009 at 11:11 am
Hi Gail,
Happy New Year and glad to hear the holidays were okay for you. Nice to know you and the kids are settling in and of course, always remember how much we care when a bad day catches you. You are loved!
Great articles on prepping the kids. Was wondering if you could do something on RESP’s. I’ve searched the site as you ask and only found a Feb 4/08 blog “Saving Downpayments and RESPs”. I have two young kids and am looking to open something for them asap.
My New year’s budget ala Gail accounts for the jars, emerge savings and RESPs for the babes. Where to start is another thing. Wow. I’ve asked about nine different friends and they all have something different set up for their children so it wasn’t as helpful as I had hoped. Sooo…would really appreciate a Gail spin on this.
I’ve gathered from your Feb 4th blog that individual and self directed is what you preferred. I have a self directed RRSP with TD so is it the same premise? (Unfortunately my stocks and mutual funds have tanked so its not very pretty to look at these days). Would it be better/safer to hold a good portion of GIC’s/Bonds, a balanced fund, etc. This is not money I’d like to gamble with although it is for the long term (14 and 16 years to redemption for post secondary). Appreciate any advice on this topic so I can get it moving forward.
Thanks sincerely Gail for all that you do.
Lisa M.
January 8, 2009 at 11:49 am
I know these lessons are for kids but as an adult, I’m thinking about these as well.
Why you may ask? Along my life’s journey, I kept meeting people who were living their dreams in these artistic fields and feeding their families as well. I began to realize that it’s not the “Art” that made them starve but they way they handled money that was the issue.
When I was much younger, I too decided not to be a “starving artist” and followed another route. In short~I sold myself short and I can say is that it wasn’t worth it.
I am now in the process of becoming an artist who will not starve.
My current music teacher lives in one of the best neighbourhoods in the GTA and has a happy family who lives in it. This is not an accident~it’s quite obvious he had a plan. It made me question my beliefs, and I realized it’s not just how much $$ you make but what you do with it.
Thanks to you Gail, I’m continuing to gain much needed financial know how and will get to my final goal.
January 8, 2009 at 1:59 pm
I Love that last bit you put in with your daughter negotiating her GIC, it’a a great example of just how easy it is to have your money work harder!
January 8, 2009 at 2:11 pm
I have a 22 year old who spent lots of money (hers and ours) going to film school to be a film editor, but struggles to find a job after graduation. I also have an 11 year old who has acted in 3 television commercials, but thankfully wants to be a teacher when he grows up, not an actor. My wife and I struggled with the whole issue of helping our kids “pursuing the artistic dream” versus planning for a career that is more obtainable. Looking at things now, I’m more inclined to nudge the kids in a direction that has a broader range of opportunities. If I could rewind 5 years, I would encourage my daughter to go to school for graphic design, and develop her film editing passion as a sideline if necessary. People who love the arts, whether it’s music, acting, whatever, can pursue these things as their recreation. Your artistic passion doesn’t need to be your day job.
January 8, 2009 at 2:32 pm
I went to University at 18 after being estranged from my parents for two years. I went in on OSAP walked in and there was literally 5 or 6 credit card companies waiting at the registration desk. That day I was give 10 000$ in credit. In one day.
Needless to say its been 5 years and this year I had to declare bankruptcy from the bad habits that have been instilled in me.
Now, I look at Gail as my parent. I have no “adult” advice, but I am changing my financial life around thanks to Gail.
January 8, 2009 at 3:18 pm
Gail – I love these lessons. As an adult I am using them as my check-up. My mom was very good at getting most of these lessons instilled in both my sister and I, however I have seen through your examples ways to improve on how she got them into us.
GIC’s, and Bonds were a big part of my life growing up, and helped me pay for my residence fee and my meal plan for my first year away at University. OSAP covered my tuition costs for two and a half years after, and I worked part time since 15 to pay for all of my extras, all the while having to stay on a projection budget. In our house a projection budget was created from all the things you know you are going to have to pay for in the next 8 months of school – tuition, books, living costs, rent, food, entertainment, savings, emergencies etc. You put down what you thought you would need in each category, totaled it all up and then worked your butt off to make sure you saved it all before the next year at school. I worked part time in a grocery store that I travelled back home to work at on the weekend, ever second week – and yes even the travel costs to do so had to be budgeted ahead of time.
My mom was very good at aiding me in that I didn’t pay rent to her while I was in school, but was required to do all chores I had been doing growing up, as well as one household thing for her each weekend (think spring cleaning type stuff ie. I’d clean my room, vacuum or clean the bathrooms, dishes, laundry, as well as wash the windows on the main floor or tend the garden, etc.) She helped us early understand that what we wanted had to be saved for – and that you had to get over the feeling of your bank account not being so high to get something you really wanted. My sister and I learned early to really use those Birthday and Christmas lists well (we were allowed to ask for ONLY 3 things for Christmas, and 3 things for our birthdays). That way if we really couldn’t justify taking that money out of the account and the account saving $40 instead of $60, then we really didn’t need that really cool item that Joey has after all.
I really like the lesson from today – they really make me feel good that while I was in school I was doing things right. (the year and a bit after school I got myself into trouble with a credit cards, that I’m proud to say I have only 2 years left to get myself out of, and one card to pay off instead of those 4 or 5 that presented me with credit) Just goes to show you that even the well taught kids can have trouble with this stuff when they stop paying attention.
thanks for posting these lessons – I am printing them and the accompanying articles off to save for when I have a little one, so I know where to start! AND to remind myself to stay the course!!
Thanks for being a constant reminder for me, now that I’m on my own and don’t have mom to ask me if I really need that anymore. Now I have a conscience that sounds remarkably like you, and a place to go to read affirmations and a show that is quickly becoming (as my boyfriend says) my religion. I don’t mind at all….you’ve/we’ve even begun to “convert” him!!
January 8, 2009 at 4:07 pm
michelle, that was an interesting comment you made about your mom’s response to Gail’s website – “I thought I taught you this stuff.” I guess I learned how to be frugal by modeling by dad’s behaviour, but now, at 27, I’m trying to teach myself everything I wish I had had a little guidance on – I learned nothing about investment options, RRSPs, how much to save for retirement, an emergency fund, how to balance a cheque book, credit rating, etc. For the longest time I assumed I had good credit because I used one credit card and always paid it off. It never occurred to me for the 8 years I had the card that since my mom was a co-signer on it, that I was not accumulating credit. It’s stuff like that which is just trial-and-error, and I owe a lot to Gail to being a positive financial influence in my life, encouraging me to go out and learn this kind of info. Money just wasn’t discussed in my household, but what an important discussion to miss out on.
January 8, 2009 at 7:11 pm
The comment about teaching about credit made me laugh at a memory of when my brother and I were small. He wanted to buy a stereo but wouldn’t have his birthday money for another 2 months. I had just had my birthday so had my little stash of money from the birthday cards and my carefully hoarded allowance.
My Mother suggested that I loan my brother the money and he would have to pay interest if he missed any payments. I am ashamed to admit that there are loan sharks with less tenacity than I had!
We both learned that it is better to be at the lending end than the borrowing end!
January 9, 2009 at 12:31 am
I do have to say that I never liked just making the minimum payment on anything. I think itsimportant to realize that there is a reason why the banks and various lenders are happy with us just making the minimum payment.
They make money!!!! my husband has a line of credit that he is now just paying off, it was a student line of credit so he no longer can use it to buy things. Before we got married he only made the minimum payment on it which was just the interest. I didn’t like that idea of just giving them money without lowering the ballance at all. We since then have doubled the payment and have seen progress. And if for some reason we don’t have enough money to pay all our bills and feed ourselves we just cut back on that payment. As well as pay attention to cost of food and eat what we have.
we have quite a bit of food in our cupboard we could make due if we had to.
I definately plan to show my kids how not to get into debt.
January 10, 2009 at 10:55 pm
Ahhh, my favourite subject!!
Our three are all sensible when it comes to money. One has student loan debt because he didn’t work before he graduated from high school, but the other two are in great shape.
Here are some of the things we did that I feel helped our kids to be responible with money:
1. At age 11 we started them with an allowance and they had to “fend for themselves”. That meant that they had to buy their own clothes, pay for their own school supplies and their own entertainment. If they went to the movies and sat with us, we paid. We bought winter coats and boots.
Every birthday the allowance went up $10 a month. It was NOT generous to begin with ($20 a month).
2. Starting in Grade 5, they were responsible for one meal a week (from scratch). I helped the first two times, then I left them completely on their own. You can’t imagine what great cooks each are now!!!! Heaping praise on them was our main role.
3. We taught them how to USE the system. If you have a credit card, pay off the bill before interest is charged. Use it to gain airmiles.
4. Don’t pay your kid’s way through university!! Our kids have been horrified to see the way that their fellow students abuse what their parents are doing for them. And students with new cars! What are parents teaching their kids when they make their lives so simple???? A fellow student’s comment to my oldest “I feel so sorry for you that you have to pay your own way through university.” My son’s reply “I wouldn’t have it any other way.” That son is now a manager of a small company in a foreign country….at age 24 yr.
5. A parent’s line of credit can be used to pay student loans. The student pays the line of credit rather than the higher interest that the student loan charges (there is something wrong about that).
Basically parents are not doing their kids a favour when they do everything for them. Confidence comes from being able to do things for yourself. To be a good parent you need to give them the skills to live on their own. So parents MUST NOT do their laundry for them or cook and clean for them. Be KIND and make them do it themselves!! We raise them to release them, not to keep them.
Sorry for the rant, but I feel incredibly strongly about this issue!!
January 11, 2009 at 12:06 pm
At my house we heard plenty about credit cards and how they were to be used carefully or they could go out of control. I must have heard that from about age 6 on… So I winced when I was dating and my now husband remarked about how he thought of credit cards as extra cash. Ugh!
Thankfully he doesn’t see it that way now and hopefully we can raise our children to be crafty little savers!