FinancialDominance.com

My wife and I have been talking a bit lately about when the appropriate time would be to start educating our three year old about money. Thus far she has seemed too young to understand most money concepts, but she likes to put spare change in the money jar and marvel at how full it gets. While at the store, we explain to her that we can not buy the toy she wants because we haven’t set aside the money for it. She seems to be catching on, but we have a huge setback whenever any of her grandparents come for a visit. Overall, I think she has a fair grasp for her age on the basic concept of money. To that end, here are a few things my wife and I plan to do to keep her financially intelligent:

1. Start early

Never assume your child won’t understand anything you tell them. Keep reinforcing the basic fundamentals of money. One fundamental that applies at any age is the idea of limited resources. Don’t let them spend more than they have and explain before going to the store that there is a limited amount of money to be spent.

My wife and I plan to encourage our children to not only save a portion of their money, but to donate a fair portion as well. We hope we can instill this in them early so that it will carry with them the rest of their lives.

2. Be open with “grown-up” finances

Bring your children in to monthly “family finance” updates. Show them the income that is coming in and the expenses that are going out. Let them know why you are saving X% in a 401(k) or other savings vehicle, and ask them for suggestions on how to cut expenses/increase income so you can contribute more.

Admittedly, this tip takes a high comfort level in sharing personal details that your kids may share with their friends. If you find that sharing your income and net worth with your children is beyond your comfort level, at least share with them the generalities of your finances. For instance, instead of using dollar amounts, use percentages. This may be an eye opener for both you and your children.

3. Set goals

Show your children how good it feels to set a lofty goal and reach it. Let them set a goal of buying that Nintendo Wii game system with the discretionary part of their allowance. When they finally have enough to purchase the system, they will enjoy and value it more than if it was just given to them.

4. Give incentives to save

Despite your best efforts, your child may not be able to see the forest from the trees when it comes to saving. They may want to spend every dollar they have every time they visit the store. In order to mitigate this behavior, match portions of their saved money and explain how their savings will grow over time. Allow them to withdraw a portion of their contribution plus a little extra after set periods of time (i.e. 1 month, 3 months, etc). They may be spending a similar amount, but you can then demonstrate that their savings had grown so they have money left over.

5. Let them learn from mistakes

This idea comes from a post I read at AllFinancialMatters.com asking how hands off parents should be. If you think your child is making a mistake with the discretionary portion of his allowance, explain to them your opinion and let them decide whether or not to make the purchase. If they make the purchase and are later disappointed in their decision, remind them about the day they made the purchase decision and let them know they would have more money to spend today if they had thought things through before.

6. Explain the value of gifts

When your children receive gifts for their birthday or at Christmas, explain to them the value of the gift. This can be done by explaining how many allowances it would take for them to save up for the gift. This may not apply to gifts that are sentimental, but large gifts such as sports equipment and video games are perfect items to talk about.

In the end, I think that the best way to teach a child to live within their means and understand money is to set a good example. If you are trying to get your child not to splurge on a video game, understand that you may have to show him that you won’t buy that 52″ plasma TV you want unless it is in the budget. If you want to teach them to save, show them the percentage of your income that goes to savings. Don’t be complacent and think they aren’t watching, because they definitely are.

These tips are based on what may be my naive thoughts on educating children about money. I would be interested to hear from others who have direct experience with children of different ages.

Share This

Apparently those looking to increase their income by asking their boss for a raise should be wary. The owner of a car dealership near Atlanta, Georgia shot and killed two employees after they repeatedly asked for raises.

I always tell my friends and family to ask for a raise if they feel the deserve it, because the worst the employer could do is say, “No.” I guess I was wrong.

See the full story.

Share This

This is a continuation of a post at Blueprint for Financial Prosperity called Six Roth IRA and 401(k) Questions Everyone Asks. The following are a few questions I hear often that are very basic but often require some explaining:

How much money can I put into my 401(k)/Roth IRA account?

The 2007 contribution limit for a 401(k) is $15,500. This amount is indexed for inflation and rises in $500 increments. Those 50 years old or older can contribute an additional $5,000 as a “catch up” contribution.

The 2007 contribution limit for a Roth IRA is $4,000. This amount is also indexed for inflation, although it has had the same limit for the past few years. Those 50 years old or older can contribute an additional $1,000 as a “catch up” contribution.

Can I take a loan out if I am strapped for cash?

Some 401(k) plans allow you to take out a loan and pay yourself back with interest. If, however, you are unable to repay the loan, the loan becomes a distribution and is subject to income taxes and penalties.

Roth IRAs allow for early distributions, but not loans. Generally speaking, an early distribution will be subject to income tax and a 10% penalty. There are some exceptions.

If I leave my company, what happens to my 401(k)?

If you are joining a different company that provides a 401(k), you can rollover the funds from your previous plan to the new plan.

If your new employer does not offer a 401(k), you can rollover the funds into a Traditional IRA or a Roth IRA. If you choose the Traditional IRA, there is no tax due at the time of rollover. If you choose the Roth IRA, there will be tax due since you are transferring from a tax deferred 401(k) to a non-tax deferred Roth IRA. Keep in mind that in order to rollover to a Roth IRA, you must first rollover into a Traditional IRA and then into a Roth IRA.

Is investing in a 401(k) or Roth IRA safer than investing in a brokerage account?

Absolutely not. Within the 401(k) or Roth IRA, your funds are invested in similar investments that you would have within a brokerage account such as mutual funds, stocks, bonds, etc.

Visit here to get the answers to more frequently asked questions about 401(k)s and Roth IRAs.

Share This

According to the Center for Responsible Lending, Americans are getting hit harder than ever on overdraft fees. Their findings show that checking account holders pay more than $10.3 billion (and rising quickly) in overdraft fees every year. To give a sense of the impact to the checking account holders, overdraft fees for a debit card transaction are approximately $2.17 for each dollar “borrowed”, and the overdraft fees for a paper check purchase are approximately $.86 for each dollar “borrowed.”

It appears that as debit cards become more prevalent and paper checks go by the wayside, people are forgetting the fundamental skill of balancing their checkbook. Even with the myriad of tools available that allow you to check your balance instantly by phone, at an ATM, or online, many people are continually getting hit hard by these harsh fees. Is this laziness or cluelessness?

The banks themselves aren’t doing anything to mitigate these fees despite their ability to do so. You may have noticed on your bank statement that the bank often clears the transactions on your account from highest to lowest. Although this may seem to make sense, think of what this means to the checking account holder. Suppose you have $100 in your account and you make five transactions in one day for $5, $10, $15, $20, and $90. Banks will decrease your balance by $90 first, and then, starting with the $20 check which is cleared next, each additional clearing would trigger an overdraft fee. If the bank would have taken the charges in the reverse order, lowest to highest, only one overdraft fee would have been triggered.

That being said, it is still the checking account holder’s responsiblity to manage their spending to avoid these fees. Many banks will recommend you link your checking account to your savings account for overdraft protection. This may sound like a good idea, but if you have trouble running out of money in your checking account, there’s a good possibility you will deplete your savings account as well.

Instead, a good first step to protect against overdrafts would be to create a budget. Once you have established and are following a budget, keep track of your balances frequently. If your checking account provider allows for online account access, take five minutes a day to check your balance. If not, stop by an ATM or call your bank to get an updated balance. These small actions can lead to big savings on overdraft fees and peace of mind.

Read what Congress is doing to prevent abusive bank policies.

Share This

The 111th Carnival of Personal Finance is up at plonkee money. These are my top five from the carnival:

1. Saving Advice shows how lifestyle inflation can sneak up on you and how to avoid it.
2. Accumulating Money explains the many benefits of 529 plans (besides the financial ones).
3. Mighty Bargain Hunter ponders the point of raising the minimum wage.
4. Clever Dude explains that focusing on debt should be a part of reaching a future goal.
5. Million Dollar Journey talks about the 1% stock trading rule.

There were a LOT of great posts to read in the carnival this week that are not listed here, so please visit the 111th Carnival of Personal Finance at plonkee money and read a few. Also take a look at my entry for this week where I talk about the return on investment of an MBA.

Share This

Here are some of the my favorite posts from the previous week:

• The Simple Dollar answers a reader who asks if it is better to pay off debts now or avoid future debt.
• Mighty Bargain Hunter shows that debt troubles are not just for low wage earners. Some of the high wage earners I know are in this exact position. They think retirement savings are a “middle class” problem.
• Free Money Finance shows thathome prices may be falling faster than the statistics show.
• Five Cent Nickel is looking for the very best 529 plans. I am currently participating in the Illinois plan he mentions and am very excited about their decision to switch to Vanguard index funds. Vanguard + index funds = super low fees.
• Consumerism Commentary talks about the team experience in the University of Phoenix MBA program. I always wondered what the team experience would be like in a 100% online class. After reading his post, I am very happy I decided to obtain an MBA the normal way.
• All Financial Matters asks if employers should reduce 401(k) investment options to encourage employee contribution by reducing complexity. I added my two cents in the comments.
• No Credit Needed has some great ideas for speeding up your debt reduction and increasing your savings. All the ideas are common sense, but are often overlooked.

Share This

Last Sunday’s edition of the Chicago Tribune had an interesting article called The Time To Save is Now by Janet Kidd Stewart. It gave an overview of the lack of savings that many soon-to-be retirees currently have. Some of the worrisome points she makes:

• More than a third of people over 55 aren’t saving for retirement
• Fewer than half have tried to calculate how much they’ll need in retirement
• Just over half have saved less than $100,000 excluding home equity and defined-benefit pensions

It’s unclear whether those not saving for retirement are depending mostly on defined-benefit pensions, social security, downsizing their home to turn their equity to cash, or some combination of these.

In any case, the most disturbing point to me was that fewer than half have actually tried to sit down and figure out how much money they will need. Despite the multitude of retirement planning tools and calculators on the Internet (which, to be fair, a lot of the older generations may not be familiar with), they are deciding to shoot from the hip and hope they hit the target. This is very dangerous if for no other reason than the rising cost of health care for retirees.

To see where you stand in relation to your peers in terms of funds for retirement, see the table below from EBRI 2007 Retirement Confidence Survey:

The moral of the story: start saving today. If you are nearing retirement, take advantage of 401(k) catch up contributions if possible. If you are young, contribute early, contribute often, and continually monitor your portfolio.

To learn how to maximize your retirement savings, check out this article at Free Money Finance.

Share This

Over the last decade or so, undergraduate degrees have changed from a differentiator to a near requirement in most business settings. That’s not to say the degree is worthless, however. Those with college degrees can expect to earn nearly 80% more than their high school counterparts. But in a business setting, the degree no longer sets you apart from nearly every person you work with who also has a college education.

Now, many are turning to MBAs to get that extra ‘edge’ over the competition. But there are several questions to be answered before selecting a school and program such as “Should I pick a top ranked school?” or “Which type of program will deliver the best results.” The Graduate Management Admission Council (GMAC) set out to answer these questions in a December 2006 research report titled Examining the Value Added by Graduate Management Education. A few of the things I found interesting:

The overall return on investment (ROI) for an MBA is 177%

The amazing thing about this number is that they only assumed a person would work for 10 years after obtaining their MBA. So for those that are receiving their MBA at a young age, this number jumps dramatically. The payback for the average MBA is 4.5 years.

The ROI for a top 10 school is dramatically lower than other schools

Although the net increase in salary is a bit higher for those graduating from top 10 schools, the total cost of the top 10 schools is dramatically higher. The ROI for top 10 schools came to 118% while their non top 10 counterparts came in at about 185%.

A part time MBA program gives a better ROI than full time or executive MBA programs

The biggest factor for a small return on the full time MBA program is the cost. The average cost of the full time program is nearly four times the cost of the part time or executive MBA program. As for the executive MBA program, the lower ROI as compared to the part time programs is due to the higher salaries of the executive MBA program participants. This is because students in the executive MBA program tend to be more experienced (i.e. executives.)

Public schools beat private schools in ROI

The total cost of the private schools in the report came in almost 40% higher than that of the public schools. This overwhelmed the fact that those coming from private schools tend to generate a higher salary.

From the results of the survey, it appears that obtaining an MBA is a good idea (financially speaking) no matter where you get it from. However, the higher price of private schools (especially those that are top ranked) do not fully equate to an equally higher salary. Unless you are in a position that you absolutely must have an ivy league diploma on your wall, you may be better off looking at less expensive alternatives.

Share This

Just as the DOW was approaching this elusive target, it changed its mind. The DOW fell 226 points to about 13,717 leaving the question open - what is driving this bull market in the first place? Will the bubble bust anytime soon?

Read more about it.

Share This

After moving into my new home a few weeks ago I purchased this water heater from Sears. The total cost of the water heater including installation amounted to much less than I had budgeted during negotiations, and I had it installed within a week.

Cut to about a week ago when I was hit with a blast of cold water in the shower. My first thought was that the pilot flame had been extinguished thus requiring a relighting. After a half hour without any results, I called the Sears help line. The lady on the line said they would be happy to help me - they could have somebody out to my home in a week. SERIOUSLY? Cold showers and baths for my kids for a WEEK? The answer didn’t change by talking to her manager and her manager’s manager, so I broke down and hired someone independent of Sears.

While talking to the independent plumber who fixed the problem, I found out that they get a ton of business from people who are unhappy with Sears customer service. He said the best thing to do is to have a good water heater installed by a plumber who offers 24-hour emergency service. Looks like he will be getting my business from now on.

Share This