Bailout Fails Market Comment

by | Mar 26, 2015 | Financial Literacy Articles for Parents

They say it isn’t a bailout … but it is.
They say it is necessary to keep Main Street alive … and they are right.

THE PAULSON BAILOUT GOES THROUGH CONGRESS

Last week, I sent an email blast telling everyone to contact their congressional leaders asking them to slow down on the bailout.  Every survey I saw showed the American public against Hank Paulson’s plan by a huge margin (9 or 10 to one in most cases).  In fact the plan had an approval rating that was lower than Congress!  I didn’t think that was possible.

We are not done yet.  While this is being voted on, it isn’t set in stone.

Wall Street is down this morning – that can either be because they don’t like the plan or because they don’t like uncertainty … or both.  I vote for the combination.  There are significant problems with the bailout and the repercussions.  There is also significant uncertainty over what will eventually get passed.

SOME KIND OF ACTION IS NEEDED

In case you hadn’t picked up on this – I am a free market enthusiast.  I believe that government intervention almost always creates waste and makes a situation worse in the long run than letting the market work through the problem.  I also believe that the problems we are facing today were created by government agencies and meddling in the first place.

That said – something needs to get done because if we muddle along too long we risk the significant chance of a completely destructive crash of the system – something that could create irreparable damage to the world economy, not just our own.

QUICK SUMMARY

There are lots of bad loans on the books of most banks and many other corporate entities.  They are often in the form of complicated derivatives – financial instruments where it is not easy to discriminate between the good ones and the bad ones.  In addition, these derivatives are often piggy-backed on top of other different-but-equally-complicated financial instruments.

While these instruments will wreak havoc on many corporate financials, the primary concerns are those derivatives held by banks and lending institutions.  As we identify this “toxic waste,” each bank’s balance sheet looks worse and worse by the day depending on their exposure to it.

Today, we not only have many banks which are technically insolvent (as they write this toxic waste off their balance sheet), the cash they spend to remain solvent from a bookkeeping standpoint is cash they can no longer lend to businesses and consumers.  They also can’t borrow money to lend because of ratings downgrades and their weaker balance sheets.

A number of times in the past few weeks, banks have found themselves unwilling to lend to each other, much less anybody else – because everybody knows that everybody else holds some of this toxic waste in their portfolio.  So everybody is a bad risk.

This is an extremely dangerous position for the economy to be in.

THE PURPOSE OF THE GOVERNMENT INTERVENTION

I am refraining from calling the ultimate solution a bailout, because if it were done right it SHOULDN’T BE a bailout.  It is only an intervention.  Whoever owns toxic waste must deal with their problems and resolve them rather than just selling them to the taxpayer.

The purpose of the intervention is to free up liquidity so that businesses can continue to operate and the economy can continue to function.  This will add faith to our banking system which will keep foreign investment dollars here in the US rather than have those trillions of dollars be moved into other countries and financial systems – an act that would be devastating.

AVOID THE MORAL HAZARD

This is probably the key point underlying all of my blog posts the past three weeks.  We got to this point because of a moral hazard that was promoted by our government in the form of excess liquidity by the Fed, aggressive lending programs by Fannie Mae and Freddie Mac and massive leverage within the already-highly-regulated banking industry.

It is this moral hazard that has promoted over-leverage by American consumers and companies and unrealistically high market prices for real estate and financial institution stocks.

These excess values have led to more leverage which have, in turn, led to even greater share prices and home values creating a seemingly-never-ending upward spiral.  This is what a bubble is.  This is what we are dealing with.  Now the cycle is broken and there is a lot of pain to be felt as values retreat to sustainable, intrinsic levels.

The new program/intervention which I believe has to come from the federal government MUST make every effort to avoid creating new moral hazards – moral hazards which would mean more asset bubbles and greater catastrophe in the future.

Unfortunately, the Hanky-Panky bailout (the Paulson proposal going through Congress) creates whole new layers of moral hazard and incentives for more poor choices in the future.

WHERE IS THE MORAL HAZARD?

If you are a bank or corporation and you got yourself in trouble by buying an investment asset that ended up losing money, under normal circumstances you would report the loss and take the hit as your stock price goes down.  You would lose some of your investors and stockholders.  As a company you might survive … or you might go out of business.  If you used leverage (borrowing) to make this investment, you increased the potential to make gains on your investment, but you also increased the downside which could make a small loss turn into a huge loss.

If, however, after making a horrible decision made worse by a lot of leverage – the government came in and said, “Hey that’s OK, we want to help you so we’ll take your crappy investment off your books and give you more than it is worth in cash.”  Now your crappy investment turns out to be not so crappy – in fact you may have ended up profiting from it (and profiting a lot if it was heavily leveraged).
What’s to stop you from continuing your behavior in the future?

You’ll keep looking for risky investments figuring that if you make money, you get to keep it.  If you lose money, someone will come in and save your butt.  That was the essential flaw in the Fannie Mae and Freddie Mac situation – profits were privatized, losses were nationalized.

NOW AMPLIFY THAT HAZARD BY 1000

In essence that is what a $700 billion bailout does.  It takes the moral hazard of condoning activity which has brought us to the brink of disaster and then puts the downside cost on the backs of future generations while giving upside to the thousands of companies that made terrible choices over the past 10-15 years.

Nobody learns anything.  “No pain, no gain!” as Richard Simmons used to say.
We sow the seeds for the next mother-of-all asset-bubbles AND we bury future generations’ prosperity with more debt, uncontrollable inflation and a banking system in which foreign investors have no faith.
No good comes out of a massive bailout – except to the relative few who get bailed out and the politicians who get elected into office by burdening our grand-children and saving us the pain of an important learning experience.

WHAT WE NEED TO GET FROM ALL OF THIS

1) As a society, we should be more self-reliant.  History is riddled with countries that tried to spend their way out of a jam whether they were socialist, communist or free market.  It never works.  I don’t believe that counting on government (especially one that also spends more than it makes) to bail us out solves any of our problems.

2) Transparency – The more we know about what is going on with a company and their balance sheet, the better.  Some people propose that regulation provides this transparency.  That has not been my experience.  Regulation usually creates ways for insiders to obfuscate the truth and protect themselves from competition.  That is a topic for a different post.

3) Responsibility – We all need to take responsibility for our money.  If a company has toxic waste on their books – they need to figure out how deal with it.  They should write it off and take the loss.  They should not be able to show a profit that isn’t there and/or pawn it off on the US taxpayer.  If a person bought a house they cannot afford, they shouldn’t be in that house.

4) Liquidity – for reasonable loans (the kind that used to be underwritten before all this started).  Cash needs to be available at a reasonable cost so that businesses can continue to operate and people can continue to live their lives.

AN ALTERNATIVE

The GOP offered an insurance alternative to the Paulson plan.  Nice.  Cute.  I don’t see how it will work.  It still creates all kinds of moral hazard especially as far as the responsibility quotient is concerned.
I am fascinated with the solution used in Chile in the early 80’s.  In this situation, the government loaned money to the banks.  This provided cash and liquidity to the system.  All loans were collateralized by the bad debt.  Any company borrowing this money would be required to keep the toxic waste on their books and to write it off over time as it matured.  This keeps the company honest about their responsibility for the debt and improves transparency within the market.  Any company with one of these loans on their books cannot distribute profits to their shareholders (or pay incentives to executives) until this loan is paid off.  This gives an incentive to the borrower to resolve the issue as fast as possible using their own resources.

The biggest advantage to the Chilean solution is that the US taxpayers can actually benefit from it.  It minimizes our exposure to losing the money (some companies will not survive and the collateral on the loan may not be worth a whole lot, but that is only a percentage of those who participate).  It takes government out of the role of hedge fund (which is what it becomes if we start buying this toxic waste – especially at “above market” prices) and puts it into the roll of market maker and liquidity resource.
The US House of Representatives just shot down the $700 billion bailout … There is still time for a more reasonable alternative.  Fax your letters to your representative today.  Tell them they will not get back into office if they vote for the bailout – you do not want to burden your kids with this bill.

SOME BOLD PREDICTIONS FOR THE FUTURE

Housing prices are not done going down.  They will continue to drop until values have retreated at least to the point of historical intrinsic value.  Historically real estate values grow at a rate equal to inflation plus productivity improvements.  That translates to about 4.5% over the past 50 years.   In order to get back to that trend-line, real estate values nationally need to drop another 15-25% (depending on your location and how you calculate the trend-line).  In these cases, prices ofter retreat PAST the historical norm like a pendulum goes past its resting point.

If we get prices to stop falling now (maybe down only another 3-5%), then expect home values to stay flat with no increases for years if not decades.  The key is to get back to the trend-line.  With great certainly I can predict that this will happen.  I cannot predict the path by which it will happen.

Financial Firms aren’t done losing value.  There is a lot of toxic waste.  Thanks to the obfuscation which comes with regulation, we don’t even know how bad the problem really is.  Banks are also pretty highly leveraged institutions – the equivalent of 90% loan to value so the balance sheets of these firms will get whacked even more as we uncover all of the exposures.  Expect huge losses and market values to end up at 10-30% of their peaks a year ago.

We will see a recession before this is done.  This is the one that kills me.  I hate recessions as people go through knee-jerk reactions to the situation and stop spending money even when the expense is for something that can truly add to their quality of life today.  I just don’t see how falling home prices, falling financial stock investments and the unravelling of all this leverage can happen without consumers spending less – and maybe for a long time (2-3 years).  There is a sea-change that has to happen regarding spending and saving.  That requires a time out from growth.

If tax rates go up in 2009, it will kill the economy.  The middle class – and especially the entrepreneurial middle class – are the keys to getting this country out of this mess.  If you punish them with higher taxes it is likely that the US economy will never recover in this global financial world.

Now More Than Ever – Financial Literacy is Critical.  The events of the past few weeks and the challenges we face in just getting Americans to understand the basics of what is going on – all lead me to conclusion that financial literacy is critical.  Everybody must understand how their money works.  We all need to know how leverage can help you and how it can hurt you.  Pandering and demagoguery are rampant in Washington DC.  It gets votes which then are translated into programs that spell disaster for us economically as a nation.

Take classes.  Read books.  Participate in an ongoing dialog about money.  Don’t take what Hank Paulson, Ben Bernanke, President Bush or even John Buerger says without asking questions and getting your arms around the concepts.

For more information on John Buerger and to read more of his wise writing, visit his Rich and Fullfilling website and as John reminds us all…

Get Control Over Your Money… Before it Takes Control of Your Life!

John D. Buerger, CFP®
Wealth Coach
jdbuerger@altuswealth.com
www.RichAndFulfilling.com
ALTUS Wealth Solutions
3211 Broad Street, Suite 201
San Luis Obispo, CA 93401
805-476-0333 (office)

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Financial Ups & Downs

by | Mar 26, 2015 | Financial Literacy Articles for Parents

As with everything in life, things go up and things go down. And then they go up again and down again. You can liken it to a wave which goes up and down, or to a glass of water you set down on a flat surface. If you knock the glass, the water is disturbed but, in time, it will once again level out.

The past two weeks I have been asked about the financial future of this country more than at any time since I started teaching financial literacy. I am NOT a financial advisor in any capacity (nor do I wish to be) but I can say this: some things stay the same and some things change and the more we understand that this ‘situation’ is just a situation and we don’t all go off the deep end, the better off it will be in the long run.

What I mean is, the basic financial principles that govern whether a person ends up financially free have not changed:

Pay Yourself First
Put Your Money To Work For You
Only Borrow Money When It’s Going To Make You Money
If You Can’t Afford It In Cash, You Can’t Afford It At All
Helping Others is Helping Ourselves

and my all-time favorite…

Your Thoughts, Beliefs and Attitudes Determine Your Wealth Potential

Then what changes?

Well, WHERE and HOW to put your money to work. HOW to borrow and FROM WHOM when it IS going to make money for you and HOW not to let what is currently going on influence your long term financial strategies and the systems that you have in place.

Again, I am no financial expert, but it seems to me that it’s just a hiccup; maybe a big hiccup for some but a hiccup just the same. Just like all of the other financial hiccups that have happened since the beginning of time, and the beginning of the stock market. It’s interesting to note the stock market time line of events since it started back in 1792 when 24 men signed an agreement that launched the New York Stock Exchange (NYSE). There have been some pretty major events in its history and yet, over time, it has always gone up. For a little stock market history lesson, click here!

Will some people suffer? Yes.
Will some businesses fail because they made poor business choices? Yes.
Will some people make a lot of money at the expense of others losing a lot? Yes.
Do you have a choice in how you are going to respond to the situation? Yes.
Do you have the opportunity, just like the rest of the people in this country, to take advantage of the situation at hand and make some money? Of course you do.

The question is, WILL you?

So in answer to my simple yet important question “Where do we go from here?”, my advice is as follows:

1) Don’t get too upset about it.
2) Seek professional advice from someone you trust before you make any rash decisions about moving your money.
3) Keep teaching your kids about money and give them every opportunity to practice with it. Don’t know how? Get The Ultimate Allowance.
4) Keep spending less than you make.
5) Keep your eyes open for opportunities.
6) Take care of your health.
7) Watch an inspiring movie or read a great book.
8) Keep a handle on your thoughts because they really do create things.
9) Remember to stay focused on your future. There is a very good reason the front window in your car is bigger than the rear view mirror.

This is the perfect time to make sure your children are getting a clear picture (or as clear a picture as possible) about what is happening. Regardless of how you feel about the situation, the bailout, what will happen to the value of our dollars, etc., this is a great time to talk to your kids about business decisions and how financial decisions can affect an entire country.

Talk to them about how some business decisions may bring you a lot of money in the short term but can turn around and bite you in the tush later on. Talk to them about systems and strategies. Ask them questions instead of giving them your opinions so they will share their own opinions with you. You never know what may come out of their mouths when they are given an opportunity to simply converse instead of defending their positions.

And finally, listen to my mother who always said…

“There, there. This too shall pass.”

Thanks Mom.


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Compound Interest vs. Compound Growth

by | Mar 26, 2015 | Financial Literacy Articles for Parents

I hear people say all the time that the most important thing to teach kids about money is the power of compound interest. But really, that’s not the true picture of why investing works and why our money grows over time. It’s not actually always compound interest that creates wealth…at least not for many investors. It’s actually ‘compound growth’ that causes money to grow in many instances. Let me explain.

Let’s divide this conversation into the three main areas of investments which in our programs we call the Three Pillars of Wealth: business, real estate and the stock market.

Let’s start with BUSINESS. Think about how people profit from owning businesses. The reason they do is many fold:

• The business appreciates in value and is sold for a profit.

• The business is able to be put on autopilot and create passive income.

In these two cases, compound interest has absolutely nothing to do with the wealth a business can create, UNLESS the business is in the business of lending money and charges compound interest on that money. Examples would be banks, credit card companies, private lending companies, mortgage companies. You get the idea.

Next, let’s look at REAL ESTATE. The profit from owning or investing in real estate comes from:

• The property or building appreciates in value and is sold at a profit.

• The property is rented out for more than the expenses on it producing a positive cash flow the owner can live on.

These two methods of making money on real estate have nothing to do with compound interest, UNLESS you’re lending money to someone who is buying the house and you’re changing compound interest on that loan or you’re carrying the paper (playing the bank) on a piece of property you’re selling.

Lastly, let’s look at the STOCK MARKET. Once again, very little profit and wealth that is created in the stock market has anything to do with compound interest. The wealth that is created is because:

• The stock or mutual fund you’re invested in grows in value because the cost of the stock or mutual fund (NAV in case of the mutual fund) goes up and you sell it at a profit (or vice verson because you are selling short…more on that later)

• The dividends you may be receiving from the stock or mutual fund are ‘reinvested’ in more of the same stock or mutual fund providing a compounding effect, but it’s not interest per se.

Bonds are another type of investment where the money you make can be interest, but it’s not always interest that makes you money when investing in bonds. Confused? That’s OK, so was I when I first learned about bonds. Much of the actual profit made on bonds is due to people buying and selling the actual bonds as the cost of those bonds goes up or down, just like the price of a stock goes up and down. Still, if you’re the holder of a bond, you do make interest on the bond itself.

So, is it important that kids of all ages learn about compound interest? Absolutely AND it must also be combined with the idea that the power of money to grow over time is called Compound Growth. The definition of compound growth is “a measure of how much something grows per year, over a multiple-year period, after considering the effects of compoundING.

An extension of this topic, if your child is old enough and ready for it, is the conversation about ‘return on investment’ and ‘rate of return.’ I have asked many experts if these two phrases mean the same thing and I always get a mix of answers; some say yes and some say no. Most say that ROI is the actual bag of cash returned from an investment and ROR is the measured rate, expressed in a %, at which the investment returned a profit.

The general question is simply, “How much money has my money made over time and how do you turn that into a percentage rate per year?” According to Wikipedia, the ROI or ROR is the RATIO of money gained or lost on an investment where the money invested is referred to as the asset, capital, principal or cost basis of the investment. To figure your ROI or ROR you simply…

Divide the amount of money you made by the total investment made. Example: Let’s say you invest $50,000 and a year later you get back $60,000. Your profit is $10,000 (not factoring in any taxes or other fees).

Your RETURN = $10,000/$50,000 or 20%. Pretty straight forward, yes? And remember, rates of return are usually quoted per year, but not always. What if you have an investment that pays you 30% every six months? Well, is that a total of 60% per year? Maybe, maybe not. In order to get a total return for a year, you have to do the math based on the figures for the year. It makes sense that it would be 60% but sometimes it just doesn’t turn out that way.

Now for some cold hard facts about actual compound interest that we share with our attendees to Camp Millionaire and Creative Wealth for Women.

CREDIT CARDS: Let’s say you buy a new stereo for $1000. You put it on a credit card that charges 19% interest per year. You only pay the minimum payment on this card. Ready for the shock?

It took you 19.3 years to pay it off and you ended up paying $2930.00 for it!!!

YOUR MORTGAGE: Let’s say you buy a house for $300,000. You borrow $250,000 from the bank at 6% interest and it’s a 30 year loan. Do you have any idea how much that house cost you? Are you sitting down? $539,596.80!!! You paid more interest on the loan that you originally borrowed.

Should you never buy a house then? No, but you should consult your accountant to find out if it’s the right thing to do financially. We teach our campers to buy rental properties first and then buy the house they live in with the passive income from their rentals. Put your money to work for you first!

OK, that’s all for today in terms of this compound interest concept. Just remember that isn’t not always compound ‘interest’ that is making your money grow…sometimes it’s compound growth based on appreciation, cash flow, profits, rents, dividend reinvestment, and more.

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.

Financial Planning Tips for Having a Baby

by | Mar 26, 2015 | Financial Literacy Articles for Parents

Article Overview

Having a baby is requires a massive amount of preparation. You must determine whether to paint pink or blue, rearrange work schedules, buy strollers, cribs, car seats and every other baby necessity. You must even decide on a name that they will carry for the rest of their life. As you are preparing, take some time to also prepare your finances.

1. Create a Written Financial Plan

Acquire a financial plan, perhaps an eFinplan financial plan at eFinplan.com. Until now, financial plans were only available to those who could afford substantial fees ($2000 to $5000) per year. For a fraction of that cost you can create a road map to help you figure out your present financial condition and plan how to reach your destination. People don’t plan to fail—they fail to plan. Having a baby is not only the perfect opportunity to create a plan for you. It is a necessity, to help your survive one of the busiest and most enjoyable times of your life.

2. Create a Debt Reduction and a Monthly Cash Flow Budget Plan

Make a plan to reduce debt, and commit to incurring no new debt. Your eFinplan financial plan allows you to identify large future purchases and plan for them. This way you can earmark savings for the things you will want and need, instead of buying them on credit.If you don’t have a budget, it is a necessity that you create one now. You will want to estimate the new expenses for day care, baby sitting, food, diapers, neo-natal medical care, etc. Be sure to calculate changes to your income if one of you may quit their job or cut back to part-time. You may run ‘what-if’ scenarios in your financial plan to determine the impact of each decision.

3. Update Wills and Beneficiary Arrangements

When you have children, it is essential that you put your plans into writing in case either parent were to die. In addition, change life insurance and retirement plan beneficiary arrangements to reflect your new estate plans after discussion with your financial and legal advisors.

4. Update Life and Long -Term Disability Insurance

When you have children, your need for life and long-term disability insurance will increase. Your eFinplan financial plan will help you determine whether there are any deficiencies in your insurance needs. The eFinplan website Learning Center contains educational information about insurance that you may find useful. Use your financial plan as a discussion tool as you meet with your trusted insurance provider.

5. Know Your Health Insurance Benefits

Study your health insurance policies to know exactly what your possible out-of-pocket costs are going to be for prenatal and postnatal care, and birth. Carefully study your policy so that you use the right in-network doctors and hospitals. Also, some people actually time pregnancies so that their deductibles are met within a coverage year. For example if you had paid medical deductibles and co-insurances in one coverage year for tonsil removal, it may be to your financial advantage to have pregnancy in the same coverage year. Obviously, this is not always possible.

6. Know Your Maternity-Leave Benefits

Study your employment manual to know your company’s policies for maternal and paternal time off. Some companies have to comply with certain legal requirements. In addition, you may be able to use some sick and vacation time. You may want to try to time the pregnancy is such a way to maximize time-off and medical benefits. For example, if you have the baby at the end of the year, you might be able to use some time-off benefits from both calendar years.

7. Day Care and Baby Sitting

If you are going to use a day-care center or a private baby-sitter be sure to investigate the cost early on in the pregnancy, and include those numbers in your budget projections.

8. Budget for Essential Baby Buys

Create an inventory list of necessities such as changing tables, diaper pales, bottles, breast pumps, monitors, child car seats to mention a few. It is amazing that anyone ever raised children without all of the latest conveniences that are now deemed necessities. Hopefully, you will have a nice baby shower to provide the essentials. If not, and you are on a tight budget, you might need to receive safe hand-me-downs or shop for bargains or at thrift stores. Never buy a used car seat as it may have been damaged or it may be too old to meet current safety standards. Also, check safety standards for used cribs.

9. You Don’t Have to Buy Everything

You will feel the pressure to be perfect parents, to buy everything to help you be the best parents and raise the best kids in the safest environment, capturing every moment. Make wise decisions about what you really need. The process of determining needs versus wants for you child will continue for about the next 18 years. It seems as if the inventors just keep inventing the latest camera, learning tool or safety device. Remember, these are not all necessities, and you will still be a good parent even if you don’t have the latest of everything. Some of the happiest adults I know grew up in modest income families, while some of the least productive adults are those that grew up with every privilege.

10. Use Advisors

Life is complex, and the only way to sort through the confusing maze is to utilize experts. Find and use trusted professional advisors: legal, tax, insurance, investment, and financial. Regarding time-off and medical benefits be sure to read your benefits books and consult with your insurance advisor, employee benefits or human resources personnel for guidance.

Summary

Having a baby is one the most joyful times of your life, and is a wonderful opportunity to plan together what you want for your child, family, and future.
Laura D. Irwin is CFO and co-founder of eFinplan, LLC. She has a degree in Communication, but her life’s joy has been raising her two children. She can be reached at lirwin@efinplan.com.
Kent E. Irwin is CEO and founder of eFinplan, LLC. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU). He can be reached at kirwin@efinplan.com. For more information about eFinplan, go to the website www.efinplan.com.

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.

Great Financial Tips for Stay-at-Home Moms

by | Mar 26, 2015 | Financial Literacy Articles for Parents

Article Overview

Stay-at-home moms face a myriad of challenges; not the least of them is managing family finances on only one income. This is just a short list of issues. Self education regarding family finances is crucial for homemakers because of reduced income, lack of retirement accounts, increased need for self-discipline (possibly more time to shop), and the fact that if the finances become an issue, homemakers may have to return to work. We wish you the best and hope that these tips are helpful.

1. Accountability – You must plan finances together with your spouse. This way, no one gets to play the ‘blame game’ when things go wrong. When both spouses work on finances on a weekly basis, overspending by either spouse will become apparent. You will also get the chance to congratulate each other on your successes. You are in this together. We all know that money is a huge cause for stress in relationships, and working together will help prevent years of financial stress. This may also help you both learn self-discipline and how to live on less. Remember the commercial where the guy owns everything and he says, “How did I do it? I am in debt up to my eyeballs!” Accountability helps you not be that guy.

2. Keep depositing money in your IRA – Even though you may not be earning an income. Women are poorer in retirement than men are because they earn less, live longer (79 compared to 72), take time out for child rearing without contributing to retirement accounts, and receive less in Social Security benefits because of the time-out for child rearing and lower earnings. This is statistically even more important for women in minority groups. To learn more about the financial challenges unique to women, see eFinplan.com Women and Financial Planning article.

3. Budgeting, Debt Reduction and Saving – Proper budgeting and debt reduction will help you meet your goals of being able to live on one income. Some women are naturals at budgeting, but if you are not one of them, a budget is simply a spending plan that helps you keep track of regular monthly expenses and savings for planned purchases and the future. If you have never created a budget, you may consider using software, an Excel spreadsheet, or simply paper and pencil. You will be spending a lot of time with it, so use whatever makes you comfortable. Put your debt reduction plan into your budget. For great information on reducing your debt, see our affiliate, Mary Hunt’s website Debt Proof Living.com.

4. Fifty Dollar Limit – Or any amount you both decide on together. This tip has saved us many unnecessary purchases because spouses must communicate about a purchase before spending over the limit. (This does not apply to the weekly bills like grocery or utilities.) At times, this rule may seem too restrictive, but we have found it to be a huge budget saver. It also helps to get a second opinion. Recently, I called my husband from the check out line about purchasing an item, and I was reminded that we already own one!

5. Understand marital financial mindsets – What happens when opposites attract? They get married, then begin to fight about money! Consider the following ways people view their finances: There are optimists, pessimists, spenders, savers, planners, procrastinators, and any combination of these. Perhaps his parents were well off financially and she was raised in poverty. On the other hand, perhaps her parents taught her sound financial principles and his parents kept their finances a secret, or worse, he has copied their example of bad financial habits. Open and honest communication about both of your mindsets may help you work through any pre-conceived views or bad financial habits. Remember that this must be done without finger pointing and with the goal of financial harmony. Perhaps reading a good book together about marriage and money would be helpful.

6. Houses and Cars – These are the biggest expenses for most marriage partners. Ideally, if you can plan to have your mortgage paid off before your first child goes to college, you will feel less stressed about paying tuition. Another great way to save money is to buy great low-maintenance cars and drive them for a long time. There is no freedom like driving a car that is ‘paid for’. Many experts recommend that you put the amount of your payment into savings after you have paid the car off to save for the next one. From personal experience, we also recommend planning for what kind of car you will need several years from now. In other words, do not buy a two-seater if you plan on having children in two years. Also, do not sell the minivan after middle school because the kids are not in sports anymore. You may need it to haul your child’s belongings to college.

7. Get Organized – Buy a file cabinet for financial and other important papers. This central location will allow you both to understand where anything important belongs. You can avoid many financial mistakes by keeping papers and bills well organized.

8. Understand your Health Insurance – Health insurance costs have risen for everyone. If you have employer-provided health insurance, take the extra time to understand your coverage, especially during enrollment time. Understanding your coverage may help you save a lot of money. Figure out which policy is best for your family. For instance, if you have a high monthly prescription expense you may research which plan pays the most for prescriptions. If your medical and/or dental expenses are very high, you may be able to deduct them (7.5) of your adjusted gross income. Keep track of your mileage to doctor appointments (20 cents per mile). See your tax advisor regarding your specific situation and see www.irs.gov, Publication 502.

9. Set long and short-term goals together – Creating goals together is a wonderful marital exercise. You will learn what each partner finds most important both now and in the future. Consider creating your eFinPLAN financial plan together. It is amazing how current wants can be dismissed when they are compared with the goals on a written plan.

10. Determine areas of overspending – Each month as you both check your budgeting progress, watch for recurring overspending in any categories. You will probably find one or two areas that go over each month. If you are within your overall budget, you may want to raise your budget amount in those areas or find ways to lower your spending. Many busy families find that eating out regularly exceeds their budgeted amount. This one requires extra self-discipline to plan ahead and create freezer meals that you can fix in a matter of minutes. Tired moms will hate this suggestion at first, but it really can save hundreds of dollars.

11. Do not let grocery shopping be a budget buster – A penny saved really is a penny earned when it comes to grocery shopping. For decades, women have come up with creative ways to save on groceries. I remember my mother-in-law saying that any money she saved from groceries went toward birthday and Christmas gifts. Somehow, through hard work she was able to feed three growing boys and still have money left over! My family preserved produce from a large garden and from local fruit growers. Others use coupons, shop for sales at multiple stores, or plan meals around sale items. All of these ways are wonderful – do whatever works for you. I recently read a huge stack of books from the library about saving money and discovered one recurring theme about grocery shopping. Most books recommended keeping a book of regular prices for each item you usually purchase. That way you can see if it is really a great sale price, or if they simply put it in the grocery flyer at the regular price. If that sounds like a lot of work to you, visit The Grocery Game. After entering your zip code and your local grocery store, you will be able to access a computerized list of best deals at your store that week. After only three weeks, we have saved about $200, and we have begun a stockpile of groceries in the pantry.

12. Judge the long-term benefit of purchases. Our children are teenagers, so we have had a chance to learn from our mistakes and wish we had done some things differently. One of our regrets is overspending on toys, and watching the toys be neglected, eventually ending up in a garage sale. Since we have begun paying for our oldest child’s college tuition, it is painful to think of how much money we could have put into a college savings account had we not purchased those toys. Another example of this is purchasing children’s furniture, which will have to be replaced as the child grows. An inexpensive bed rail can make an adult-sized bed usable from toddler age to adulthood.

Laura D. Irwin is CFO and co-founder of eFinplan, LLC. She has a degree in Communication, but her life’s joy has been raising her two children. She can be reached at lirwin@efinplan.com.

Copyright © 2008 eFinPLAN, LLC. All Rights Reserved.

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Best Reasons for Giving Your Allowance

by | Mar 20, 2015 | Financial Literacy Articles for Parents, Uncategorized

We’ve all heard, and probably said, that practice makes perfect. while most of us know there’s no such thing as perfect, there is, however, learning to do the best you can with what you have to work with and what you know at any particular time.

If you’re like most parents, you know deep down in the recesses of your mind, that you have to at least attempt to teach your kids how to use money wisely. Often when the topic of kids and money or teens and money comes up in conversation, many parents admit they just don’t don’t what to do to teach their children how to manage money.

The question is, How to you teach your kids how to handle money and not have it cost you a futune or lead to constant fighting over money?

This is where the confusion often kicks in…you only know what you’ve experienced in the realm of financial knowledge and that may not be the best place to start. The most important thing is simply start somewhere.

At some point in their children’s lives, most parents usually consider giving their children an allowance of one type or another. The challenge lies in determining which type of allowance to give.

There’s the “giving an allowance just because” method, the “giving an allowance and making them do chores method:, there’s the “giving them an allowance for grades method” and there’s the free for all method where you keep trying different things and eventually throw up your hands because nothing seems to be working.

At this point most parents opt for the ‘pray it all works out somehow’ method. Sometimes it does; sometimes it doesn’t.

What if there was a way to truly empower your children with the tools and information they needed to move out and stay out, except for visits, of course?

What if giving your child an allowance could actually save you money instead of costing you extra money?

Well, there is such a method, but before you start using this powerful system, let’s look at why it works.

Experience is the best teacher:

Most of us have discovered over the years that we learn best when we’ve experienced something first hand. It’s a nice idea to learn from other people’s mistakes and be motivated by other people’s triumphs but the fact remains…if we do it ourselves, we get the visceral lesson and there’s no better or longer lasting lesson than that!

Letting your children learn about money is exactly the same thing. You can’t TEACH them how to spend money wisely but you sure can put them in situations where they experience how to do it wisely (or not, as the case my be:-).

Imagine that your child wants to be a professional basketball player but you never giving him a basketball to dribble or throw, never giving him time on the court to practice, oh yeah, never give him a coach, and, oh yeah, never teaching him the rules to the game. This is what money is like for most young adults. They are rarely given a chance to learn how to use it wisely. Most of them learn how to spend it really well. Spending it, however, doesn’t lead to financial success or freedom!

Learning to do more than simply spend money is why providing your child with an allowance is so critical. Practice is how lessons are learned and habits are formed. There is a saying that says, “Repetition is the mother of skill.” If this is true, then only through the actual practice of using money will a child truly learn to use this resource wisely. That’s why allowances are important. No practice, no lessons. No lessons, no skill. No skill, well?, we know what happens when there’s no skill. You have a society that’s deep in debt with no knowledge of how it got there or how to get out.

Practice, Practice, Practice:

It’s up to parents to provide the financial practice our kids need to go it on their own successfully. And it’s that what you really want? There’s no prouder moment than when you realize your child is a full-grown adult who is fully responsible for himself and his family.

With the right type of allowance (we’ll get to that in a bit), your child will experience the three important aspects of financial practice, all with their inherent lessons woven in.

Remember that human beings are typically motivated in two ways:

1. We move away from pain (the most prevalent).

2. We move toward pleasure.

Let’s look at how an allowance can prepare your kids for real life through these two constructs: pain and pleasure.

Practice learning from poor choices.

There’s nothing like making a painful mistake to teach you a lesson. The most valuable lessons we ever learn come from making decisions that didn’t turn out in our favor.

Once they’ve make a financial choice that was somehow painful and unacceptable to them, they generally steer clear of that choice in the future.

Practice learning from making wise choices.

Most of our most vivid memories are attached to moments in our life where we did good, conquered an obstacle, reached a goal and the like. Wise financial choices have a powerful way of making lasting impressions on us.

Think back right now on your past to a time when you made a wise decision or choice with money. (If you can’t remember one, this is all the more reason to get your kids on a powerful allowance system as soon as possible.) It’s probably something you have repeated several times since then.

Examples are buying, remodeling and selling a piece of property for a profit, investing in a great stock that went up in value and you sold it for a nice profit, starting a business with a great idea that eventually became the way you made your living and became financially independent.

All of these examples are why people end up in real estate, business or the stock market as their primary method of investing. Success leads to pleasure, pleasure leads to a propensity toward becoming an expert in a certain area and expert status leads one, directly or indirectly, into different careers and lifestyles.

Practice learning as a matter of repetition.

It’s hard to do something wrong over and over and over again. For most people, once you’ve done something wrong, especially if you’ve done it wrong more than once, it’s time either give up, try harder or get help and coaching.

When children are put in charge of their own financial affairs at an early enough age, let’s say 6-8 years old, they have more than a decade to figure out what works and what doesn’t work. This is why it’s so important to start providing opportunities for practice with money as soon as the child is ready.

Please note that some children never appear ready. They never ask for money, never ask for stuff, and don’t want to be responsible. At some point this type of child must be put in charge of their finances or they may never move out! And that’s not usually in the generally accepted parent-child contract!

So how do you give your child an allowance that works without it costing your a bloody fortune? Simple, you take the money you’re already spending ON your child raising them, and you run a lot of that money THROUGH them instead.

We’re not talking about running rent, basic food, insurance and stuff like that; we’re talking clothes, hair bows, sports equipment, school supplies, books, entertainment, and the other stuff of life that they could easily be put in charge of.

The intention of this type of allowance is that by the time they are 18 and move away from home, they are 100% responsible for everything they need to survive on their own, and hopefully, a few of the things they want to make life enjoyable.

In addition to running some of the money your use to pay for their basic needs through them, along this path you’re going to encourage your children to start making their OWN money as well.

This is not as challenging as you may think at first. Children are little entrepreneurs in the making; they are idea magnets. It’s their job. They see opportunities everyone IF they have a parent, guardian or mentor to open their eyes to the opportunities in the first place.

The Ultimate Allowance: How to Get Started

It’s pretty simple to start this type of allowance. Simply get out a piece of paper and your favorite pen, sit down with your child and start looking at all of the expenses you are now shelling out for directly.

Depending on your child’s age and level of maturity, decide together what items you will start putting them in charge of purchasing. Decide together how often you’ll provide this allowance (weekly, biweekly, monthly) and talk about what might happen in terms of making poor choices (consequences are better if they know them before hand), coming up short or even losing money.

Talk about what could happen if they make great choices. Knowing they get to celebrate with a movie or ice cream, gold stars on a nice clean poster board, a small bonus for cutting costs (make it as life like as you can) all can help motivate them to make better choices.

Ask Don’t Tell:

Please do not ‘tell’ your child that you are going to start giving them an allowance and ‘this is the way it works.’ Consider this a financial rite of passage so to speak and enroll them in the excitement of being able to fend for themselves, be in charge of their own destiny, become the CEO of their own lives!

Just like adults, we despise being told what to do. We generally feel really good when we’re honestly enrolled into something exciting, especially if there’s something in it for us. You know your child best—their buttons, their passions, what move them. Spend time thinking about how best to enroll your child in the idea of being self-sufficient and in control. You may be surprised at how willing they are to take on this next exciting challenge.

Nothing is more powerful that being fully responsible for your own life. Using the right allowance strategy will provide the essential, and critical, financial practice your children need, before they move out on their own, to do, be, have and create anything they want in their lives.

What more could a proud parent ask for? Sit back and feel the glow knowing you’re doing everything you can to prepare your child for success, whatever that ends up meaning to them. Feels great, doesn’t it?

Elisabeth Donati is the owner of Creative Wealth Intl., LLC and creator of Camp Millionaire, a unique financial intelligence program for youth.
Elisabeth is known as The Financial Literacy Lady

Elisabeth is an expert in teaching the basic financial principles everyone needs in a way that is engaging, empowering and fun.

She is the author of The Ultimate Allowance and the weekly ezine full of thought provoking insight and information on all things
financial literacy related…
Financial Wisdom with a TWI$T.

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