Monthly Archives: May 2016

Planning for our children’s future: The financial final frontier

Personal finance consists of several big areas, and I’ve tended to tackle one at a time so I can put all my money and energy toward it. As I’ve written about in the past, I roughly divide the stages of taking financial control into three areas: the present, the past and the future. The first necessary step is getting your present budget under control; making sure you don’t spend more than you bring in. The second is cleaning up debt created by  past actions, such as credit card or student loan debt. And the third is securing your future, which I’ve mainly defined as saving for retirement. (I also consider paying extra to the mortgage in this category, although that could also go under the “clearing up debt” category.)

But there is another important aspect of the future to consider, for those of us who are parents: securing our children’s future.

The obvious first step for many is to save up money for their children’s college tuition. And while I agree this is important (and something I’ll likely start to tackle in the next couple of years), an even more important step that not as many people seem to talk about is making sure your children are financially literate.

College tuition is still rising, and kids are graduating with more debt than ever. So having money set aside for college tuition is no doubt extremely smart and valuable to kids. But if they don’t know how to manage their own finances by the time they graduate from college, it really won’t matter whether they have $0 in student loan debt or $50,000.

So even while I’m not yet saving for their college, I’m trying to make talking and thinking about money part of my kids’ everyday life. I never hide a thought about money from them, whether it’s weighing whether or not to buy something on impulse, talking about how we saved up to make a planned purchase, or explaining that keeping the water running costs us money.

I also tried to start giving my older child Astrid an allowance beginning at age 3. I kept it up for a while, always having her divide her $3 into three areas: $1 went into a jar for donating, $1 went into her piggy bank for saving, and $1 into her wallet for spending.

However, I soon found out that cash is just another toy to kids who don’t truly  understand its value yet. The money inevitably found its way out of the three areas and got mixed together, along with toy money and other random toys. So I eventually stopped giving her an allowance and decided to put it off until she understood money a little better.

I still don’t think she’d be able to resist playing with money, but I did want to start giving her an allowance. So when I stumbled across the website ThreeJars.com, I was thrilled. This site is a perfect way to still give the kids an allowance that they can easily access as cash, yet keep that cash out of their rooms so it doesn’t get played with and possibly lost.

The site lets you set up something resembling an online bank account for your kids, though much simpler and more visually appealing.

ThreeJarsChild

You can set up automatic deposits of their allowance and divide it into the three areas of spend, save and share (donate) in whatever ratio you prefer. You can even have the site calculate interest on the money. The parent login gives you a view of all your children’s accounts so you can change contributions at any time:

ThreeJarsParent

What differentiates it from a regular bank account, though, is that you’re not actually depositing money into an online account. You’re responsible for keeping the money for your children. In essence, you’re the bank.

So every week I take out the cash for their allowance and put it safely away in a hiding spot in the house. Their ThreeJars account automatically adds that amount weekly. When the kids want to spend their spending money, I’ll give them the cash and help them “withdraw” it from their online account. Every once in a while I’ll put actual money into their real mutual funds and “withdraw” that from the “save” jar in their online accounts. And I can help them donate money online using my own checking account, then deposit the corresponding cash and “withdraw” that amount from their ThreeJars account.

I’ve shown the account to the kids and tried to explain it. They seem basically uninterested in this allowance that’s basically just a number on the computer screen. I’ve decided to keep doing it and reminding them about it occasionally in the hopes that someday they’ll become interested in it.

And I think they’re more aware of it than I realize: We overheard Astrid talking to one of her little friends about where she was going to put her tooth fairy money, and she said, “I have a bank account on the computer.” So I guess she was listening after all!

Weathering a perfect storm

I usually write about personal finance from an individual accountability perspective. And there are so many stories out there (including mine) about irresponsible behavior being the cause of many people’s money catastrophes. But I think it’s important to also acknowledge that we live in a perfect storm of factors practically designed to lead more and more people down the road to financial ruin (or at least constant struggle with finances). As Elizabeth Warren and Amelia Warren Tyagi put it so eloquently in the first line of their book All Your Worth: “The rules of the game have changed.”

Income stagnation and widening inequality (rich people taking most of the financial gains) are big parts of the picture. These charts paint it better than I ever could. Suffice it to say, if you (like Elizabeth Warren’s mother) had to take a minimum-wage job to try and keep making mortgage payments, it wouldn’t happen.

Good-paying jobs that don’t require a college degree are in steep decline. But college tuition has skyrocketed. For many that means starting out life with an ever-bigger student loan burden. And the resulting salaries for recent grads in the past decade have hardly seemed worth it. There have been brighter reports this year, but chances are if you came from a low-income background, that college degree is not only going to incur higher debt but lower lifetime earnings than for kids from higher-income families.

Access to credit and the general attitude toward it have contributed. If your parents (like mine) were born in the 1930s, credit cards with revolving credit (you know, the kind we have nowadays that you don’t have to pay off right away) weren’t even available until they were well into adulthood and used to functioning without them. By contrast, many adults today were seduced into applying for their first credit card at a college fair, with no instruction on how to manage it intelligently.

So shouldn’t parents be teaching their kids to know better? Well, people my parents’ age were barely aware of revolving credit, and turns out 72% of parents experience at least some reluctance to talk to their kids about financial matters!

In addition, the number of consumer goods considered to be needs — from toilets to washers and dryers to dishwashers to smartphones to computers to cable to cars — has grown exponentially since the 1890s to today, as this article shows. And really, now that more people are living alone and many families need both parents to work to get by, many of these conveniences are necessary to keeping up our pace of work outside the home.

To make matters worse, the traditional “three-legged stool” of retirement — employer pension, Social Security and personal savings — appears to be broken beyond repair. I have never worked at a company that offered a pension. That plummeting blue bar in this graph is the nearly extinct pension or “defined benefit” plan. I still hold out hope that Social Security will be saved, but some believe it will disappear. Even if it doesn’t, chances are future generations will get less, and won’t qualify until they’r older. And this depressing graphic shows that people are unable (or unwilling, or unaware of the need) to save. So there goes the third leg.

This is only a partial list of the unprecedented financial problems facing people today. My point, though, isn’t to give up hope or abandon attempts to have personal responsibility. If anything, it’s a call to work even harder to hold onto your smaller earnings and maximize their value.

In my opinion, major reforms are needed to curb predatory lending, make education more affordable, and put income inequality somewhat back in balance, and financial literacy education needs to be much more common. But until then (and it’s going to be a hard struggle if it happens at all), getting mired in frustration or self-pity at the injustice of it won’t help anything — it’ll only  make things worse.

Lots of people do still have a fighting chance — but not if they give up the fight. That’s why I’m determined to keep talking about personal finance and help as many people as I can in my small sphere of influence.

stormy

The perils and the benefits of refinancing debt (but first, the perils)

I had a bad habit in my twenties and early thirties. Practically a ruinous one. And it’s something I see a lot of other people in a similar position get into.

I’d gradually run up debt on a couple of credit cards. I only ever paid the minimum monthly payment — this was before the days where a credit card statement was required to disclose how long it would take to pay the debt off and at what cost, so I kind of saw the minimum payment as a “recommended” one. Also, I always felt I needed every cent of my paycheck (and then some (hence the creeping debt). Paying more than the minimum was a luxury I couldn’t afford (though oddly, I could afford a number of other luxuries like new clothes, restaurant meals, drinks and tickets to shows).

But, as a result of adding more debt while not paying any extra off, those minimum payments would creep up. Having more money going to minimum payments meant less discretionary money, which (since I failed to adjust my lifestyle accordingly) meant even more credit card use.

And so the cycle would continue until even those minimum payments were a real burden. I was always scrupulous about paying on time, but it would get to a point where I feared I’d soon no longer be able to make the payments. Typically a period of frugality would ensue, where I cut out all fun and worked hard to spend as little as possible and maybe put a little bit extra toward the credit cards.

Then, inevitably, an offer would come in the mail for a new credit card. 0% interest for 12 months or some similar offer would be dangled before my stressed-out eyes. I always had great credit, so I’d always get approved for the new card. I’d transfer some or all of my other credit card balances over — sure, 3% of my balance would get added as new debt for the privilege, but it seemed a small price to pay.

My old cards would suddenly have little or no minimum payments. The new card wouldn’t bill me for a month, and when it did, the 0% interest meant a smaller payment than I’d made cumulatively on the balances before.

Suddenly I’d have some breathing room in my budget; money left over in my checking account after paying all my bills. I’d have the best intentions to use all that extra money to start paying down that balance before the 0% period expired.

But somehow, even though I had the same amount of debt that was stressing me out before, having the lower monthly payments just made it seem less of a crisis. I’d loosen up on the spending a little bit. What was meant to be a little break from the frugality simply became my new normal, so that extra money in the checking account would start to get spent instead of sent to the cards.

And then, when I got used to that level of spending, I’d start eyeing my old cards, which now had tiny or no balances on them. Spending a little bit would only trigger a $25 minimum payment; no big deal, right?

And before I knew it, they had balances again. And before I knew it, the 0% period would be up and my minimum payment on the new card would be punishingly high. And I’d cycle through again: going to an extreme of frugality, getting a new 0% offer, transferring balances, spending up the old cards again.

When I finally hit a wall where even I could see that cycle couldn’t continue much longer without missing payments, the fear of default shocked me into a different state of mind. For a long time, I put virtually every extra penny toward debt. (With a few carefully planned release valves of fun, having learned my lesson about overdoing frugality.)

But I did do two more balance transfers to consolidate my consumer debt. One was a credit card with a fixed 3.9% interest rate on transferred balances. Not as good as a 0%, but the fixed rate meant I wouldn’t suffer the fate of having a ballooning payment. The other one was an unsecured loan. At 8.9%, the interest rate was good but not spectacular. The thing that attracted me to it: there was no fee to put my balances on it, it wasn’t a credit card so I couldn’t add to the balance, and there were fixed payments for 60 months, so it would be paid off in 5 years at the latest.

Those two balance transfers really helped me because they not only reduced the number of bills I had but also reduced my monthly interest payments, enabling me to put more money toward debt. And the terms were better for where I was in life, unsure how fast I’d be able to pay down those balances.

But the only thing that ensured it was a good decision to do those two balance transfers was my being serious about getting out of debt once and for all. If I hadn’t been ready, I’d have started spending the newly freed-up credit on my old cards. Nothing can stop that except your will and determination not to do it.

So the only time I’d ever recommend a balance transfer is if you’re so serious about getting out of debt that you would never consider using the old cards (or the extra money in your budget). It’s hard to know when you’re at that point, but using balance transfers repeatedly without being serious about it can be disastrous.

magnifying glass on bills