Funny Money: Where does the term “cheque” or “check” come from?

The simplest way to start children off on the road to a balanced financial life is to give them some loot to manage. How much you give will depend on your personal circumstances and your attitude towards the whole concept of an allowance.

To learn how to manage money responsibly, children need an income they can rely on – one given at regular intervals. The experience of handling a steady flow of cash will teach many fundamental skills, including how to plan ahead, the skill of setting goals (both short- and long-term) and how to save.

The amount you choose to give your child will depend on how much you can afford, your child’s age, and what you expect your child to do with her allowance. If, for example, the most you can afford is five dollars a week, so be it. While many parents are stuck on the two-dollar-a-week allowance, just think about what two dollars can buy in this day and age (after you deduct for saving and sharing) and you’ll have a good idea of how effective that amount will be in teaching money management. 

Naturally, younger children need, and are capable of handling, less money. If all your child is buying is candy and the occasional toy, you may want to start her off with a relatively small sum. At five years old, 50 cents a week may be more than sufficient.

If you expect older children to buy some of their own clothes, pay for their own haircuts and plan for big-ticket buys such as camp, a television or car insurance, you’ll have to figure out what each of those things costs. To those Planned Spending items you’ll need to add some mad money (hey, they’re kids), some money for establishing a regular savings habit and perhaps also some money for sharing.

I have long recommended that people use the age of the child as a guide, giving a dollar a week for each year of age. So a five-year old gets five dollars; a seven-year old gets seven dollars. You’re the best judge of the amount that will be most appropriate for your child. Just remember that it needs to be enough so that your child can save, share and spend (mad money and planned spending included.)

As your child gets older, review and adjust the amount he receives. Pick a specific time of year – the beginning of the year, your child’s birthday week, the beginning of a new school year – and make the review routine. Ask your child to list the five most important things he wants to do with his money. If he is an avid reader and wishes to buy his own books, he’ll need more than a child who is only interested in candy. Listen carefully to what your youngster has to say.

If your son is looking for a hefty increase, ask him to give you a written proposal or a formal presentation explaining how much he wants and why. If you were asking for a raise at work, you’d have to justify your request. Perhaps he feels it is time he started buying his own clothes. You can negotiate the initial amount and attached responsibilities, and implement the plan slowly. Moving from no clothing allowance to a year’s clothing allowance in one fell swoop is a recipe for disaster. Let your child assume responsibility in small increments.

Before you do your allowance review, think about what you want to accomplish over the next year in teaching your child about money. Talk with your partner about how much responsibility you feel your child can now take on. Perhaps you wish to start your daughter on an investment program. If so, you’ll need to do a fair amount of teaching, and you’ll need to up her allowance to take the money for investing into account. You’ll also have to carefully monitor her progress to ensure the funds are being directed to the appropriate new category in her budget.

The Logistics

• Younger children find it easier to handle money if they are given a small amount every week. Consider what time of week is best. If your experience says that giving an allowance at the beginning of the weekend means it’s all gone by Monday, then give it on Monday or Wednesday. While you want your child to accept responsibility, young children need some help in developing the skills. The timing of the allowance may make all the difference.
• Children who are older and have established many of the habits of budgeting should be asked when and how often they prefer to receive their allowance. While some kids like getting a little money each week, others may prefer a lump sum once a month, allowing them to plan spending for the month.
• Whatever allowance schedule you establish with your children, make sure you stick to it. It’s demeaning for anyone to have to constantly ask for money. And providing the allowance on time will send a subtle message about the value of honoring commitments.
• Also think about the denominations in which you’ll give the allowance. If you give your ten year old all her money a single bill, she’ll have trouble implementing her budgeting plan without hitting a store to make change. On the other hand, if she gets smaller denominations she may find it easier to set aside the money for the various parts of her budget.

Next Week: Setting Expectations

Funny Money Answer: It derives from the game of chess. Putting the king in check means his choices are limited. A cheque or check is designed to limit opportunities for forgery and alteration.

Gail Club News

Common wisdom among those in the money world holds that “debt” is a young person’s disease, and that “asset acquisition” – building up your nest-egg — is something that you do as you hit midlife and beyond. I’m not sure who makes up the rules for how things should work. Personally I haven’t lived by the rules and so I’ve never placed much stock in them. And I’m here to tell you that this piece of common wisdom couldn’t be more wrong.

I am getting loads of questions like the next one, and they are a reflection of the fact that people, no matter their age, are in a bind because they don’t have Clue One about how to manage their money.

My husband and I are both in our early 50s. My husband has had financial difficulties combined with bad luck during the past 10 years so we have struggled financially. We have really fell behind financially and not is the time to own up to our debts and pay up. We have been mortgage free for that period of time however now we hvae been to the Bank and are seriously considering mortgaging. Our total debt is $65,000.00. I worry whether this is our best option to repay our debts? I worry about mortgaging when so many are losing their job. Our monthly mortgage payments would be very affordable as compared to the monthly payments we would have to make to eventually pay off our debts. We ideally want to pay our debts before we retire. What would you suggest?

I could tell this woman to go ahead and do the mortgage. After all, in their early 50, she and her hubby have time to get that $65,000 paid off, and the ease to their cash flow would feel good. They’d pay a lower interest rate in the short term. And life would stabilize.

And yet I find I am loath to say, “Go ahead.”  There must be an underlying problem with her budget for them to have accumulated this kind of debt.  Yes, there have been “financial difficulties and bad luck”, but when you hit a wall the answer isn’t to move your spending to credit, the answer is to Stop Spending.

If I give this woman the okay to move her consumer debt to her mortgage, will she go right back out and start spending on credit again? Will her husband sigh with relief and think they’re in the clear. After all, a $65,000 is not a huge burden. And when you’re retired you have to live somewhere, so having a small mortgage is not the end of the world.

Of course, it could simply be a case that this couple rushed through their mortgage payment to get mortgage free, without ever looking at the credit they were using to supplement their cash flow. I see this all the time. People, in their mad dash to be mortgage-free give no thought to how their doubling-up and massive prepayments are affecting their budgets. Stealing from Peter to pay Paul, they end up with higher interest payments so they struggle to keep up.

If I could actually see this woman’s face, if I could see how serious she was about being debt free, if I could see how much she and her husband were together on this, I might be able to assure myself that the mortgage idea could work.  And this comes to the crux of the problem I have.

So many people say they want one thing, and then turn around and do something else that totally undermines what they say they want. “I want to be debt free,” they say. Then they go right out and put $200 on their credit card for dinner. “I want to set up an emergency fund,” they say. Then every time they have an expense that’s a little out of the ordinary, rather than cutting back somewhere to take care of the expenses, they dip into the “emergency” fund. “I want to help my kids through school,” they say. Then they dip into their child’s educational savings, promising themselves they’ll replace it as soon as things get better.

It’s as if we have no stick-to-it-ive-ness. We can’t hold a thought. We’re a bunch of Financial ADDs who MUST react to whatever stimulus is currently coming our way.

If this woman closes every form of credit she has and swears on her dog’s head that she’ll never ever put anything on credit again, then I’d say, “Go ahead with the mortgage.” Of course that would also mean she’d have to make a budget, track her spending daily, and never buy anything that was a Want when there were still Needs to be taken care of. There would be no excuses, no exceptions.

She would also have to get a job. I’m assuming from her letter that she does not work outside the home since she never mentions having an income. Even if she does have an income, to pay for the mistakes they have made, both these people need to find a way to Make More Money to deal with the long-term interest cost of the mortgage. So they must find a way to make at least an extra $500 a month net, so they can make an annual $6,000 prepayment to offset their mortgage interest costs.

There, that’d do it for me.

Now it’s your turn. For those of you who love case studies, here’s one for ya:

Vic works full time and makes about $50,000/yr. Vic’s partner wants to return to school in about 18 month and the program will last two years. That’ll mean the family income will go down by 50%. They have no car payments, and about $3,000 in consumer debt, and have been making extra payments against their mortgage of about $300 a month. But since they’ve been in their home for under a year, they haven’t built up much equity yet.  Vic knows things will have to change, but is desperately afraid of them getting in over their heads. What would you tell Vic?

Gail Club News: There are people in both Hamilton and Saskatoon who would be interested in joining or starting a Gail Club. If you would like to link-up in Hamilton or Saskatoon, email me at getgvo@gmail.com and I’ll pass on your contact info. For those of you who are interested in starting a Gail Club and don’t know where to begin, read the blog that started it all.

Gail Club Alert: Lynda in the Windsor/Essex County area, Jessie in Calgary, and Derek in Toronto are interested in joining or starting a Gail Club. If you want to hook up with Lynda, Jessie, or Derek, email me at getgvo@gmail.com and I’ll send on your contact info. Jessie had a slew of responses so you may end up with two clubs in Calgary if you also bring your family and friends to the group. Good for you!

Susan Mladenovich, CMA, is an accountant who agreed to write a guest blog about a little understood disability benefit. If you have a disabled dependent or know someone who does, send them the link to this so that they can become more familiar with a new and very important benefit. Life is tough for people who must deal with disability. We need to spread the word so we can take advantage of whatever benefits are available to ease the strain. Email Susan directly at susan@accountingdepartment.ca or visit her website at www.accountingdepartment.ca. Here’s Susan…

As an accountant, I am often involved in helping my clients get access to government funds like the disability tax credit and CPP benefits. It is amazing to me how difficult it is to get information on government programs that help with people suffering from disabilities.

Just before Christmas, a major program finally came into existence, which had been announced in the federal budget in 2007. The Registered Disability Savings Program allows eligible people to qualify for up to $4500 in government grants for a $1500 investment.

If you are the parent of a disabled child, a big question is what will happen when you are no longer there to provide the care you’ve been giving. Years of working to keep the child at home as a participating member of the family all vanishes as the only option is to have the dependent child placed in a home after the parents’ death.

Compounding the issue is the fact that recipients of provincial disability programs are not allowed to accumulate any assets or money, making putting money away for the future nearly impossible.

The Registered Disability Savings Plan (RDSP) will allow people with disabilities to put money aside in an account and allowed to grow tax free until it is needed. This is similar to the new Tax Free Savings Account but is a separate program. There is a $200,000 lifetime contribution limit but no annual limits. Also, anyone can contribute to the plan and there are no restrictions on when or how the funds are used.

In conjunction with the savings plan, the government offers a Disability Savings Grant. For families with an annual net income of less than $75,769 the grant will contribute:

• $3 for every $1 contributed on the first $500
• $2 for every $1 contributed on the next $1,000.

For families with net income over $75,769, the grant is $1 for every $1 contributed up to $1000.

There is also a Disability Savings Bond, which provides low-income (under $21,287) families with $1,000 per year without any contributions required. That is 100% FREE MONEY!

A point of clarification: family income depends on the age of the person with disabilities. For individuals under 18, family income would be the combined income of the parents. For a person over 18, family income would be the individual’s income plus their spouse’s income, or just their own income if they are single, even if they live with their parents. So, for several of my clients, the over 18 child living at home only receives disability benefits, leaving their net income well under the limit for the $1000 bond.

The challenge with the program is that the federal government had to work with the provincial governments to ensure that disability recipients would not be penalized by having their benefits reduced. As you can imagine, this has taken quite a long time. British Columbia, Newfoundland and Labrador, Saskatchewan, Manitoba, Yukon, Alberta, and Ontario have all exempted the RDSP as an asset and income when determining a person’s eligibility for provincial disability benefits. Quebec and New Brunswick have exempted the RDSP as an asset and partially exempted any payments from the plan. Prince Edward Island has fully exempted the RDSP for calculating eligibility for income?tested social programs, except where someone’s income exceeds the low?income level defined by the National Council on Welfare.

Okay, let’s do some math.

• If your net income is under $21, 287 you will receive $1000 with no contributions by you.
• If the family net income exceeds $75,769, you can receive a maximum of $1000 matched dollar for dollar to your contribution. This is a 100% return on investment!
• But the magic really happens for those with family income under $75,769. By contributing $1500 the government will give you $3500 ($3 x $500 + $2 x $1000).
• If you make under $21,287, the total government contribution is $4500. That’s right, $4500 added to your contribution of $1500.

While the launch of the program was finally approved on December 3, 2008, the grants and bonds are an annual amount that do not carry forward (unlike the RESP grants which don’t expire). So to take advantage of the 2008 government contributions, a plan had to be established before December 31st, 2008. Only one bank was offering the plan – Bank of Montreal. However, the deadline for 2008 was extended to March 2nd, 2009 so you still have time to act sock money away for 2008. But time is running out.

The basic requirements are:

• Eligible for the disability tax credit (which Gail has asked me to write about another time);
• Has a social insurance number;
• Have filed a 2007 and 2008 tax return;
• Under 50 years of age.

If you need more information, go to www.rdsp.ca or www.plan.ca.

For a first person account of a parent navigating through applying for the program, go to http://dailyhomerenotips.com/2008/12/20/registered-disability-savings-plan-rdsp-time-running-out-for-2008/ . There is a link there to the BMO group as well.