What should be your child’s first lesson about Financial Literacy (money management)?

Question  What should be your child’s first lesson about Financial Literacy (money management)?

Answer  How to save money.

Complete Answer  A basic assumption of Financial Literacy (money management) is “Don’t buy stuff if you don’t have the money to pay for it”. Most children know that instinctively. Unfortunately some adults who find themselves in financial difficulty seemed to have forgotten that basic assumption of Financial Literacy.

A child’s first lesson in Financial Literacy is how to save money. It’s called “Pay Yourself First” (PYF Savings). Every time a child has money to spend, a birthday gift, money earned for raking a neighbor’s yard, et cetera, 10% should be saved. This should be automatic and nonnegotiable.

Although these concepts are beyond the understanding of a child, in the future the PYF Saving account could be used as a rainy-day fund, a child’s personal bank to borrow money from, and eventually a retirement account.

Financial Literacy Knowledge/Skill

Teach your child how to save money using the concept of  “Pay Yourself First”.

Comments or Questions

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When should you teach your child(ren) about money?

Question  When should you teach your child(ren) about money?

Answer  When a child is given the opportunity to make a financial decision.

Complete Answer  It is never too early to teach your child how to handle money (Financial Literacy).  The best time to talk to your child about handling money is when they are given the opportunity to make a financial decision.

Please Note: A financial decision is made up of two parts;
1. the decision to spend or not spend money and
2. what will be purchased.

Your feelings of apprehension are normal and are similar to the feelings you had when your child first rode a two-wheel bicycle without you jogging beside them. I can assure you of two things, 1. they will make mistakes 2. but they will make fewer mistakes because you shared with them your experience and knowledge of handling money (Financial Literacy).

Financial Literacy Knowledge/Skill

You should teach your child(ren) how to handle money (Financial Literacy) when they are given the opportunity to make a financial decision – to spend or not spend and what will be purchased.

Comments or Questions

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Next week’s topic: What should be your child’s first lesson about Financial Literacy (money management)? 

Should you teach your child(ren) about money?

Question Should you teach your child(ren) about money?

Answer Yes.

Complete Answer  “Give me a fish and I can live for a day, teach me to fish and I can live for a lifetime”. Consistent with that theme and as your child’s first teacher, one of the most valuable lessons you could teach your child is how to manage their money – Financial Literacy. My parents used the expression, “How to stand on your own two feet”. Additionally, our children learn from seeing what we do.

There is a reluctance to talk about finances, especially with our children. “People would rather talk about their sex lives than their finances.”17 As difficult and awkward that may be, Financial Literacy it is one of the most valuable lessons a parent could give a child.

The “when” and “what” talks about finances will be covered in coming posts.

Financial Literacy Knowledge/Skill

Teach your child(ren) how to manage their money – Financial Literacy.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: When should you teach your child(ren) about money?

What does a family’s spending plan look like?

Question  What does a family’s spending plan look like?

Answer  Family spending/expenses take priority over individual spending/expenses.

Complete Answer A family spending plan is similar to a spending plan for a single person – simply combine net incomes to get Family Net Income.

Family Net Income 100%
Pay Your Family First (Savings) 10%
Housing 30%
Transportation 15%
Health & Medical, Giving, Retirement, Debt Paydown, et cetera 20%
Lifestyle 25%

However, because each member of a family is financially responsible for the financial well-being of the entire family, family spending/expenses take priority over individual spending/expenses. In the above example, the first four categories, Savings, Housing, Transportation, Health & Medical et al,  would be considered family expenses and take priority over Lifestyle spending/expenses.

Because we all have different values, interests and priorities, in my family’s spending plan, Lifestyle spending is divided in half; 12.5% for my wife and 12.5% for me. Your family’s Spending Plan will be unique to your family. The above Plan is only provided as a guide. Additionally, your family’s income and expenses vary from month to month. You both get to decide what categories are included and how much is spent for each in your Plan.

Financial Literacy Knowledge/Skill

Develop a Family Spending Plan unique for your family.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Should you teach your child(ren) about money?

Do personal finances change after you are married?

Question Do personal finances change after you are married?

Answer Yes.

Complete Answer It is no longer “your money” and “my money”, it is “our family’s money”. Jesus said to the Pharisees, “God made them male and female. For this reason, a man shall leave his father and mother, and the two shall become as one flesh”.16 All family members are expected to contribute to and are responsible for the financial well-being of the family.

The net pay that each person brings home is added together to equal the “family income”. Very rarely do both spouses earn the exact same pay. That does not matter – each is contributing what they can to the family. Remember that the pay you receive for your work is a gift from the Good Lord. If you make more money than your spouse, thank the Lord for the talents given to you and the opportunity to earn more money. If you make less money than your spouse, thank the Lord for your spouse.

Financial Literacy Knowledge/Skill

All family members are expected to contribute to and are responsible for the financial well-being of the family.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: What does a family’s spending plan look like?

Should personal finances be discussed before you are married?

Question Should personal finances be discussed before you are married?

Answer Yes.

Complete Answer  Discussing one’s personal finances is difficult, but it’s a discussion that needs to take place. Each person brings to the marriage their individual financial history, current finances, and future financial goals. The discussion should include those things that will, or could in the future, have a financial impact on your marriage. It is absolutely imperative that each person be completely honest about their finances with their future spouse. In a recent survey, 31% of 1,045 respondents would consider it a “deal breaker” if a person in a relationship lied about debt.13 You can imagine how disheartening it would be to find out that after you said, “I do” you find out that the love of your life has $33,000.00 in student loans14 or has a credit card bill that has gone into collections. Of course you may also learn that your future spouse’s rich aunt has set up a college trust fund to pay for any great nieces’ or nephews’ future education.

A good place to begin the discussion about finances is to share your credit score and credit report with your future spouse. Be mindful that a credit score is a number derived from a credit report. A credit report is a detailed credit history. You can get a free credit report once a year from each of the three major credit reporting agencies. Log on to www.annualcreditreport.com to request your credit report. You may have to pay for your numerical credit score. Your credit score will impact your ability to secure a home mortgage and the interest rate you will pay. It will also determine the interest rate for auto loans and credit cards. Auto insurance rates as well may be affected by a credit score. Some employers use your credit score as a factor to consider when you apply for a job. Because a credit report contains a wealth of information, it will provide many topics for discussion. Which in turn increases communications.

Pleas Note: Two of the most common reasons given for divorce are “money problems” and “lack of communications”.15

Financial Literacy Knowledge/Skill

Discuss personal finances before you are married.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic:  Do personal finances change after you are married?

 

Can you insure yourself?

Question Can you insure yourself?

Answer Yes.

Complete Answer  To insure yourself is called self-insure.

The underlying principle of insurance is shared risk/loss. As an example: For every 100 people, one person will have a financial loss of $1,000 during a year. It may be you or one of the other 99, we don’t know. If everyone pitches in $10 ($10 x 100 = $1,000) there will be enough money in the insurance pool to cover the loss of $1,000 for that unlucky person. The other 99 people, each will be out $10 – shared loss. If you decide not to pay $10 to participate in the insurance pool, you instead set aside $1,000 to be used if you become than unlucky person, you are insuring yourself.

Please Note: If you choose to self-insure, you are still exposed to any potential risks and are financially responsible for damages or losses you may cause.

The most common form of self-insurance is an insurance policy with a deductible clause. Generally, the higher the dollar amount of a deductible, the lower the cost of the insurance policy. It would be prudent to set aside the amount of the deductible into a savings account to be used if you suffer a loss. As with other types of savings, I have found that having money automatically deducted from my paycheck and placed into a savings account is one of the easiest ways to save money.

Financial Literacy Knowledge/Skill

A person can self-insure by setting aside money for potential losses.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Should personal finances be discussed before you are married?

Do you need insurance?

Question Do you need insurance?

Answer Only you can answer that question.

Complete Answer  Your answers to the following questions will help you determine if you need insurance:

 1. What are your financial responsibilities?

  • You are financially responsible for your medical care.
  • Most states will require you to carry automobile liability insurance. Liability insurance covers the medical and property loss and damages you may be responsible for if you cause an accident. Additionally, if you borrow money to purchase as car, as a condition of the loan, the lender may require you to carry collision insurance to pay for damages, including total loss, of the car you have financed.
  • You are responsible for your personal property. As a renter, most landlords will not cover the loss of your personal property caused by a fire or theft.
  • As a home owner, mortgage companies will require you to carry homeowner’s insurance which covers the loss of real property.
  • As a pet owner, your are responsible for the damages or harm your pet may do to others or their property.
  • Your are responsible for the harm you personally do to others or damage to their property.

2. How much of a potential financial loss can you afford? 

You could conceivably insure yourself against every possible kind of financial loss. The cost, however, would be prohibitive. You have to determine how much of a financial loss you could afford and are willing to take the risk.

Examples: I do not need health insurance to cover the cost of a doctor visit for a common cold. On the hand, I am certain that I could not cover the cost of a kidney transplant. I can afford the cost of a new coffee pot if mine wears out. I could not afford to replace all of my personal possessions if they were destroyed by a fire or flood. I probably could afford a new transmission for my car. I could not afford to replace my car if it was totally destroyed in an accident.

A trusted insurance agent could help you determine risks, potential losses and cost of insurance.

Words of Wisdom The best type of insurance is a policy you never use. The worst type of insurance is a policy that you need and don’t have.

If St. Peter calls you home early, will there be enough insurance, money and/or assets in your estate to settle your debts and pay for a proper funeral service? Don’t pass on those financial responsibilities to your loved ones.

Financial Literacy Knowledge/Skill

Determine if and the amount of insurance you may need.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Can you insure yourself?

Should you lend money to a family member or friend?

Question Should you lend money to a family member or friend?

Answer No, give them the money.

Complete Answer  When you lend money to a family member or friend, you change the relationship with that person. You are now a lender and they become the debtor. Additionally, your and their values are involved, “What’s important to them may or may not be important to you” and vice versa. Remember that we tend to spend money on things that are important to us.

We all will, at some time in our lives, have a financial crisis and will need some help. When and if a family member or friend asks for help in the form of a loan, use this occasion to really help them. In education will call this a “teachable moment”.

Ask them “What happened?” Follow up their answer with “What will you change in the future so this does not happen again?” Then, if you can afford to, demonstrate the virtue of charity12 and give them the money they need with the condition that they will not ask you again.

Financial Literacy Knowledge/Skill

Be charitable for those in need.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Do you need insurance?

How do you get out of debt?

Question How do you get out of debt?

Answer Stop spending more money than you take home.

Complete Answer  When you have mastered the three most critical elements of managing your money; know your income and expenses, live below your means, and save (Financial Literacy Knowledge and Skills), you will be in a position to get out of and stay out of debt.

Step 1 in getting out of debt is to stop spend more money than you take home each month – live below your means.

Step 2 is to list all your debts from the smallest to largest balances.

Debt Balance
Credit Card A 300.00
Credit Card B 1,500.00
Credit Card C 3,500.00
Car 18,000.00
House 103,000.00

Step 3 is to determine the amount of minimum monthly payment for each.

Debt Minimum
Monthly
Payment
Credit Card A* 25.00
Credit Card B* 37.50
Credit Card C* 87.50
Car 500.00
House 1,100.00

*Minimum payment of $25.00 or 2.5% of unpaid balance, 18% interest on unpaid balance.11

Step 4 Pay extra on the debt with the lowest balance while paying the remaining debts at the minimum or required amounts each month.

If only the minimum amount ($25.00) was paid each month for Credit Card A, the total interest would be $33.27 and take 14 month to pay off. On the other hand, by adding an additional $75.00 each month (total $100.00), the debt would be paid off in 4 months, with total interest of $9.32.

Step 5 When the first debt is paid off, add that money to to pay off the next debt, then the next,  and so on until you are out of debt.

Please Note: The process of getting out of and staying out of debt only works if you are living below your means – spending less money than you take home. If you continue to spend more money than you take home, you will never get out of debt.

Financial Literacy Knowledge/Skill

How to get out of and stay out of debt.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Should you lend money to a family member or friend?