As I wonder what to write about this week, I am reminded by my sweet 17-year-old that I am too old to know anything. This comes about as she is learning to drive my car, now I guess after 40 years of driving my 17-year-old who yearns to be free is in that stage of Dads don’t know anything. This may be correct in today’s world of teenagers but I know one thing I own the car and control the keys.
The interesting fact about raising two girls is eventually I do know something and become the smartest person in the room as long as no one else is around. My 20-year-old went through a similar stage and now that she has bills to pay, she understands that the money tree in the house is not always fruitful. There was a steep learning curve but we managed to get through this together. I had to sit her down and draw diagrams as this generation works well with pictures since they are on their phone all the time.
Let me set this up so you understand how I got to be the smartest in the room again.
I gave my daughter her very own credit card. Yes, I did – Bad Idea not really in a society where cash is a thing of the past and everything you do requires a good credit rating. Teaching your child about good credit management before, they go to University and move out into the real world is a key lesson in Financial Wealth Sense.
The beginning of the lesson was harsh and a steep learning curve for all involved, as I paid the credit card bill monthly. The credit card was meant to be for gas and emergencies. She understood the gas part well but the emergencies quickly became Starbucks, Booster Juice, Boston Pizza and all other things that she had to have. In the beginning I did not mind her using the card at will as I knew what she was spending it on as the app on my phone notified me each time a transaction was made. Like I said I paid the bill monthly so she would continue down the path of having good credit and to be totally honest she did not have a job because of school and sports commitments. In the beginning it was fine but then the very fine line became easier to cross, she was starting to spend money at will. The learning curve was a $1,500 visa bill from various spends during a one-month shopping spree. Again, I knew it was happening and I let her do it to teach the lesson. Wait for it!
Once the month was over and the final bill was in, I filled up the car with gas gave her a gas card for $150 and put $250 in her bank account for extras. Because it was meant as a lesson not a punishment, I said this needs to last you six weeks, you now must choose how you want to spend your money and to clarify I did take the credit card away for the same six weeks. Of course, she did not understand why and in fairness I never explained how this would play out. I already knew exactly what would happen given the parameters I set out for her when I gave her the credit card. She had no idea that she had spent that much in a month as her exact words where, “It was easy all I had to do was tap tap!” I also explained that it was nice that you wanted to pay for all your friends’ coffees, and dinners but that would have to wait until you had your own money to be that generous.
This is where the diagrams come in to play because remember this was about teaching a lesson not a punishment. With pictures and a lap top, I showed her how credit ratings work and why she needs a good credit rating in the future so she can buy a car, a house, or even apply for credit. I then explained that she had no money coming in (other than birthday, holiday money from generous relatives, and odd jobs) but she was spending as if she was gainfully employed.
I then asked the $1,500 question.
How will you pay this bill?
Of course, there was a blank stare followed by the words, “I don’t know.” This is where many individuals end up making monthly payments on consumer spending for money that they did not have in the first place and it’s too easy to get caught up in the cycle.
I drew this diagram below to help explain the process of money and her future lifestyle: Three Kinds of Money
Lifestyle: In its simplistic form are the things that we can afford to do and have while we enjoy the merits of living for today and days to come.
Accumulation: Is the process of collecting assets, through purchase or by obtaining them, an activity of collecting for a particular purpose in the future.
Transferred: This is money that is being directed away from your Lifestyle and Accumulation of funds that will not help you lead life the way you want in the future. This is where Credit Cards, and Debt usually reside!
So now that you understand the three kinds of money above:
Which would you least want to change moving forward?
If you said Lifestyle, you would be correct. No one wants to change the way they live on a daily basis. So, we cannot take away from your LifeStyle.
Which would you want change the most?
If you said Accumulation, you would be correct. We want this to be the biggest piece of the circle moving forward because our accumulation will help us keep the Lifestyle to which we have become accustomed to in the future.
So, by default that leaves us with Transferred, we want this to be the smallest piece of the circle in our future because this is money that we are losing unknowingly or unwillingly through Credit Cards, Debt, Interest and Monthly Payments.
“Does all this make sense?” I asked.
She said Yes! She now understands the process of money and it’s transactions, and for the next six weeks she managed her funds, she was proud of the fact that she made the money last although the car was running on fumes she did have money left in her spending account.
She still has the credit card today but only uses it when it’s absolutely needed, she has managed to find a great summer job while in university and has made a fair amount of money. She has started an investment portfolio (Accumulation), she has also created a budget plan for herself and has managed to stay within her limits (Lifestyle). I have only had to provided some support for bigger ticket expenses that happen from time to time but I always attach a limit to those purchases to keep her in check (these would be the Transferred expenses). If I did not help there would be monthly payments and interest since they were not in the budget. To be fair she does try to contribute some money to these purchases. When she graduates and finds that dream job I will teach her the value of an Emergency Fund to compensate for things that happen outside of her budget.
My point here is simple we have to teach our children how to be financially stable, we must teach them how to live for today and be set for the future because if we don’t, they will find themselves in a cycle of never-ending debt with bad credit. It’s easy to do when you don’t understand the value of your needs versus wants or financial well-being.
I guess the moral of this story is that I may not always be the smartest one in the room at all times but the one time I need to be I will be.
@ Henley Financial and Wealth Management Inc. 