Kids also go into the student loan system with all kinds of misconceptions. They think that the six-month grace period they’re given comes interest free. Wrong. They think that the interest rate on student loans is lower or comparable to what they can get through the bank. Wrong. They think that the payment amount they’re given by the student loan system is designed to get them out of debt. Wrong again!

The six-month grace period comes with a cost: interest. If you’re a student in the Maritimes, you’ll graduate with an average debt of about $28,000, and that six month deferral could cost you as much as $1,000 in additional interest. You’ll have the option of paying it in a lump sum. But most people just add it on to their principal, and end up paying interest on interest. Talk about putting compounding to work AGAINST you.

Don’t fall into the trap of thinking that student loans have lower interest rates than private bank loans. The interest rates are actually higher on student loans. Why? Well, remember all those years you were in school, using the government’s money and paying not a red cent in interest. The interest rate clock was completely off. Well, the government is going to get it’s pound of flesh, so your student loans come with a hefty price tag once the interest rate clock is turned on. In fact, if you choose a variable interest rate, you’ll pay prime + 2.5% while the fixed-rate loan charges prime + 5%. Whew!

As for keeping you in debt for a long, long time, the student loan system default repayment term is 114 months, which is 9.5 YEARS and most people go with the default without giving a second’s consideration to the cost of the loan. If you graduate with $20,000 in student loans and go for the default at today’s rates you’ll pay $10,748 in interest. Ouch!

7. Does your kid know how the banking system works? Most kids have a clue, but just. Sure they know how debit cards work, but do they know that they have to keep track of what they’re spending so they don’t end up bouncing debits/cheques? Think if you start with “Hey, I want to talk to you about banking” you’ll get “Gee, mom, I’m not a noob.” Try this: “So do you know what it’ll cost if you try to spend money that isn’t in your bank account?” Yup, fees are always a great place to start because everyone hates paying bank fees. Get yourself the fee schedule for the bank your child will be using at university (very likely the one on campus) and go over the fees explaining what the various services and accounts are. Of course, that means you’ll have to understand what you’re talking about!

Encourage your child to keep a regular eye on his finances. Not only is it easy to lose track of your spending, but id theft problems can be thwarted quickly if people are vigilant about watching their bank accounts online. If kids are using a shared computer, reinforce how important it is to sign off fully when finished. And clear the cache.

Tomorrow — Part 4: id theft, credit histories and tax returns

Part 1: cash flow management

Part 2: contracts, impulse control and credit cards

Essential Money Skill #1.

Essential Money Skill #2: How to manage a bank account.

Every teenager should have an account with his or her own money, and know how to use an ATM, complete a debit card transaction, write a cheque, and reconcile a bank statement.  Hey, there are some ‘dults who can’t reconcile their bank statements. If you’re one of them, you should learn too.

If you think taking your ten-year-old to the bank and opening up a bank account means you’ve done the job, you’re very wrong. Have you shown Little Miss how the debts and credits work on her statement? How to transfer money between accounts? Have you explained how interest works and why it’s important that money work as hard as people do? Have you talked about the fees that are often charged, and how quickly they can add up? How about the magic of compounding return? The Rule of 72? Hey, you got some ‘splaining to do.

TO DO:

Sit down and explain how banking works to your young’un. It doesn’t matter what he thinks he knows, you still need to have this conversation. Use the Socratic Method so you don’t totally bore him to death. The Socratic Method? What the Dickens… In a nutshell, that’s when you ask questions and let your child provide answers, correcting any misinformation as you go. It beats the Pedantic Method – I talk, you listen – by a mile.

Savvy shoppers may already be hip to using a debit card. Are they also hip to all the ways people have of stealing their identity? See, you aren’t done yet.

Telephone banking and internet banking may be new to you if you’re an old dog, but they are a natch for your kids who live on their computers and cell phones. If you’re not already banking online, get your kids to show you how. There’s nothing like teaching a lesson to learn a lesson.

Have your child reconcile your bank statement a half-dozen times till he’s good at it.  Can’t remember how? Here’s a mini-lesson:

Once a month you’ll receive a listing of all the transactions on your account for the previous month. The worst thing you can do is stick your bank statement in a drawer, ignoring it. Instead, stick it in your end-of-month-bills file. At the end of the month, gather the statement, your cheque-book register/accounts book and receipts for the previous month. Sit down, sharpen your pencil and haul out your calculator. You are now ready to begin reconciling your bank statement.

All money items charged to your account at the bank are called debits. These include cheques written, debit card purchases, ATM cash withdrawals, fees and charges. All money items put into your account at the bank are called credits. These include things like deposits you make and interest you earn. When you reconcile your account you are simply accounting for each debit and credit that occurred during the previous month and trying to find any items that you didn’t know about or that the credit union didn’t know about (as of your statement date) and list them. We are also going to find any mistakes made.

1. Grab a blank piece of paper. At the top of the paper on the left side write the title MY RECORDS. At the top of the paper on the right side write the word BANK. Under the title MY RECORDS, write the amount your accounts book says you have in your account as of the date of the bank statement. Let’s say your statement is for the month ending June 30th, then you would write under MY RECORDS the balance you have in your accounts book for June 30th. If you have no items for June 30 in your accounts book, then use the preceding date. For example, you might have paid a bill on June 28th and then not used your account again until July 3rd. Use the balance you show for June 28th and write it on your paper under MY RECORDS. Lets say it is $1654.36 just as an example. 

2.  Under the word BANK, write the final balance that your bank statement shows for that date. Again we will assume it is June 30th and as an example let’s use a balance of $1525.37. 

3. Compare and check off all of the items in your accounts book against all of the items on your bank statement that match. 

4. Under MY RECORDS list any items from your bank statement that you forgot to note in your own records. You may have forgotten to add in that cheque for medical reimbursement you deposited on the way to the movies.  

5. Under BOOK, list anything in your accounts book that doesn’t appear on your statement. It is possible that the cheque you wrote on June 28th has not yet cleared your account. There might be several cheques that have not cleared. 

6. Total the two columns. Remember: If it is a credit (i.e., a deposit), you add it to your balance. If it is a debit (i.e., a cheque you wrote), you subtract it from your balance.  

7. If the two amounts are the same, you have balanced and your job is over. If there is a difference, you know something is wrong. So you’ll have to dig a little deeper. You may have miscalculated (if the difference is divisible by 9, you may have reversed your numbers). Or there may be a mistake on the statement or in your records. Verify everything until you balance. 

8. Make any corrections/additions/deletions to your accounts book to bring it up to date.

Essential Money Skill #3: How to comparison shop.

You might be very used to comparing the prices of similar items or brands, or comparing the prices at different stores to get the best value, but your kids probably aren’t. While a price comparison is a no-brainer, they may stumble when it comes to the comparison on quality, learning the hard way that “you get what you pay for.”

This is a lesson you demonstrate. You show your children by example that taking the time to look at the cost and quality of an item means you really care about where your hard-earned money is going. If environmental issues are important to you, this is a good place to address those issues too.

If you buy stuff, stick it in the cupboard with the price-tag still on and never use it, you’re sending a strong message to your children. If you take something that’s broken and fix it, carefully explaining not only the financial savings but the inherent positives of making do, you’re sending a strong message.

One of the best places to start your lessons on comparison-shopping is the supermarket. Once you’ve mastered the concept of unit prices at the grocery store, you can move on to The Gap versus Old Navy, and Future Shop versus Best Buy.

TO DO:

Take your child grocery shopping and explain unit prices.  Look at the packaging and talk about how deceptive it can be. Talk about name-brands versus store-brands. Do a “taste test” to see how much of a difference there really is and bring home the idea that a bigger price doesn’t always mean better value. But sometimes it does.

Talk about how you comparison shop using fliers, coupons, or whatever else you do to stretch the grocery money.

Talk about how to plan meals. Make her responsible for planning, shopping for, and prepping at least one meal a week.

Have him do the grocery shopping for the household for several consecutive weeks.

Have her comparison shop the next major purchase your family has to make, be it a new car, a vacation or a new bed. This is a good place to review quality versus price, and reinforce the importance of “warranties” and “service.”

So many of the lessons we have to teach our kids about money are wrapped up in the lessons we should be teaching them about life. For a long time we haven’t talked about money because it’s been a big no-no. But you see where THAT has got us. And some of us are so doggone determined to ensure our kids have a great life, that we’ve been protecting them from the very experiences they need to become fabulous in adulthood. Home is a place to experiment with new skills in safety. If they blow something, you have the luxury of being able to talk about what  to do differently next time. 

Leaving home is stressful enough as it is. Having the skills to cope with some of the life’s basic issues is one way to ease that stress.

Next: Essential Money Skills #4 & #5.

I am totally amazed at the amount of money people are willing to shell out on bank fees. Over and over I meet people who are racking up $80, $150, $300 a month in bank charges. When I do up a budget for a family, I always allow for $20 a month. Many of my readers think THAT’s too much, but not everyone I work with has a PC Bank around the corner. Where I used to live, for example, the closest branch was a Royal Bank that was only open two days a week and never when I wasn’t working. Everything else is ATM-based. And if you’re not a Royal Banker, then you’re automatically paying ATM fees.

Generally, ATM fees run from $1.00 to $2.50 per transaction. This doesn’t look like a lot of money if you look at each transaction separately, but those small fees add up very quickly. And they double if you use a machine that doesn’t belong to the bank with which you have your account.

Obviously the easiest way to avoid ATM fees is to switch to a no-fee bank and only use your bank’s machines. But that’s not a reality for many people who live in rural areas that aren’t well serviced.

When access is limited and expensive it means that instead of withdrawing smaller amounts many times, you must figure out how much you need in a pay period (or better yet in a month, if you have the cash flow) and withdraw one large amount.

Many grocery stores allow you to take “cash back.” That’s when you add cash to your debit transaction when you pay for your groceries. This is a smart way to get cash without paying fees, but it only works later in the day when there’s money in the till.

If you’ve got the discipline to pay your credit card bills off every month in full and on time, use a credit card instead of paying in cash. This also gives you a monthly summary of where your money has gone for your semi-annual financial review. And if you have a smart card, then you’ll collect useful points. My last grocery shop of the year cost me $140 less because of the points I’d racked up on my grocery credit card.

Often, paying your bills online or via telephone banking is free. And your online or phone payments should be posted the next day. If your bank is making the hold on your transactions longer, ask for the hold to be removed. If they won’t make it happen, then shop around.

Don’t assume that the bank account you’ve had since Moses was a lad is still the best account going. Do some research and find the most suitable account with the lowest fees to meet your current banking needs. Take a look at your banking habits. Do you use ABMs, write cheques, do telephone or internet banking? These transactions are priced differently from one institution to another. The Financial Consumer Agency of Canada has the Cost of Banking Guide that will provide a list of packages or accounts that best fit your banking profile.

The big downside of switching accounts is that all your auto deposits and auto debits must also be switched, and that can be a royal pain in the ass. Some financial institutions offer a free service that gives you a hassle-free way to transfer your pre-authorized transactions and bank accounts from one place to another.  Ask if the company you want to deal with will do this for you. That should earn them extra brownie points.