From birth, we are a voracious learning center full of curiosity. By age 4 or 5 our brain has quadrupled in size. (Goswami 2008) Yet, the ability for us to learn as we grow is dependent upon our cognitive development. Just as children need to walk before they run, they also need personal, enjoyable experiences with money, like shopping with their parents, to prepare them to understand basic financial concepts like counting money, a skill not typically acquired until age 5.
Discovery Learning Reigns!
Early on, we learn by imitating the actions of our parents. From then on, it’s all about discovery learning. Providing children with abundant experiences within a trusted learning environment prepares them to tackle new problems with confidence and try different strategies to solve their problems. (e.g. Chen & Siegler, 2000) This ability, known as metacognition, is valuable in resolving financial dilemmas or better yet, avoiding them later in life.
Make saving a fun experience!
‘You can lead a horse to water but you can’t make him drink,’ is another way of saying learning is more effective if we’re motivated. Children need to understand the relevancy of a proposed activity to their life or they may rebel feeling it’s not worthwhile. Explaining the relationship between the activity and their situation will also give them confidence they can succeed at a task–at their appropriate cognitive level. For example, you wouldn’t ask a 5 year-old to make change. (Gelman and Merk, 1986)
Cultivate A Strong Relationship
Finally, a parent’s relationship with their young child strongly influences the child’s cognitive ability. Reading to your child, language development activities, responsiveness and warmth of interactions influence positive growth and development as well as the motivation to learn. (eg. Grolnick, 2009; Melhush, 2010)
Learning Behaviors Indicate Readiness
As we explore ‘saving’, we will often refer to the extent to which the following cognitive learning behaviors are necessary and relevant to the skill to be acquired. i.e. receiving an allowance. To have a positive learning experience, we will discuss the necessity for a child:
To exhibit self-control
To plan for future events
To be attentive
To remember instructions
To apply learned concepts
To perceive causal relationships
To comprehend that skills learned today will be of future benefit
Please share your tips and advice on teaching money management skills with other parents by leaving a comment. All comments are screened for appropriateness. We look forward to hearing from you!
The little ones are now in Kindergarten or first grade. Their awareness of money and its benefits is heightened and now it’s personal. Today’s schools are asking them to help pay for their education by contacting their relatives to ask for money. This money may be an outright donation to fund the librarian or computer lab or it could be a request to purchase wrapping paper, cookie dough or grapefruit!
What is a little one to think? They are familiar with coins and dollar bills some of which have even found their way into their piggy bank. And it’s obvious from the way their parents fuss about saving that money is important.
They may be thinking they won’t have any books to read if there’s no librarian—and they like reading! Time to panic? Well no, because this is where their ‘hidden’ inclination to exhibit self-control surfaces. Together with their parents they create a plan to induce their aunts, uncles and grandparents to help fund the librarian! At this age, budding self-control tendencies and the ability to plan future events for personal benefit are inherent readiness skills!
Interesting to them is that this librarian scarcity dilemma can simply be rectified with money. This is the first step to understanding that money has VALUE. Comparing the monetary value of a librarian versus a computer is, however, not possible at this age! In addition, their attention span for discussions of such abstract topics is way too short.
Money is Interesting
What CAN be gleaned by 5-6 year olds, is that money has an important place in the lives of their family members and now in their own life. They will be involved in discussions about fund-raising goals that have been set for their family to help pay for their school librarian. This will definitely motivate them to learn more about money. Here are some money activities you can do with your children to reinforce basic money concepts.
Go on a treasure hunt for misplaced coins around the house—on the floor, under pillows, in jars and pockets etc. When found, arrange all the coins in their specific piles and ask your child to count them by the number in the stack. Next, show them how a nickel is five pennies etc. Ask them if they would rather have a nickel or a penny. Don’t expect them to understand the value of the various coins, but you have piqued their imagination. Now, take them shopping with you and show them how to put coins together to check out. Buy a McDonald’s special $.50 soft serve on the way home with coins found around the house.
Play Clue Jr. or Checkers with them . These games reinforce ‘planning’ and ‘thinking’ skills that can help them understand abstract ‘coin value’ concepts.
Use cooking as a way to teach coin concepts to your children. Help them cut a lime in half and then show them that one nickel is half of a dime.
Buy Cuisenaire rods and teach them fractions! Amazon has them for $11.88. I used them to teach my children basic math concepts.
Kids and Money 4-5 is the first in a new series of articles designed to help you teach your children about money including its value, its management and how to invest it for maximum returns. Woven through all these fundamental concepts will be financial responsibility without which financial literacy is worthless. With college and credit card debt in the TRILLIONS, we must ensure even our youngest children acquire the financial literacy they need for a secure and happy future.
It’s not easy!
We begin the series with tips and tricks for engaging your 4-5 year-olds in the money game. At this tender age, most of them are just learning to count and are not capable of understanding how the value of money relates to purchases and employment. You may want to refer to an earlier article on How Learning Influences Saving at this website for more information.
Walking the dog is expensive if you have to hire a ‘dog walker’. Offering to pay your children to walk the dog at this age is pointless because they cannot understand the value of money yet. They can, however, understand the concept that paying a ‘dog walker’ for a month means we can’t go out for pizza and a movie every Friday night. It’s one or the other! Walking the dog can quickly become the lead-in to a discussion on where money comes from and how to get it!
While young children don’t yet understand the value of money, they seem quite adroit at bartering! They know what they like and they want it–NOW! You can use this natural instinct to your advantage in helping them understand that money doesn’t just pop up out of the ground like a weed. And speaking of weeds, children this age are entirely capable of pulling weeds. And guess what, a nickel for every 10 weeds they pull can add up to a trip to the ice cream parlor pretty fast. Any by the way, this is how mommy and daddy get money–we work for it, too!
I fully support parents who limit their children’s screen time. Enough of coming home from kindergarten to sit and watch TV or play with an iPad even if it is educational. But, if you limit screen time more than normal, you can introduce the concept of BONUS screen time for extra time spent outside or in physical activity/sports! Bonus time can lead to discussions of how you earn bonuses at work and try to save that extra money for emergencies. By the way, I don’t think it’s prudent to discuss traumatic financial affairs in front of children. There’s nothing a 5-year old can do about your financial problems, but they still are old enough to worry about your welfare instead of concentrating on success in school.
“Show them the budget!”
Everyone is short on time, but no one more that MOTHERS. Increasing your child’s financial literacy works best when you involve them in your daily financial management tasks, where possible. For example, when you’re making up your shopping list, ask you children for input. Not only might it be an insight into the commercials they are watching/hearing, but it gives you the opportunity to talk about your food budget! No, we don’t just go to the store and buy anything and everything we see on the shelves.
Night out with Mom!
A girl’s night out with mom can be the best reward of all for sticking to your budget! Share your food budget with your child and take her shopping with you. Keep your receipts and at the end of the month, total them together to see if your stayed within your budget. If you did, plan a special event to celebrate your thrift. Saving and being thrifty should be a celebrated endeavor whenever possible!
So you had a great holiday but spent way too much and ate too much too? It’s not too late to get back in shape financially and physically!
Make a Budget First…
Without knowing the resources you will have to pay off your holiday expenses, you can’t create a realistic repayment plan. Write down the income you will have for the next 6 months. Now make a list of your recurring monthly expenses. Swear not to make any more discretionary purchases until your holiday debt is paid off! Use the remainder from your monthly payments to begin paying down your holiday expenses.
Pay off Credit Cards ASAP!
According to The Balance, the average credit card interest rate is now 21.25%! In February 2019, consumer credit increased at a seasonally adjusted annual rate of 3-1/4 percent. Revolving credit increased at an annual rate of 1/4 percent, while non-revolving credit increased at an annual rate of 4–1/2 percent.
This means people are borrowing more and paying more to borrow!
Credit Card Alert
Store credit cards have the highest average interest rates.
The average APR on credit card purchases is 21.25%.
Store credit cards have the highest average interest rate.
Business credit cards have the lowest average interest rate.
Cash-back credit cards have the lowest average interest rate among consumer cards.
Debt Repayment Blues
If you borrowed $1,000 to pay for a “happy” holiday, you may find yourself singing the blues when payment comes due. And, using the current credit card average interest rate of 21.25% and if you were able to repay $40 per month, it would take 76 months to pay-off the $1,621 you borrowed. Yes, incredibly you’re paying 62% more than you borrowed! Use thisDebt Repayment Calculator to calculate your own repayment schedule.
Setting aside religious preferences, there are three things I believe parents need to promote with their children during the holidays: Gratitude, Giving, and Responsible Gifting. Having said that, the holidays are especially great for family fun! At our home, we had the ‘Elf’ leave small gifts under pillows or ring the door bell and vanish (leaving a gift behind) a few weeks before Christmas. Of course, the Elf came more frequently to children making ‘wise choices’ like doing their homework and going to bed on time! Frequently the Elf who was thousands of years old and some say lived on the moon during holidays-off, left games the family could play together! These games gave parents their children’s undivided attention for a couple of hours in the evening for discussions of gratitude, giving and responsible gifting.
It’s easy to gain agreement that the family has a lot to be grateful for when you not only have a roof over your head and food on your table but the Elf is dropping by with gifts now and then! The question is, should we as a family be doing anything to show our gratitude? Some family members may feel they don’t need to be grateful for anything because they got where they are through their own hard work! But a deeper look at the origin of their success may well reveal that an ‘opportunity’ was presented to them. A better job offer? Funds for college tuition? A job mowing neighbors’ lawns? Yes, they asserted themselves to take advantage of the opportunity, but that ‘opportunity’ could have gone to someone else, too.
Consensus on gratitude is a great segue into discussions on ‘giving.’ When possible, we want to engage the whole family in a ‘giving’ activity. Giving your time and expertise to help someone is much more rewarding all around than writing a check. More importantly, it lets your children experience heartfelt appreciation from a non-family member for their contribution—an experience they may never forget. Of course, you, the parent, must propose several ‘giving’ options from which to choose. Should we shovel snow off the sidewalk for the elderly couple down the street? Should we help a widow store her outdoor summer furniture and tools? Maybe bake some cookies and sing carols as you deliver them to a handicapped neighbor? Whatever you choose, make it an activity for several members of the family and when it’s completed, go out for hot chocolate or ice cream sundaes! Your children will relive the ‘giving’ experience over the hot chocolate and look forward to the next opportunity to give of their time and ‘expertise’!
Dogs Love Holiday Strudel too!
Have you ever seen a young child tear the wrapping off a holiday gift, throw it down, grab another gift, tear its wrapping off and repeat the process for every gift never even opening one of the gifts? Even though several of the gifts may have been on the child’s Gift Wish List, they will appear disappointed there weren’t more gifts to open! You can manage this situation by having children alternate gift opening and by helping them inspect each gift and determine how it can be used.
The more important question is how much should you spend on gifts for your children and what types of gifts should they be? The amount you spend for each child clearly depends on your disposable income, but even if you are flush with cash, you need to reign in your desire to give your children their every heart’s desire. Too many gifts will simply end up in the closet never to be played with again but taking up valuable space. Additionally, too many gifts can distract from the true meaning of the holiday. I liked to give my children gifts that required an activity, like a pair or skis, hockey skates or a skateboard. Added to that were clothing items like a cool new pair of sneakers, sweaters or ski jackets to complement their skiing activities but which were also suitable for school.
Orange Rolls in the Making
Your children won’t have a clue about what they got for Christmas two years ago. But, here’s what they will remember. Your 17-year-old football wide receiver son will remember his favorite aunt teaching him how to make the 100 year old family orange roll recipe and that he’s now the next-in-line Orange Roll King!
May you have a joyful and peaceful holiday with your family by your side!
A Home Warranty is not your homeowners insurance. A Home Warranty is a contract designed to protect you from unexpected costly repairs or replacement of appliances in your home. The contract is generally for a year. The monthly premium ranges from $40 to $70 per month and depends on which appliances and systems are included in the contract. There is also a deductible of $75 to $100 for each repairman visit to repair or replace an appliance.
What’s The Pitch?
This is the pitch from Home Warranty of America (HWA): “Imagine you’ve been using that lovely new refrigerator you purchased last year and then suddenly, as soon as the manufacturer’s warranty expires, it dies on you. If you don’t have a home warranty, it may cost you hundreds or even thousands of dollars to fix or replace it.
If you have a home warranty with HWA, you can file a claim online or with our customer service team and we’ll take care of the rest. Once the claim is received, we’ll connect you with an approved service provider to assess the problem and your appliance or system will be fixed as quickly as possible.”
What Should I Do?
What’s the Reality?
The reality is that they are a for-profit company that needs to show a profit. If you need too many repairs or your repairs are too expensive, they will not renew your contract or they will find reasons not to make the repairs.
Read the Fine Print! Gotcha!
Here’s what happened to me with my Sears Home Warranty. I had an old but in good condition Subzero refrigerator. Some of the vegetables in the vegetable drawers were freezing. I filed a Service Request online which was approved by a Sears representative. Then the first glitch occurred: Sears could not find a repairman in my area who could repair a Subzero! They said I would have to find a repairman, which I did in a town 50 miles away.
The repairman said the refrigerator needed a heater component specifically designed to keep the drawers from getting too cold. There was no other solution. Sears approved the visit by the repairman but then reneged and refused to pay for the visit or the $250 part stating it was a manufacturing defect that the manufacturer should repair. Since the fridge was long since out of warranty, I was out of luck.
Be Prepared to Find Your Own Repairman in Rural Areas!
Shortly thereafter, the blower on my stove top started making a loud noise. I contacted Sears with the Thermador model number and was told it was not covered. Why, because the blower was UNDER the stove top in a cabinet not over top of it! Specifically they stated:
Thank you for contacting us.
Upon review of your agreement, we cover a self-contained range exhaust unit located above the range. Please be advised there may be a cap limit on your appliance as it is classified as an ultra-premium appliance.
Refer to IV. General Exclusions and Limitations, Item 7 wherein it states:7. This Agreement does not cover any of the following: repair or replacement of systems, appliances or components classified by the manufacturer as commercial-grade. In no event shall we be liable for claims in excess of $1,000 in the aggregate, per agreement term, per commercial-like or ultra-premium appliance including, without limitation, brand names such as Bosch, Dacor, Delfield, Fisher & Paykel, GE Monogram Series, Jenn–Air, Meile, Sub-Zero, Thermador or Viking (individual trademarks are owned by the brand name company).
Upon further review of the information you’ve provided, the model number shows the cook top is independent. If the cook top is independent it is not addressed by your warranty. Please refer to your Agreement, Section II. DEFINITION OF ITEMS, 1. Kitchen/Laundry Appliances, paragraph 2 wherein it states: Examples of Items/Conditions Not Covered: Automatic deodorizers; buckets; commercial units; damage to clothing; doors; door cables; door glass; door seals (other than for front load washers); drawers; drip pans; exhaust fan not solely for venting range/cooktop fumes; filters and screens; food spoilage; standalone or self-contained icemakers and ice/water dispensers; external water supply lines; independent telescoping range exhaust; interior lining; internal shelves; knobs and handles; light bulbs and fixtures; lock and key assemblies; panels and/or cabinetry; racks; removable minitubs; rollers other than clothes dryer drum rollers; rooftop exhaust units; rotisseries and probes; secondary units; shelves; springs; stand-alone freezers; structural components; timers and clocks (oven/range clock-timers are excluded unless failure prohibits normal cooking function); trays; dishwasher and trash compactor tubs; venting; conditions of water flow restriction due to scale, minerals and other deposits. We hope this information was helpful. Sincerely, Marcos Customer Support Services
That was enough for me and I cancelled the contract. But be aware before you cancel that your home warranty contract is for a year. If you cancel before the end of your contract term (12 months), you will have to refund the cost of any repairs paid for by your home warranty company during your year long contract period! So if you had a plumbing repair that cost $270 and they paid $170 (Remember you have to pay a deductible.) you will have to refund the $170 to the home warranty company if you cancel before year end–even though the repair was made perhaps several months before cancellation.
Little Wiggle Room in Home Warranties!
There are times when a ‘fair’ home warranty contract can be worthwhile. If you travel frequently or have a rental, a home warranty can be useful! Here is a link to the best home warranties of 2019. Be thorough in your research and read the fine print carefully!
This is a question on the minds of many Americans as they watch the stock market rise and fall. What should you do with your money? To set the stage for future discussions, let’s take a minute to make sure we understand the Time Value of Money, Inflation and the Rule of 72.
Time Value of Money
Many factors contribute to whether the the US Dollar is weak or strong. They include monetary policy, inflation and economic growth. If the Federal Reserve Bank is easing/decreasing interest rates, the Dollar is weakened and deflation generally occurs.
The Figure below show how much $1,000 today would be worth in the future if it were discounted at various rates i.e. 2, 3, 5 and 7 percent. As you can see, in around 70 years at a 7 percent discount rate, your $1,000 would be worthless!
Money Needs to be Invested to Retain Value
Inflation is the constant rise in the price of goods and services over a year, for example. Inflation weakens the Dollar and results in a decrease in the purchasing power of your money.
As prices rise, your Dollar buys fewer goods and services. This loss of purchasing power impacts the general cost of living across the board ultimately leading to a deceleration in our country’s economic growth. Below is a chart that shows the impact of inflation on the price of a cup of coffee over 50 years.
What Caused a Cup of Coffee to Become so Expensive?
What is the Rule of 72?
In finance, the rule of 72 is a method for estimating the time it takes an investment to DOUBLE. The rule number (e.g., 72) is divided by the interest percentage per period (usually years) to obtain the approximate time required for DOUBLING.
How Does the Rule of 72 Work?
To estimate the number of periods required to DOUBLE an original investment, divide 72 by the expected growth rate/percentage.
For instance, if you were to invest $100 with a compounding interest rate of 9% annually, the rule of 72 divides 72 by 9 to arrive at 8 years for your $100 to DOUBLE to $200. Below are other examples of the rule of 72 and the returns you could expect from your investment.
Years to Double
In summary, the worst place to keep your money is under your mattress where it will only devalue over time and become dead money. Banks are currently providing very low rates of return, but your money is guaranteed against loss by the US government through the Federal Deposit Insurance Corporation (FDIC).
The US stock market has experienced an average gain of approximately 10 percent since 1980. If you have a long term perspective, it’s a good investment, but losses are not insured by the US government. Real estate can be a good long term investment, but you should consult a local realtor to find the best value for your money.
If you have children and you want to provide them with the benefits of a post secondary education, you should definitely consider a 529 Plan.
I wouldn’t have financed my car for 7 years instead of 3.
I would have waited to get married until I had saved more money.
I would have paid my credit cards on time.
I would have ‘vacationed’ at home a few times.
I would have invested in a 529 Plan for my education.
The list goes on with ‘would’ve’ and ‘should’ve’. What matters is what you do now! Incredibly, the latest economic reports find that the 1.6 TRILLION of Millennial student loan debt is actually exceeded by CREDIT CARD debt! Below are the leading sources of debt for the various generations.
PRIMARY SOURCE OF DEBT
PERCENT OF TOTAL DEBT
Generation Z (Ages 4-22)
Millennials (Ages 23-37)
Generation X (Ages 38-53)
Baby Boomers (Ages 54-72)
It may be getting late for some of the generations above, but not for Generation Z! Now, while they are so impressionable, is the time to model wise money management and ‘conjure up’ opportunities for them to experience saving, borrowing and investing.
Provide Learning Opportunities
Of course, the opportunities you provide must be tailored for their learning development as we saw earlier. When my oldest grandson graduated from high school, I invested $10,000 on his behalf at Charles Schwab. Now that he has completed two years of college and his investment has increased to $12,500, I helped him open his own brokerage account and transferred the profit into his account. To leave it at that would have been to drop the ball, however!
Every Penny Counts!
The next time he came by to visit me, I had him select four stocks in which to invest his profit. I then had him download the Vector Vest investment app I use and taught him how to use it. He was proud to have his own brokerage account and dying to buy some stock! That afforded me the opportunity to teach him how to be a good stock picker! Time will tell, but at least I opened his eyes to the world of investment.
My five year old granddaughter is a different case. Next time I see her, I plan to ask her for a loan–a loan that pays interest!! I’ll let you know if she bites and how much interest she wanted to charge for the $5.00 I hope to borrow…
The 80/20 rule was discovered by an Italian engineer named Vilfredo Pareto and is often referred to as the Pareto Principle
But how can the 80/20 rule be applied to improve family fiscal management? Well, if 80 percent of results come from just 20 percent of our efforts, the first step is to prioritize your tasks/activities.
What are your most important tasks not just for the day but for the month? Make a list of them: Paying the bills, making a budget, searching for coupons, finding a part-time job, refinancing the car loan, buying kids’ shoes while on sale, replacing lightbulbs with lower cost led bulbs, finding ride-sharing for after school sports, trying to repair a leaking sink yourself, etc.
WOMEN ARE STILL DOING MOST OF THE COOKING AND CLEANING!
After each task write down an estimate of how much time it will take to accomplish. This procedure forces you to identify “bottlenecks” that may have kept you from doing the task earlier. When I follow this procedure in my own life, I am frequently surprised with how little time I think it will take to accomplish ALL the tasks. In fact, it makes me feel more motivated to get started. Why have I been procrastinating so long?
Now, ask yourself, which of these activities will be most valuable to my family. Those with the highest value should be done first. But, maybe you can’t complete your most valuable task in one day? Not to worry. Complete as much of your #1 task as you can and move on to #2. Accept that there will be interruptions like fixing lunch, picking your child up from school or doing a load of washing. Use these minutes away to ponder your #1 task.
TIME IS MONEY!
At the end of the time you have to work on your fiscal management tasks, place a check mark beside the ones you have accomplished. If you only completed one-half of #1, enter “1/2” next to it. Next morning, get up, get the kids off to school and resume working down your PRIORITIZED task list.
Let’s look at an example. From the list of tasks above, which one has the greatest value to your family? If you don’t pay the bills, the water or electricity may be turned off! But if you don’t make a budget or get a part time job, you may not have enough money to pay the bills? If you can’t refinance the car loan, you may lose it and not be able to get to work! What to do first? You may feel so stressed that you can’t make a rationale decision and start cutting coupons to relieve the stress!
PAY THE BILLS FIRST!
Don’t fall into the trap of doing the easiest tasks first. Frequently these easy tasks are pesky but of the least value to your family. Instead, think which completed tasks would be most valuable to your family. If you pay the bills first, you buy time to complete the other tasks. You can then make a budget for the next month, look for a part time job and refinance the car loan.
In this example, the most valuable task probably took the least amount of time—an hour or so to pay the bills. You might say that 20 percent of your efforts produced 80 percent of the results that kept the family solvent for another month!
When Interest Rates Are Lower, It’s Cheaper To Borrow
Some families may use these lower interest rates to buy a new refrigerator and maybe a new stove to match it while interest rates are low!
The danger is that when interest rates begin to rise, unexpected challenges can arise, too! For example, higher interest rates cause businesses and employers to cut costs. Some of those cost reductions could cost you your job or that of your spouse! Meanwhile, you still have to make those refrigerator and stove monthly payments for maybe two years on one family salary.
Currently, according to the Federal Reserve Bank, since 2008 household debt has increased 19 consecutive quarters to 13.67 trillion dollars. Non-financial corporate debt reached 9.92 trillion dollars the first quarter of 2019. Both are the highest in history.
Be Prepared For A Rise In Interest Rates!
As interest rates are decreased by the Federal Reserve Bank to help keep the economy growing, families need to be prepared for their eventual rise. I recommend not financing the purchase of the new refrigerator and stove just because interest rates are low, especially if the current appliances are in good working condition. Instead, save for the new appliance and pay cash, if possible.
PUT PEN TO PAPER!
Review Special Offers Carefully
Be careful about entering into agreements to buy appliances on an offer of ‘interest-free” for a period of time. If you are late on one payment, you will be charged not only a late fee, but you may be liable for interest on the item for the entire eighteen to twenty-four months!
A few months ago, as interest rates were falling, I thought about replacing my 2003 Maytag washer and dryer which were still working well. I went to Home Depot and spoke with a repair tech. He told me I would be better off keeping my 16 year-old Maytag appliances and replacing parts as needed. He said most new washer and dryers are not as reliable these days and don’t last as long! His estimate for a new refrigerator was a life of five years; my current Subzero fridge has been with me for 25 years!
As a general rule, if both of you are working, try to contain your total revolving monthly expenses (rent/mortgage, utilities, car and food) to the salary of one spouse and save/invest the other spouse’s income. You’ll be happy you did when that emergency knocks at your door.
Budget Budget Budget…
Of course the secret to successful family financial management is a BUDGET! If you are a single parent, the monthly budget, prepared in cooperation with your children, is an absolute necessity. If it’s not in the budget, it’s not being purchased. It’s not the fashionable attire your wear that makes people seek you out, but rather the “content of your character” that makes you their friend.
Note: Higher interest rates are good for bond investors and retirees depending on their retirement funds for income.