What Are You Teaching Your Kids About Money?

How did you learn about money? Did your parents teach you how to write a check, balance a budget, and open banking and investment accounts? Or did you learn through another trusted adult, like a teacher or college professor? Or did you overdraw in your checking account, go into credit card debt, and had to spend your 20s or 30s digging yourself out? Well, you're not alone. The state of financial literacy in America is scary. According to numerous studies conducted by a variety of organizations, America needs to improve its financial literacy. Participants in a Financial Industry Regulatory Authority's Investor Education Foundation survey were asked these questions:

1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have? More than $102, exactly $102, less than $102, or don't know?
2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest over the life of the loan will be less.
5. True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.

Only 39 percent of participants answered four or more questions correctly. Yikes! How do we fix this? One step forward would be to have parents take a more active role in teaching kids about money and financial responsibility.

Monkey See, Monkey Do

Kids watch what their parents do and learn from what they observe. (Many children believe that money originates from the ATM since they observe parents using ATMs to withdraw cash.) Use cash whenever possible around them so they can see money being exchanged for a good or service (and they can also see when it's spent, it's gone). Hold on to receipts and explain that you need to keep a record of your purchases so you can track your spending. Share, Save, Spend has great tools for parents and kids. With older kids, encourage them to ask questions about budgeting and investing -- and give them a glimpse of how you successfully manage your own money. Show your teenagers your paycheck stub and teach them about how taxes work, what a 401(k) contribution is, and the difference between gross pay and net pay. Many people go to college without realizing how these basic money concepts work. The Jump$tart Coalition is committed to "educate and prepare our nation's youth for life-long financial success." How can you help educate the next generation?

Unlearning Credit Card Habits from Mom and Dad

Psychotherapists agree that our parents have a profound impact on the people we become. By and large, your parents probably set a wonderful example for you to follow.

But what if your parents had some less-than-ideal financial behaviors? Specifically, how should you go about unlearning your parents’ bad credit card habits? The key is to recognize where mom and dad went wrong and make a plan to do better on your own. Ready to get started? Take a look at the details below.

If your parents only paid minimums

Why it’s a problem: Your credit card company only requires you to pay a small sum every month to keep your account in good standing. But minimum payments usually only represent 1-3% of your total balance. If your parents only paid minimums each month, they were digging themselves deeper into debt.

This is problematic for two reasons. For one thing, credit card debt carries a high-interest rate. In May 2014, the average credit card interest rate hovered around 15%. If you’re not paying off your balance in full every month, you’ll end up paying way more for your purchases in the long run.

Also, carrying credit card debt is bad for your credit score. Thirty percent of your score comes from your credit utilization ratio; if your parents consistently used more than 30% of their available credit because they only made minimums, it’s likely their scores weren’t in tip-top shape. This probably made it difficult and expensive to obtain other loans.

How to do better: Make it a priority to pay your credit card bill in full each month. If this is tough for you, these tips should help:

• Make a budget – This will help you plan for your credit card spending
• Track your spending – After making a budget, you should keep tabs on how you’re doing. Use your bank’s online tools to help with this.
• Set alerts – Most credit card issuers allow you to set text or email alerts when your spending has hit a certain threshold. This will help keep you accountable.

If your parents paid their credit card bills late

Why it’s a problem: Paying credit card bills late is one of the worst things you can do for your credit score. Thirty-five percent of your score comes from your history with paying your bills on time. If your parents made a habit of paying their credit card bills late, their credit likely suffered.

Plus, paying your credit card bill late by even a day can result in a fee. Most issuers charge $25 for the first offense and $35 for subsequent late payments. This might not seem like much, but it can really add up over time.

How to do better: If you’re properly budgeting and tracking your spending (see above) you should be ready to pay your bill as soon as it comes in, so don’t delay.

Once again, setting up alerts with your credit card issuer is helpful. Arrange to get a text message or email when your bill is issued, and another in advance of your due date. If you prefer the old-fashioned route, mark your calendar. Find a method that works for you and stick to it!

If your parents were constantly shuffling credit card debt around

Why it’s a problem: Doing a balance transfer to pay off high-interest credit card debt is a good idea if you do it carefully. But if your parents were constantly charging up their plastic then shifting the balance onto 0% cards, they weren’t showing ideal credit card behavior.

First, balance transfers come at a cost. Most issuers charge a fee of 3% of the total amount you’re transferring in order to move the debt. Depending on the size of your balance, this could amount to big bucks.

But more importantly, constantly shuffling debts around is a sign that your parents weren’t managing their money well. Everyone overcharges sometimes, but if you’re spending and budgeting carefully, this should be rare.

How to do better: If you make a mistake and end up in credit card debt, finding a good balance transfer deal can help you minimize interest charges.

But be sure to take a step back and figure out why you were forced to take this route. Maybe you need to build an emergency fund to help deal with unexpected expenses, or maybe your budget needs tweaking. Either way, take a balance transfer as a sign that you need to work on your financial habits – then be sure to do so.

The bottom line: Our parents worked hard to teach us good habits, but they may not have been perfect. If you need to unlearn some bad credit card behaviors, check back often with the Nerds – we’re here to help!

Retirement saving: Size isn’t the only consideration

I recently read one of those articles debating whether a million dollars was enough to retire on these days. Mostly, the focus of the article was on the fact that a million dollars aren’t as significant as it used to be due to the impact of inflation. That’s a good point, but it also got me thinking that the size of your nest egg is just one side of the retirement equation.

First, to quickly illustrate the inflation issue, consumer prices have roughly doubled over the past 26 years. That means that a million dollars are worth about what $500,000 was in 1988. To think of this on a forward-looking basis, suppose that inflation continues at a similar rate, which has been pretty moderate compared to longer-term history. If you are around 40 years old today and think you could live on a million in today’s dollars, then you had better count on saving two million because that will have the equivalent purchasing power by the time you reach retirement.

The deceptive thing about the size of a retirement nest egg is that the numbers always sound more lavish than they actually are. Between the erosive effects of inflation and the number of years over which savings have to last, it takes a bigger nest egg than most people intuitively expect to fund a comfortable retirement. But again, as challenging as that is, the size of the nest egg is only one side of the equation.

The other side is the question of how much that nest egg will have to buy, and there are several variables that go into this side of the retirement equation:

1. Your mortgage. Your home may be your biggest single asset, but it may be offset by liability in the form of a mortgage. While some people steadily pay down that liability so it will be gone by the time they retire, others continually renew the liability by borrowing against home equity. This makes a big difference in how big a nest egg you will need. If your mortgage is paid off, you will have much lower monthly costs and an asset you can sell at some point. If you still owe on your mortgage, it will probably continue to be your largest monthly expense.
2. Other debt It’s important to think of your nest egg on a net basis, where its value is offset by whatever you owe. So, if you have accumulated a significant amount of debt, your nest egg may be smaller than it appears. If it’s credit card debt, that’s even worse than offsetting because you are probably paying more in credit-card interest than you are earning on your retirement savings.
3. Where you live. The cost of living varies widely from one part of the country to another, so if you plan to live somewhere expensive, think of this as a form of “instant inflation” that will immediately reduce the purchasing power of your nest egg.
4. Lifestyle. What kind of retirement do you envision? Is it a quiet one of reading good books and working in the garden? In that case, a million dollars could still go a long way. On the other hand, if you plan to travel extensively and live it up, you could burn through that million long before you die. Retirement planning should include some rudimentary budgeting based on the lifestyle you plan to lead so you know how far your money has to stretch.
5. Social Security projections. Unless you are one of the ever-shrinking numbers of employees who still have a defined benefit pension, Social Security may be the only regular income stream you have in retirement. The size of that income stream goes a long way to determining how quickly you will spend down your nest egg. You can get a projection of what your benefits will be from the Social Security Administration, based on how long you worked and how much you earned. Getting these projections for yourself and your spouse will help you know how much of your remaining budget your nest egg will have to cover.
6. Work prospects. More and more people are augmenting their nest eggs by continuing to work in retirement, but whether or not this is a viable option depends on your health and the marketability of your job skills.

The point is, there is no universal answer to a question like “is a million dollars enough to retire on?” A million dollars may be plenty for some people, and not close to enough for others. It’s not all a question of how rich you want to be, but also of how well you’ve contained the liabilities that are going to offset that million dollars. So, if you want to make sure your retirement savings are sufficient, don’t just go by general benchmarks. You need to do some detailed planning to determine how big a nest egg will meet your specific needs.

Source: Retirement saving: Size isn’t the only consideration

6 Credit Card Mistakes Students Make

Top Credit Card Mistakes

College students live in a sometimes-confusing world between childhood and adulthood. On one hand, young adults attending college away from home often live in supervised dormitories as they begin to take on some of the responsibilities of adulthood. On the other hand, those 18-year-olds (and older) are granted nearly all of the same rights and responsibilities of adults.

So when it comes to credit card usage,  students often make mistakes that more experienced cardholders are more likely to avoid (or at least to know better than to make). Here are six of the worst mistakes that students make when they start using credit cards.

1. Carrying a Balance 

If parents could get their college-age children to follow just one piece of financial advice, it should be to pay their credit card statement balances in full. Students may feel like they can cut their immediate expenses by paying the minimum payment, or perhaps a little more, but interest charges will accumulate very quickly on past and future charges. Unfortunately, many parents will be in a poor position to offer this advice, as about two-thirds of all credit card users carry a balance on at least one of their credit cards each month.

And don’t forget that credit card debt can have a major impact on your credit score too. If you want to see how your debt is affecting your credit scores, you can see two of them for free every month on Credit.com, and get some tips on how to build good credit.

2. Missing Payments (or Making Them Late) 

Between attending classes, studying, and all of their other activities, college students can be pulled in many different directions. Add to that their group living environment, frequent address changes, and an irregular academic calendar, and it is easy to see how students can accidentally fail to make a payment on time.

To avoid costly late fees and penalty interest statements, students can create electronic reminders of their payment due dates and log into their accounts online to view their statements. Fortunately, most card issuers now offer both email and text alerts.

3. Paying Your Tuition With a Credit Card 

It used to be that many colleges accepted tuition payments with a credit card, and savvy parents might earn rewards for paying that way. These days, many schools add a substantial processing charge when tuition and fees are paid with a credit card, typically more than the rewards are worth.

Worse, some students attempt to finance their education by charging their tuition and carrying a balance. This is a very risky strategy, as credit cards have much higher interest rates than most student loans. And unlike student loans, interest on a credit card is not tax-deductible.

4. Co-Signing for a Friend 

Before the Credit CARD Act of 2009, banks could offer credit cards to students who had no income, with the assumption that their parents would pay their bills. Now, applicants under 21 must show their own ability to pay their bills in order to be approved. In response, some students are asking their friends aged 21 and older to co-sign credit card applications.

When someone co-signs or makes a friend an authorized user, that person is putting his or her own credit at stake, as the primary account holder will be responsible for paying the bill. Those who make this mistake put not only their finances and their credit scores at risk, but their friendship as well.

5. Not Calling the Card Issuer

Students and other new credit card users can find these products confusing. When they get hit with fees and penalties after the inevitable mistake, the last thing they want to do is call someone at a big company to talk about it. Unfortunately, that would be a mistake as well. Because the credit card industry competes fiercely to attract and retain customers, card issuers can be very generous and understanding when cardholders need help. Students should be encouraged to call to ask for their interest rate to be lowered, their late fees to be forgiven, or just to learn more about their cards and their options.

6. Shirking Credit Cards Entirely

For as much trouble as students can get into when they misuse credit cards, it is almost as big of a mistake to avoid credit cards altogether. Credit cards are not just secure and convenient methods of payment, they are an invaluable way to build one’s credit score. Having a credit card account in good standing allows cardholders to begin to build a credit history. After graduation, having a strong credit history will help students when they need to rent an apartment, get a car or home loan, and purchase insurance.

Class of 2014: Here Are 4 Tips for Acing Real-World Finances

Finance

Congratulations! You have just become a college graduate. This is exciting -- and maybe scary -- time. You're probably looking to start a career, earn your first significant paycheck, take your serious relationship to the next level, find a new place to live, and accomplish a lot more fun stuff.

But you might also be staring down the barrel of a lot of heavy financial issues: paying down student loan debt, saving up for those big life changes, figuring out how to manage your own finances, and determining how soon you'll need to start thinking about retirement. (Spoiler alert: now.)

Don't worry. I'm going to give you four tips to financial success

that will make it all a lot simpler.

1. These Are Your Financial Priorities

You have a lot going on right now. The best thing to do is to take a deep breath, relax, and plan. Start by determining your financial priorities. Most people will want to focus on the following (in order of importance):

• Building up an emergency savings fund.
• Paying down your highest-interest-rate debt.
• Repaying your student loans.
• Balancing debt repayment with saving for retirement.

Wait, we're already talking about retirement? You bet.

2. Save What You Can for Retirement and Future Needs

If you're earning an income from a full-time job, it's time to start contributing to your retirement accounts and investing some of your savings. It's never too early to start making progress in this area because time is your biggest advantage as an investor.

The earlier you start, the more your nest egg will eventually be worth -- even if you don't feel like you're saving much. The secret is compound growth -- something so potent that when people claim Einstein called it one of the most powerful forces in the universe, folks believe it. 

Even if it's just $50 or $100 a month right now, contribute what you can to your retirement and major savings accounts that will help you cover future needs and expenses. And then don't touch it.

Make this easier on yourself by taking advantage of "free money" opportunities where you can. Your company benefits package is an excellent place to start.

3. Live Frugally to Aggressively Pay Down Debt

Learn this lesson as soon as possible: Material stuff doesn't make you any more of a person. Possessions are unlikely to make you genuinely happy and fulfilled. So stop wasting your money by trying to accumulate things, things, and even more things.

Instead, make sure your spending is in line with your priorities and your values. You worked hard for your money, so be mindful of what you purchase with it. Embrace living frugally -- which doesn't mean living cheap.
Being frugal means you're more resourceful and less wasteful. It means you're not pressured into buying things you don't need -- or maybe don't even want -- by your peers, family members, or a society that encourages mass consumerism.

Once you've realized you don't have to spend every cent you make on stuff that you don't really value, you should have money to allocate toward your debt. Get aggressive with your loan or credit card balance payments.

The sooner these big debts are gone, the sooner you'll be more financially stable and secure. The longer you hang on to debt, the longer you'll be unable to advance other financial goals, and the more money you'll be paying in interest.

4. Establish a Side Hustle

Feel like there's not enough money to go around each month to cover all your financial goals, expenses, and wants? You do have the power to solve this problem. It's called a side hustle. Any kind of part-time work you can do on the side will accelerate your progress as you repay debt, save for the future, and acquire the money you need to make big things happen in your newly independent, real-world adult life.

Investment Advice for New College Graduates

Photo Credit: jannoon028
Congratulations, you are a newly minted college graduate! Now that college is over and you are being pushed into the real world, it is time to think about your future. In order to do so, you need to think about investing. I know, investing can be confusing and therefore overwhelming at times. There is a lot of information out there and much of it contradicts itself. Below is a guide to helping you manage the investing portion of your life.

Keep Living Like You’re In College

You’ve probably heard this before, but I need to mention it before we get started. I know that the first paycheck you get will feel great. It did to me too. You’ll start thinking about all of the things you can buy with it. I did too. But you are better off living like a college student for as long as you can and saving all of the money you can.

You don’t need a new car. If your car is in good shape, keep driving it. A car is not a status symbol, it is transportation. I drove the car I had in college for about five years after I graduated. All of my friends were making $400 monthly payments on a car. I was saving $400 every month. Fast forward to 15 years after college and many of my friends are struggling with their finances, complaining about not having enough. Me on the other hand, I have enough money saved that if I were to lose my job, I could survive for a few years without worry.

This isn’t to toot my own horn. It’s to show you that the habits you start with after college will continue for your life. If you start spending everything you earn, odds are you always will and won’t get ahead. You will always be struggling with money. You don’t want that and I don’t want that for you either.

Contribute To Your 401(k)

Now that you are living below your means, you will have excess money to save. The first thing you should do is start investing in your 401(k) plan at work. Start with 10% of your salary. If you do this from the beginning, you will learn to live on a smaller paycheck from the start. Trust me, you won’t even miss the money. If you are fortunate enough to be earning a high salary, feel free to invest more than 10%.

From there, make it a point to increase your contribution each year by at least 1%. You won’t notice the lower paycheck and you will be able to take advantage of your money compounding upon itself.

As for investments, we’ll get to that a little further down.

Start an Emergency Fund

Your next step is to create an emergency fund. Your emergency fund should cover your monthly expenses for 8-10 months. Many will tell you to have 3-6 months saved in an emergency fund, but I am a little more conservative and like to have more money saved up in cash.

Create a Taxable Account (or Roth IRA if eligible)

Once you are saving for retirement through your employer’s 401(k) plan and you have an emergency fund, you can start investing in a taxable account. Don’t get too scared about the terminology. A taxable account is simply a non-retirement account. I suggest you start one because, with a 401(k) and a Traditional IRA, you can’t access that money until you are 59 ½ years old or pay a penalty. With a taxable account, you can access that money any time, without penalty.

One caveat to this is a Roth IRA. You can invest in a Roth IRA and withdraw any of your contributions at any time, without penalty. If you withdraw any earnings on your money before you are 59 ½, you will have to pay a penalty. And yes, you can have a 401k and an IRA at the same time.

Regardless if you are investing this money in a Roth IRA or a taxable account, you will want to start saving money here too.

Where to Invest

The key to being a successful investor is:

• Have a Plan
• Stick to the Plan
• Find Low-Cost Investments

Have A Plan

To start, you need to have a plan. This doesn’t have to be super detailed, you just have to know what you want your money for. The more details you can provide the better. For example, maybe you want $1,000,000 by age 65 so you can retire to Florida. That is a perfect start to your plan and provides some detail.

Next, you have to figure out how you are going to get there. You need to know how comfortable you are with investing in the market and determine your asset allocation. One rule of thumb is to take 120 minus your age. This is the percent you should have in bonds. So, if you are 25, you should have most of your money in stocks.

But, you might not be comfortable with this amount of risk. If you want less risk, then you need to increase the number of bonds you own. Understand that you will need to own stock if you ever plan to retire. Unfortunately, you won’t be able to earn a high enough return from just bonds alone to meet your retirement goals.

Stick to the Plan

Let’s say you are going with 90% of your money in stocks and 10% in bonds. The key now is to stick to this allocation, regardless of what the market is doing. You are investing for the long-term. What happens next Tuesday is irrelevant to your situation since you are going to be invested for another 40 years.

Understand that the stock market has cycles. It will go up and it will go down. That is the way it works. You are going to hear a lot of “noise” from the news and magazines. Remember that the goal is to get you emotionally involved. Once you act emotionally, you are bound to lose money in the stock market.

Wall Street earns money when you trade. The more you trade, the more the machine makes. But ignoring the noise allows you to keep emotions in check and this will allow you to be a better investor. The sooner you understand this, the better off you will be.

Find Low-Cost Investments

While you won’t see a bill come in the mail for fees that you pay into the mutual funds you own, you do pay fees. They are just hidden in the return of the fund. You want to invest in funds that have the lowest expense ratio possible. You should never be paying more than 1% in expenses.

A 1% expense ratio is equivalent to a $10 fee for every $1,000 you have invested. This may not sound like much now, but when you have hundreds of thousands of dollars invested in the stock market, the fee quickly adds up. It’s your money, don’t give it up so easily.

Final Thoughts

As I mentioned earlier, the concept of investing sounds intimidating with so much information out there. But it really isn’t that complicated at all. You just have to be smart about a few things. If you can make it a point to keep your expenses low so that you have more money to invest, you are going to be in good financial shape. When you begin to invest, pick low-cost investments, and stay invested. Remember that the market will drop and will be volatile over the short-term, but the long-term trend is up. If you can ignore this noise, you will be a successful investor.

Source: Investment Advice for New College Graduates

5 Money Lessons I Learned From Watching Wheel of Fortune

"Wheel of Fortune" is one of America's longest-running game shows, giving away more than $200 million in cash and prizes since its premiere in 1975. But behind all that wheel spinning, hand-wringing, and gown-gazing, the show has something more to offer astute viewers. If the game is financial security and the wheel is just a series of chances to make or lose money, then watching Wheel of Fortune can teach us a few fundamental financial lessons.

1. Pay Attention

In every game, there seems to be at least one "Wheel of Fortune" player who isn't quite paying attention. I can't blame them. Under those lights, in front of that crowd, and in that hothouse of pressure, I'd be lucky just to stay vertical. Players repeat letters that have already been called, solve puzzles partially, and give other players an advantage, or mispronounce words so badly that their answer can't be accepted. These are cringe-worthy moments that make me wonder about the level of self-flagellation that happens once the cameras are off.

Not paying attention to our personal finances is just as risky. Being on financial autopilot costs money

. We don't adjust our savings rate as our income increases; we put off revising our withholding tax and continue to think that a big refund check at the end of the year is actually a good thing. Or we don't get around to canceling that unused gym membership and end up tithing $65.00 a month to a very unworthy cause.

When it comes to solving our own financial puzzles, not paying attention is a luxury most of us can't afford.

2. Think Creatively

If there's one skill that serves contestants well on "Wheel of Fortune," it's creative thinking. Solving those puzzles effectively means not letting your mind get too attached to a single potential outcome. For example, the partial clue, "h_ _ _es" could turn out to be horses, houses, or hoaxes. Finding the right solution means cycling through options quickly and creatively and trying to see how different possibilities might fit together.

The same is true of winning the financial game. Successful savers need to constantly source new avenues of income, savings, and investing. Getting locked into one path to the exclusion of all others limits potential and return. (See also: How Cash Flow Allocation Helps You Retire)

3. Seize the Moment

Smart players also seize rare moments, and it's exciting to see solid strategy pay off. For readers unfamiliar with the game, contestants are presented with one Prize Puzzle each show. In addition to the regular cash payout, the winner of the Prize Puzzle gets a deluxe vacation package. I can't tell you how many times I've seen players keep spinning that wheel even when it's obvious they've worked out the correct answer. All too often, these relentless players land on a "bankrupt" wedge and their competition swoops in to collect the trip to Nassau or Hawaii.

In our financial lives, the same thing can happen. We keep spinning that figurative wheel well past our moment to lock in a better mortgage rate, transfer our credit card balances to zero-interest introductory rate, or shake hands and finalize a smokin' bargain on a used car. I'm not advocating thoughtless action, but there are moments when calculated-but-quick action wins the day.

4. Don't Get Greedy

Sure, every game show is a gamble — that's the whole idea. But it's curious to watch players keep spinning the wheel when there are only one or two (quite obvious) letters remaining before the entire answer is spelt out before them. The motivation is obvious: collect more money. The risk is just is clear: get stung by that looming bankrupt wedge. Call me overly cautious, but with a comfortable lead and an answer in my head, that spinning wheel would come to a screeching halt. Vanna might even have time for a quick coffee break.

Same with my financial life, taking an unnecessary risk just to feed the idea of "more" seems counterproductive. I know it sometimes takes big risks to establish a big lead, but the potential pitfalls can be profound.

5. Stay in the Game

Even when it appears to make no financial sense at all, savvy "Wheel" contestants buy vowels. Buying vowels keep them in the game, keeps their mind churning for a solution, and keeps their competitors at bay (at least momentarily).

The financial rule behind this approach is simple: Sometimes you have to spend money to make money. Stretching tight budgets, sacrificing certain wants and needs, and forgoing a few of today's comforts can all help fund investments in our tomorrows — and that's an essential piece of any sound money management plan. Saving and investing keeps us in the game even when it's hard to see the big picture.

Bonus Round

At the risk of stretching this analogy too far, let's wrap things up by talking about the bonus round. On "Wheel of Fortune," the bonus round is the winning player's last chance to walk away with an even bigger payout. The player is given 10 seconds to solve a single puzzle; the minimum cash prize is $30,000, but it can go as high as $1 million for lucky players who've managed to score the requisite million-dollar wedge. (See also: Do You Know Where Your Net Worth Is?)

I call this part of the show the "financial independence" segment, closely mirroring retirement. Players who've managed to make it this far have done several things right and now simply have to up their game slightly to sail through to the end. Of course, a little luck doesn't hurt either. I guess life really does mirror art…or game shows (or both).

Are you a Wheel Watcher? If you could characterize your savings strategy by a game show, what show would it be?

Source:  5 Money Lessons I Learned From Watching Wheel of Fortune