In response to: What do you think? Should you discuss finances with your children?
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We both waffle back and forth on these two perspectives and right now we’ve settled somewhere in between. Our children know we have debt, but don’t know the amount. They know I make pretty decent money, but don’t know how much. Our older boys pretty much know the details of our monthly expenses, such as the cable bill, phone bill, utility bills, etc. We’ve shared this with them to help them appreciate things a little more.
I definitely think talking about finances with children is important. I don’t have kids, but I was one 
I don’t think you need to get into exactly what the figures are to have valuable conversations. Far too many people become adults with far too poor an understanding of personal finance. Given how important managing money is today I think it is like hunter-gathers not teaching a kid how to hunt.
Books: Money Sense for Kids – Growing Money: A Complete Investing Guide for Kids – The Motley Fool Investment Guide for Teens – Raising Financially Fit Kids – A Smart Girl’s Guide to Money: How to Make It, Save It, And Spend It
A few blog posts on teaching children about money: Personal Finance for Children and Pre-Teens – 5 Tips for Savvy Parents – Teach your teen the basics of money management
Related: Questions You Should Ask About Your Investments – Why Americans Are Going Broke – How Not to Convert Home Equity
From the official US Federal Trade Commission site:
Viewing your credit report is an important step to financial security. You should review your credit reports annually (at least) to correct and any errors. Also doing so can be a tool to help you spot identity theft. The credit report site also has a large frequently asked question section with answers to questions like: What is a credit score? How do I request a “fraud alert” be placed on my file? Should I order all my credit reports at one time or space them out over 12 months? (I would suggest spreading the requests out during the year myself).
Reposting, original is from last January.
So lets say you have a 401(k) and are adding to it regularly, you own your house, you have no credit card debts, you are paying off your car loan and overall your financial house is in fairly good order. Still you keep hearing the news about credit crisis, mortgage meltdown, dollar depreciation… It is enough to make you nervous but what should you do?
Frankly very little in the macro economy has much impact on what is a smart long term strategy. Should you move your retirement money into a money market fund, because of the risks of stocks now? No. If you are good enough to time the market you are already amazingly rich (or will be soon). But either no one is able to do this or next to no one is. Occasionally you might get lucky and time things right but being able to consistently do so over 40 years is just not something that happens.
So what you should do now is what you should always do. Have cash savings. Pay off your mortgage (don’t over-leverage yourself – don’t take out equity just because you have some). Save for retirement. Have health insurance. Don’t take on credit card debt (or most other debt). Keep up your employment skills (learn new skills…). Diversify your investments (stocks, international stocks, real estate, cash…).
People often get careless when the overall economy is good. And so maybe you failed to do what you should have been doing then. But the right thing to do today is essentially the right thing to do always. For example, Americans are drowning in debt. They were also drowning in debt 3 years ago. That problem is the same. If you have too much debt you should fix that. Not because of all the fear today, but because to much debt is always bad. You should not take out too much debt in the first place and if you have to much you should fix it whether the economy is strong or weak.
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The next shoe to drop in housing
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Fannie and Freddie are demanding higher credit scores and charging higher rates for those who don’t have them. Until recently, a borrower with a 620 score might pay the same as one with a 680 score, said Victoria Bingham, chief executive with Pacific Rim Mortgage in Tigard, Ore.
But now that person might have to pay a half percentage point more. With today’s rates, that translates into 6.75% for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client base.
Borrowers must also put more money down, especially if they don’t have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.
Related: Federal Funds Rate and 30 Year Fixed Mortgage Rate – Mortgage Payments by Credit Score (Aug 2007) – learn about mortgage terms – Beginning of the End of Housing Bubble? – How Not to Convert Equity
Some people think all financial info is boring. I actually find a good deal of it interesting but this tip is pretty boring. Building a cash safety net is an important part of your personal finances. We have explained previously the very simple idea that you don’t buy what you can’t pay for. If you can’t pay for it this month, don’t buy it.
But that leaves out one thing. Even if you do have the cash you should be building up a cash reserve before buying luxuries. The typical advice is to build up 6 months of expenses in cash (rent or mortgage, food bills, utilities, health care, etc.). Now actually building up to that level can take awhile and forgoing all non-mandatory expenses until you have that saved is not usually reasonable. But as part of your personal finances building up an cash reserve is important (even if it is boring).
A significant portion of downward spirals in personal finances are started when people have emergency expenses and have to borrow that money (since they don’t have cash reserves). If you are over say 26 and don’t have a cash reserve yet saving for it should be part of your monthly budget. How quickly you build that up is a personal decision but I would say a 1% of the target amount (so if you are aiming for a cash reserve of $20,000 then $200/month).
If your finances don’t allow that, then do what you can. But realize that is one of the weaknesses in your personal finances and try to fix that as soon as possible.
Very important personal financial allocations for you to put first include: current needs (food, car payment, rent/mortgage, utilities…), insurance, creating a cash reserve, retirement savings, saving for future purchases. Then there are luxuries and treats, such as: eating out, vacations, cable TV… Many people put current needs, luxuries and treats fist and then say they don’t have the ability to do what is responsible. That is not often true for those that actually have an internet connection to read this blog.
Related: Buy less stuff – Saving for Retirement – How to Use Your Credit Card Responsibly – Trying to Keep up with the Jones
For those that don’t find picking stocks fun it is nice to know that just investing in indexes is likely the best option for almost everyone. I have much of my retirement assets invested in index funds. I still think I can beat the market (though the results of the last few months have not been kind) but the amount I invest in individual stocks is not a huge percentage of my portfolio. I still like Google, for example, and in fact might well be buying more this week (it is down over 10% since I added to my position a couple weeks ago). Can You Beat the Market? It’s a $100 Billion Question
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From 1986 to 2006, according to his calculations, the proportion of the aggregate market cap that is invested in index funds more than doubled, to 17.9 percent. As a result, the negative-sum game played by active investors has grown ever more negative.
The bottom line is this: The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you.
Interesting. I am surprised by the rapid increase in the total expense of trying to beat the market. I guess all those wall street bonuses add up. In my opinion the article does not provide adequate support the claims made, but I think overall the claim are sensible (based on numerous studies of results). The odds of beating the market yourself are very low. And the odds of paying the right people to beat the market for you are likely not worth the cost (in the market today).
Related: Advice from Warren Buffett – Stop Picking Stocks? – 12 Stocks for 10 Years Update – Feb 2008
1,000 True Fans by Kevin Kelly
But the long tail is a decidedly mixed blessing for creators. Individual artists, producers, inventors and makers are overlooked in the equation. The long tail does not raise the sales of creators much, but it does add massive competition and endless downward pressure on prices.
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Assume conservatively that your True Fans will each spend one day’s wages per year in support of what you do. That “one-day-wage” is an average, because of course your truest fans will spend a lot more than that. Let’s peg that per diem each True Fan spends at $100 per year. If you have 1,000 fans that sums up to $100,000 per year, which minus some modest expenses, is a living for most folks.
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I am suggesting there is a home for creatives in between poverty and stardom. Somewhere lower than stratospheric bestsellerdom, but higher than the obscurity of the long tail.
Another interesting idea from Kevin Kelly. I like real life examples of applying economic and financial thinking, which I think his post does well. We have more options that just working for some organization. I have a bit of work to do to gain myself 1,000 fans and quite a bit more to get to 1,000 true fans. But I am making some progress in that direction.
Related: Who Influences Your Thinking – Street Use with Kevin Kelly – Signs You Have a Great Job… or Not – Curious Cat Investing Search
Kiva is a great organization I have mentioned before (e.g. microfinancing for entrepreneurs). They let people to loan money directly to entrepreneurs around the world through their web site. Loan can be as small as $25. As the business produces income from the capital loaned the loan is paid back. Kiva is setup as a charity, so those making the loans do not make a profit. In actuality the capital is provided through a Kiva partner (intermediary) that often does change interest to the entrepreneur (many are non-profits themselves that use the interest to fund operating expenses – and I think some are for profit, though I may be wrong on that).
I loaned an additional $300 to 6 entrepreneurs today and donated $50 to Kiva. The entrepreneurs I helped fund are located in: Togo, Dominican Republic, Senegal, Nicaragua, Bolivia and Uganda. One of the things Kiva does very well is take advantage of the internet to connect to these people. You can see short profiles and photos of them on my Kiva profile.
I hope some of you readers will join and provide loans. If so I would love to add a link to your profile from the Curious Cat Kiva supporters page.
Related: Using Capitalism to Make the World Better – Kiva: Internet based Microfinancing – Make the World Better
Great advice from Warren Buffett. He spoke to students at UTexas at Austin business school and one of the students, Dang Le, posted notes of the discussion online. The internet is great.
On diversification:
Great advice. Warren Buffett uses great concentration (little diversification) but you are not Warren Buffett.
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Getting turned down by HBS [Harvard Business School] was one of the best things that could have happened to me, bad luck can turn out to be good.
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We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.
It is hard to beat reading Warren Buffet’s ideas on investing and economics.
Related: Buffett on Taxes – The Berkshire Hathaway Meeting 2007 – Buffett’s 2006 Letter to Shareholders – Warren Buffett’s 2004 Annual Report – books on investing
The story is a bit boring. People spend money they don’t have. But it is hard to ignore the story when it is so important. And so many people are foolishly ruining their financial future. When credit cards put you in jeopardy
Please stop. Don’t spend money you don’t have. Don’t think those political “leaders” that practice the same spending money they don’t have financial management are worthy of respect and don’t follow the bad example they continue to set.
The article gives some tips. I would suggest the tips for using your credit cards I have blogged about earlier. But the main thing is really simple: don’t use your credit card for loans – pay off your full balance every month. Save money for things you want. When you have the money saved, then buy them. This is not rocket science it is pretty darn easy. Don’t spend what you don’t have.
Related: Too Much Stuff – Financial Illiteracy Credit Trap – Poor Customer Service from Discover Card – Trying to Keep up with the Jones – Raising Taxes on Future Generations