1.    What will my payment be? You need to be able to work the monthly (weekly, bi-weekly, whatever) payment into your cash flow without buggering up your spending plan. And that doesn’t mean cutting into the amount you’re setting aside for savings. If you can’t manage the payment easily, that’s a sign that you should not be borrowing. Assuming all your other costs are in line, stop borrowing when your payments are eating up more than 15% of your net income. However… and this is a big “however”… if some of your costs are already out of whack – if you have huge housing costs or big childcare expenses – you may not even be able to afford the 15%.

2.   What will this loan end up costing me in the long run? If you don’t take the time to add up what the total cost of borrowing will be when you take out a loan you’re making like an ostrich and you’re gonna end up with buckshot in your beeehind. The best way to get the total cost of the loan is to ask the lender. You can do the calculation yourself by adding up the interest cost each month, but you’ll be off slightly doing it manually because interest is calculated on the declining balance.

If the lender says (in a deep, patronizing tone), “Well, since you have a variable interest rate, that will depend on what the rate is each month” ask for a calculation assuming today’s rate plus 1% for safety. Then keep your eye on your rate. Don’t be fooled into thinking that the “prime” rate a lender quotes you is the central bank’s prime… it isn’t. The lender’s prime is likely to be a couple of points higher. Ask specifically what the rate will be.

3.     Can you get a better rate if you secure the loan? The interest rate on a secured loan – that’s a loan that has assets of some kind attached to guarantee the loan — is lower than an unsecured loan. So a home-equity line of credit that uses the equity in your home to secure the line is always cheaper than a line secured only by your signature (your promise to pay). When you offer to secure the loan you are giving the lender a legal claim to whatever you use as security if you default, which means the lender assumes less risk and you have to pay less interest.

4.    How long will it take to repay the loan? I can’t tell you the number of people I’ve worked with who have no idea how long it’s going to take to get out of debt based on their current payments. This seems to be particularly true for people repaying student loans. They “settle” for the repayment amount they’re offered by the lender without ever figuring out how long it will take to get the loan paid off or how that will affect the overall cost of the loan.

Here’s a newsflash: the longer the term of your loan, the more interest you will pay.

5. Is there a penalty or fee if I want to repay the loan early? Once upon a time loans were completely open and could be repaid in full at any time. Not so much anymore. More and more lenders are charging a fee if you make extra payments or decide repay the whole loan off early.

6.  If I miss a payment, how will that affect my interest rate? As the money rules have changed, lenders have become far less flexible and far more punitive for even small slips. If you miss even one payment you’ll likely see your interest rate increase by 2% or more. If you have a variable interest rate, lenders can raise your rates at any time with barely a hint so your very affordable line of credit could become an albatross in no time flat.

7.  Must I buy loan insurance? Some lenders give you the option of buying life and disability insurance on your loan so that if you get sick and can’t work the loan won’t go into arrears and ruin your credit history. These insurance loan policies are usually quite expensive and should be avoided if at all possible.

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.