Monday, February 2, 2015

"Old School" and "Just in Time" Mehods Combine to Teach the Benefits of Financial Responsibility

President Obama is putting forth a budget proposal today. For details please see Obama to Detail Nearly $4 Trillion Budget for Fiscal 2016.

Like all budgets proposed by him the past several years, this one will be DOA. The sad fact is that neither political party is interested in achieving fiscal responsibility by agreeing to live within our means as a society. Thus, the game of name calling will continue unabated and our fiscal insanity (doing the same thing over and over and expecting a different result) will as well. If you're into political theatrics, this may be fun to watch. For me, however, I'll do my best to avoid watching the display of raw politics and 'amateur hour' acting.

So how hard would it be to get us on the right path if some serious minded people were in charge instead of the current crop of sound bite driven politicians we sent to Washington (and states and cities and school districts and so on) to do the "people's work?' And how would we as serious minded adults best go about teaching our kids the proper and highly valuable lessons of personal finance?

An ongoing and "Just-in Time" approach is advocated in The Smart Way to Teach Children About Money. It recommends an ongoing "Just in Time" process whereby the costs and benefits of such things as (1) buying on credit (and then later paying back the principal amount borrowed with lots of interest), (2) borrowing for college, (3) buying a car with a lengthy loan duration, and topped off by (4) a high priced unaffordable house are communicated immediately prior to each large 'purchase' decision. "Just in Time" makes sense to me. In any event, the article is absolutely worth taking the time to read, both for adults and youngsters.

For those 'old school' types, however, there's a simple way to go about teaching finance to youngsters. Four Key Money Lessons I Learned as a Child should be required reading for all Americans, including the political class:

"There is a lot written about how to teach children about money. A Google search on “money lessons children kids” returned 144 million hits! I would like to tell you some of the lessons I was taught as a child that I am passing down to my own children.

The importance of hard work: As a typical teenager, I wanted to be independent and have my own money to go out with friends (this was in the pre-Internet days; Pacman had just come out). I was expected to work in the family business with no pay. I still remember, when I complained about this cruelty at the dinner table, how my father used to point at my plate and tell me, “This is your paycheck.” One day he encouraged me to find a job to see how money gets earned, so I did, at a Del Monte factory assembly line working eight hours straight. I was so tired and sore after work I could barely move. And then I had to do it again the next morning. My father smiled when I dozed off at the dinner table before I headed to bed. But I understood then that he was right: I had to do great in school so I could avoid doing this type of work the rest of my life. It worked. Looking back, I believe that was one of the most formative experiences of my childhood. I made my 16-year old son go flip burgers and he had the same epiphany. I am sure my father was smiling from up above at us.

The importance of saving: At every opportunity as a child, I was drilled with the mantras, “You have to save because you just don’t know what the future holds and you need to be ready,” and “You make the bank pay you interest; you never pay the bank interest,” and “Debt is evil.” These beliefs have been ingrained in me and I find myself repeating them to my own children. I took them by the hand and opened accounts at a local credit union where they deposit a chunk of the money they receive from grandparents, and for birthday and Christmas presents. I show them the interest they earn (not very much these days) from the bank because they saved!

The importance of budgeting: While I was growing up, my parents paid for everything in cash. They always made sure to tell me how much something cost and related that to how long they had to work to pay for it. I have repeated the process with my own children numerous times so they can grasp that nothing is free and if they want to get something they better have the money to pay for it. As I am a big fan of using travel rewards credit cards (never ever carry a credit-card balance!), I always made sure to tell my children when I pulled out the credit card that I would still be paying for it when I received the monthly credit-card bill. When my teenage son requests something, I tell him it will cost him X hours flipping burgers and then ask, “Is it worth it?”

The importance of compounding; I keep reinforcing how important it is to start investing early. I love the saying, “The more you invest, the earlier, the better.” My teenage son will open a Roth IRA in a few weeks with the maximum allowed for the 2014 tax year. There will be a time when you can no longer work or be able to earn money so how are you going to live when that happens? This is why it is so important to save a portion of everything you earn. Make it a habit and you will be fine later in life and have more choices than people who live paycheck to paycheck.

I guess there may be some advantages of children having a financial planner for a father and establishing good money habits early. I can’t wait to tell them, after they are independent, that their parents plan to spend or donate every dollar and they should expect nothing from us! By then, they will already have learned that they better not goof around too much and instead should work hard, save, and invest early and often."

Summing Up

Learning and practicing personal financial responsibility can be simple -- not easy but simple.

And the lessons for youngsters can and should come from concerned adults teaching by both example and word.

Old school is the best school. Hard work has no substitute. Living within our means makes us feel good and gives us a sense of accomplishment. Then we can pass these lessons on to the next generation.

President Obama and most of the rest of the political class apparently don't understand these simple rules of thumb. Perhaps they were never taught them. But that's no reason for the rest of us to make the same mistakes.

That's my take.

Thanks. Bob.

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