Now and Then. How financial literacy has changed for our kids.

My wife was at a conference recently where one of the topics was how financial literacy needed for our kids has changed compared to what their parents and grandparents needed. An interesting topic. Here are some areas where I see this.

1) Payment methods. It wasn't too long ago "cash was king". Most people paid for things with cash or personal cheques and had a paper book to updated at their local bank branch. Now people rarely physically go into a bank branch but use ATMs or instore cash-back to get cash, use ATMs, online methods and sometimes cheques to pay bills and debit cards, credit cards, smart devices or cash to make instore purchases. What does this mean for our kids? First, they have a lot more options so need to know a lot more to make the right choices. Second, some things critical to financial literacy such as budgeting and cash management are a lot harder. When you just had cash and your bank book it was easier to find out how you were doing compared to your budget compared to now where you can easily spend money via your debit card, for example, and not know your account balance.

2) Investments. I remember my parents range of investments, when I was growing up, amounted to banks accounts, GICs, and Savings Bonds. Sure there were people investing in stocks, bonds and other investments but not generally the "masses". Then came new investment types (e.g. Mutual funds) and channels to access them ( e.g. Online access to self controlled accounts). This led to a huge shift in people investing in asset types they never did before and an increase in "do-it-yourselvers". For our kids, they need to know enough to understand their investment choices so they can invest on their own or at minimum have some basic background to understand what is being offered to them by investment professionals.

3) Outsourcing. Many people now will "outsource" some of their routine non-paying work to others compared to previous generations. People eat out more frequently (i.e. don't cook for themselves), hire others to clean their house, or cut their grass. For our kids, this has created an expectation, and with this, the need for the extra income to fund this and more thought on how to budget for these "nice to haves".

3) Supersize. The rise of consumerism has created the demand for the "supersize" whether for restaurant meal portions, cars, houses, TVs or other items. We have created a strong desire for these "nice to haves" and the feeling for our kids that it is okay to go into debt to get them.

This list could go on and on. So what does it all mean? For me, it has further reinforced the need for our kids to gain financial literacy knowledge prior to needing it rather than learning only through their own experiences or by accident.

James Whelan, www.moneymatters4life.ca

Where does the money come from or how businesses make money?

An interesting conversation you can have with kids or anyone for that matter is when you're talking about a company or business....where does their money comes from and how do they make money/profit?

A lot of times kids don't really understand this but talking about it with them is a great way to enhance their financial literacy and really just part of learning how the world works.  Kids using technology especially become isolated from a lot of this because a lot of things seem "free" to them.

I started thinking about this after having a conversation with my son about "monetizing" his youtube videos.  He has been quite active for a long time creating and posting youtube videos so this prompted us to talk about if he makes some money doing this, how does youtube make money.   Basically, he figured out that advertisers pay youtube fees to post their ads on videos and they share a slice of the money with him. Before I asked the question he hadn't really thought about it.

Here are some examples of companies/businesses you can talk about - Grocery stores, Car manufacturers, Car dealers, Cell Phone companies, Banks.  All of them have different business models and it is interesting how they make money.    For example, many car manufacturers don't make most of their money from making cars but from financing people buying cars.

Examples are all around us.  See if you can come up with any to discuss with your kids or students.

James Whelan, www.moneymatters4life.ca

Credit Cards - Understanding your rates

I had a comment after my last posting "Credit Cards - Are they for everyone" from Marc at GreedyRates.ca that not all credit cards have high interest rates.  He has a point.  Some cards have fairly low rates.  The "high interest rate" disadvantage in my posting was more about credit cards having high interest rates especially compared to other forms of debt because credit cards are really just a type of loan.

For those of you who are thinking of getting your first credit card, just received a credit card or are experienced credit card users, I have a question for you -- Do you understand your rates?

I took a couple of credit cards at random to look at the rates.

Card #1 - Offered a 0% rate for the first 12 months but then after that increased to 17.99%.  If you didn't make your minimum payment twice during any 12 month period, they'll add on another 5% to give you 22.99%!! until you maintain at least your minimum payment for 12 months.  Card #2 - Offered a 9.99% rate.  If you didn't make your minimum payment twice during any 12 month period, they'll add on another 5% to give you 14.99%!!

So depending on the card, much different rates and some additional penalties is you don't pay on time.

There is another concept people sometimes are not clear on - Interest and relation to Grace period.   Most credit card companies will give you about 21 days grace to pay the bill so if you statement date is November 5, the Payment Due date may be the 25th of every month or November 26 for the November statement.  Here's the part where there may be some confusion, if you make your payment in full by the due date, then all interest charges for new purchases are waived.  If you only pay the minimum, you are charged interest from the date of the purchase and not the statement payment date.

These are only a few details to understand.  For a lot more detail, try the Credit card section on the Financial Consumer Agency of Canada website - www.fcac.gc.ca

If you want to compare cards, www.creditcards.ca or www.creditcards.com are good.  I took a look at GreedyRates.ca also.  Worth a look.  Entered criteria is applied to reward formulas and interest rates and gives an evaluation of cards including their view of pros and cons.

James Whelan, www.moneymatters4life.ca

Credit cards - Are they for everyone?

A friend of mine confessed to me recently that he used to have a credit card but had to get rid of it.   He saw it as "free money" and had every intention to pay it off at the end of each month but ended up only paying part of his balance and very quickly ended up owing a large amount.  He made the decision to get rid of his card, worked at getting rid of his debt (this took a long time) and now only buys things if he has the money to pay for it.

So credit cards may not be for everyone.  Here are some thoughts on the advantages and disadvantages of having them.

• Advantages: Convenience, Access to Funds, Safe and Reliable / Fraud Protection, Insurance for Purchase, Rewards

• Disadvantages: Convenience, High Interest Rates, Potential Fraud, Higher Prices for all Consumers, Decreased Self-Regulation, Hidden fees

The disadvantage that caught my friend was "decreased self-regulation" or when you don't regulate your spending as much as you should, do more impulse buying, less comparison shopping etc.

Here are a couple of links you may find useful for teaching students, children (and adults) about credit cards:

• Get it on Credit This video is very entertaining while at the same time you learn about credit cards, payment terms, compound interest and credit scores.
• Funny Money - Cost of Borrowing  - This is a great lesson created by the Investor Education Fund, a Canadian non-profit organization, for learning about reading a credit card statement and the cost of using credit cards.  See the video they also created in the link above. 

James Whelan, www.moneymatters4life.ca

All you can do is ask... Financial Institutions and Consumer Power

Financial literacy often talks about how financial products work and maybe consumer rights but there is one thing often not talked about....Their power as consumers.  Many young people (and adults) feel intimidated by financial institutions and don't think about this.

Let me give you two examples:

• I accidentally went over my credit card limit and was charged a fee.  I thought if I went over, my card would be declined but found out with this specific card the issuer thinks all purchases are considered important by customers so let them go through but with a fee.  One phone call to the customer service explaining the situation and how I've been a good customer convinced them to waive the fee.
• The daughter of a friend of ours was using her bank card and made quite a few transactions after she had a zero balance.  The result was some overdraft charges.  She didn't know for her account, if you have a transaction with a zero balance, there is a charge for every transaction.  A visit to the  branch manager with her parents and a discussion was all it took to get the fees removed (and she learned what overdraft meant).

The lesson here is "all you can do is ask" and the worst that can happen is a financial institution can say no to your request for waived fees or a better deal.  It only costs you a phone call, visit or email so well worth the time.  

James Whelan, www.moneymatters4life.ca

Credit & Debit Cards, Money Mgmt - iPad/iPod Celebrity Calamity App Review

Here is a free app called Celebrity Calamity that's useful for teaching students about credit cards, debit cards and money/cash management.  It's really well done and has the added bonus that it's presented in a game format so it provides entertainment and learning at the same time.  Follow the link below to check out the video review to give a quick guided tour without having to download it.

View video app review

Download app from itunes



James Whelan, www.moneymatters4life.ca

Budgeting - Are you top-down or bottom-up?

I was re-reading an article from MoneySense, one of my favourites (link below) and they were talking about budgeting and the two main approaches - Top-down and Bottom-up.  Top-down is where you  set a budget and follow it.  This is the one most talked about where you collect all your receipts to figure out where you are spending your money, set a budget amount for all the spending categories and then track every expenditure.  If you're a very detail-oriented person, this works for you.

The one that's not talked about so much is the Bottom-up approach.  With this approach, you decide in advance how much you want to save in advance and put it aside before spending on other things.  The article gives a saving target as an example but you could extend this idea for other things.  Let me give you an example.  When I was in university, I had 4 different room mates over my time in school and we shared the grocery expenses but didn't really know who would be doing groceries so came up with a simple solution.  At the beginning of each week, each of us put a agreed amount of cash in a cookie tin and whoever was going to the grocery store used the cash and put the receipt and change back in the can.

After university, when my wife and I had more financial responsibilities (e.g. house, car, insurance), we used this same idea.  The cookie tin became a separate bank account and the cash in the tin became transfers from our accounts right after our pay cheques were deposited for all these regular expenses.  What was left in our banks accounts after the transfers could be spent on other, more discretionary things.

Try talking with your kids or students about how you budget and what works well/not well for you.  It might require a bit of experimentation but bottom line is everyone has to decide what works for them.

James Whelan, www.moneymatters4life.ca

Link: How to Save More, Summer 2012, www.moneysense.ca