TedCo Software Financial Matters Blog

When in casual conversation people discover what I do for a living I am often asked, “Where should I put my money?” The answer to that question has too many variables to give an easy answer. Sometimes, when the conversation goes on for a bit, people seem very surprised (even shocked) that I have a portion of my client’s portfolios in stocks. I see responses from, “Isn’t that risky” to “there is so much that can go wrong.” They are right, stocks carry some very real risks, but as I see it they have a better risk/return profile than most other asset classes do today. Domestic (US) stocks are, “The best house in the neighborhood,” or, more accurately, “The best house in a bad neighborhood.”

Cash investments are showing such poor interest rates that, after taxes, you are barely ahead of stuffing cash in a mattress. Adjust those rates for inflation and you are better off buying spam (assuming you have a large cupboard and like spam). Those insured and guaranteed accounts are guaranteed to lose buying power.

Fixed Income investments are suffering a similar fate. Worse, they value of those investments fluctuate in an inverse relationship to interest rates. This means that if rates go up the value of bonds will go down. As rates are much more likely to go up from the current levels fixed income investments really need to be viewed as a way to generate income, and not a place for growth.

Real Estate seems very unlikely to make a big comeback in the immediate future. This is particularly true if interest rates begin to rise. That combined with the significant supply available in the housing market means that Real Estate has very little upside for a couple of years.

Commodities are a mixed bag, and precious metals seem to have gotten quite a bit ahead of their historic growth rates. Gold, with very little industrial use and a long term history of matching inflation, seems very speculative at these levels. Barring a significant disaster gold and silver just do not look like great bets. A fair amount of gold’s recent rise appears to be based on the assumption of continued easing on the part of the fed. When Federal Reserve Chairman Bernanke’s speech this week seem to signal the fed would be much less likely to continue easy money policies, stocks retreated a bit (about half a percent). The biggest reaction came from precious metals with Gold and silver both dropping more than five percent.

The world is a scary place. Terrorist attacks, earthquakes, tsunamis, and financial woes in Europe and Asia make it a scary place for stocks as well. Even with all that, corporations are lean and efficient and growing earnings. Americans are slowly returning to work and debt is decreasing. Though it is never easy to guess what will happen next, stocks appear to be ready to return to their historic place as the best hedge against inflation. They are “the best house in the neighborhood.” At least for now.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

We Americans have a lot of revolving debt, about 850 billion dollars worth of it. Most of that is credit card debt, and more than a bit of it is overdue. If you are contributing to that ugly pile of overdue debt it is time to work on getting yourself out from under that ugly pile. Excess debt can damage your ability to save, invest, and achieve the things you really want in the future. Here are a few tips to helping get out of the hole.

1. Fix the cash flow. If you can’t get yourself to a positive cash flow your situation will just continue to deteriorate. Simply put, you can’t spend more than you bring home (for very long) without problems. Usually the spending side is easier to reduce than the income side is to increase, so get a handle on your spending.
2. Paying off debt is a type of investing. Prioritize paying down debt within a reasonable time frame over saving and investing. Work on savings after you have a handle on cash flow that includes paying off debt. As an example, say you have a credit card balance of $8,000 with a 14% interest rate. Given current market performance, paying off the card before investing is a no-brainer. But even if the stock market was experiencing an annual gain between 8% and 9%, paying off debt would still be your better bet.
3. Negotiate with your credit card companies. Just call them up and ask for a better rate. It can’t hurt. More than half of people who request a reduction receive one. A drop of seven to ten percent will sure help in the quest to eliminate debt.
4. Consolidate at a lower rate if you can. Not only does it make it easier to keep on top of the payment a lower rate means you can pay down principle that much faster. A few extra hundred dollars paid against principle is sure a nice way to speed up the process.

Even if it takes a few years paying off, that debt will be an important step in securing your future.

Editor’s Note: For an organized approach to reducing your debt load checkout the software application DebtDasher at www.DebtDasher.com.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

It’s True: It’s What You Keep That Matters

As an investor you take on risk in the hope of receiving sufficient reward to justify that risk. That is just basic investing; where there is no risk there is no reward. Another basic reality of investing is that governments love to tax any profit you happen to make. It may not seem fair that you take the risk and they get some of the reward (ok, it more than seems unfair) but, “that’s the cost of living in a civilized society” (or so say those that take your profits).

The reality of investment-related taxes means that tax planning is an important part of your investment planning. Careful planning can help you reduce that cost. This planning won’t help you avoid taxes you rightfully owe, but with a little care you might be able to shrink the tax bite a bit.

Tip #1 – Keep Good Records
Whenever cash moves into or out of an investment you get some sort of receipt (often a trade confirmation). Keep all of these irritating bits of paperwork. With them you can establish your cost basis (how much you paid for the investment). Whether you use a computer or a journal you can keep track of your taxable gains and losses throughout the year. Track your tax liability as the year progresses and you might avoid an unpleasant surprise come tax time.

Tip #2 – Take Advantage of Tax Breaks
Investment accounts that allow you to defer taxes or even take income deductions can be a good way to manage investment-related taxes. 401ks and deductible IRAs are a nice way to push those taxes off for many years. When buying mutual funds outside of a tax-deferred account, pay attention to portfolio turnover (the lower the better). Another approach is to focus on index-based investment. They often have little turnover so produce little gains in the course of the year. Annuities can provide some tax deferral as well, but they do have a drawback. Though you do not pay taxes on gains until you draw the money out those gains are all taxed as regular income, even if the increase is mostly capital gains (which would normally be taxed at a lower rate).

Tip #3 – Use Those Losses
Have you taken losses in the last couple of years? Keep track of them. Capital Losses (usually from losses on stocks and stock mutual funds, but there are many other sources) can reduce your taxable income up to $3,000 a year. Whatever you do not use in a given year will carry forward into the next. Here is the trick: these losses offset Capital Gains dollar for dollar until they are used up. For example: I recently spoke with a woman who was heavily invested in stock mutual funds before the crash. Near the bottom of the market she finally gave up and sold her investments, switching to more conservative income producing investments. She has $180,000 in carry-forward losses. Unfortunately, she can only use $3,000 a year to reduce her income. At that rate it will take her 60 years to use up those losses. However, if she invests in something that produces Capital Gains those losses can offset her Capital Gain income dollar for dollar. That makes a lot more sense (assuming that sort of investment makes sense for her situation).

Keep your eye on the investing ball, including the tax implications of your decisions. To find out how these ideas fit into your investing plans consult your tax professional.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

Sometime before the new year Dan Hite of Tedco software had asked me to explain the differences in financial advisor compensation. I asked if he was trying to tell me my fees were too high, but it turns out that wasn’t what he meant at all. Turns out that my friend Dan, like 98% of people, was trying to understand how advisors get paid. The basic thing you need to know is that the client pays the advisor; the question is: how convoluted a path does the money take getting from the client to the advisor.

Why is this even important? It is important because an advisor’s compensation plan tells you how your advisor is incented, and if they may have a monetary incentive to make certain recommendations above others. If the person advising you has incentives to make recommendations that are not in your best interest you should know that going in.

So how does your advisor (or the company that pays your advisor) get paid? For almost all companies the answer is either commissions, fees, or some hybrid of the two.

If a company receives its compensation by charging you a transaction fee for buying or selling an investment, or it is paid by a third party provider of investment products when you buy those products (typically mutual funds and insurance products like annuities) through them they work on commission. Even though the practice has become less popular in recent years it is still the most common method for paying your advisor. That a conflict of interest exists is clear: the advisor only gets paid if you buy (or sell) an investment. These investments can have large costs attached that can be hard to find, though a good advisor will make a point of disclosing the costs involved. Insurance-based financial products have been particularly guilty. These products are often complex with many moving parts. It becomes difficult to clearly see the costs involved. If you combine that with high payouts to advisors you can see why these products are popular among advisors (I have seen commissions in the eight percent range). The value of recommendations in this environment is highly dependent on the integrity and skill of your advisor and the culture of the firm they work for. Unfortunately, this compensation model tends to reward sales skill much more than technical ability. There are some great advisors out there who work on commission, but that is in spite of their business model, not because of it.

If you pay a fee for services (like money management and financial planning) and commission investments, your advisor is Fee Based. The term Fee Based has become more popular. The most common approach is to charge the client a fee for preparing a plan or model portfolio, then collect commissions for executing the recommendation. A variation of this model is called Fee Offset, but it is still the same basic model. There are some good advisors who only use commission products when they cannot find a non-commission alternative. Sadly there are others that will charge for a plan, and then recommend and sell heavy commission products; essentially they “double charge” for the work. This can be the most difficult model for the consumer to understand how the advisor is incented, though advisors like to refer to it as “more flexible”.

The smallest group are the Fee Only advisors. Fee only advisors (and firms) have only one source of revenue, a fee paid by the client for advice or ongoing management. This fee is not connected to the purchase of investment products, nor is the firm compensated by any third party. This model removes the incentive to recommend one product or investment over another. However, it cannot remove all conflicts as the incentive to persuade the client to use the advisor still remains. Still, this model can be argued to be the “cleanest” approach to providing financial advice. There are relatively few fee only advisors in the United States (or elsewhere) but the numbers are growing. The growth in this model has been largely consumer-driven as the total compensation tends to be lower than in other models, and in some cases the liability higher.

Whichever advisor you choose the most important part is that you have a high level of confidence in the integrity and ability of the advisor. If you want a third party opinion look for advisors with a CFP designation for planners (www.cfp.net/default.asp), for investment managers you can also look for the CFA (www.cfainstitute.org/pages/index.aspx). If a fee only advisor sounds like the way to go you can find them at NAPFA (www.napfa.org), the largest organization of Fee Only planners.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

Learning the power of deferred gratification is another important skill, and one that is innately tied up with learning how to save. Most children (really, most people) are not born with the saving gene. When so many animals do it instinctively one wonders what has gone wrong with our instincts. I blame it on the supermarkets. If we needed to store up food for the winter then we would all develop an impulse to save, or at least savers would be the only people still around come spring time. As it stands we are unlikely to let our children starve through winter just because they did not put up enough Skippy peanut butter in their dresser, so it appears we will need to teach them how to save and the power of deferred gratification.

We all come out of the womb appreciating gratification (and that is about all we are good at the first year or two). It is the deferred part that just seems so hard. That is the part we need to learn, so as parents that is the part we need to teach. This process can start fairly young, but it is an abstract concept, so probably the lessons won’t take root until age four or five. In the case of teaching children, deferred gratification does not mean denying a bottle so they get a bigger bottle later. (The rest of the world begs you to just please feed the hungry, screaming baby on the six-hour cross-country flight.)

As they hit that age were they develop favorite shows and snacks, the lessons can begin. One of those things they will not express a fondness for is (probably) naptime. Who would want to miss out on all the neat stuff that happens when they ought to be napping? As naptime approaches, kids will suddenly express an overwhelming need for “veggie tales” (or whatever entertainment is currently rocking the pre-school crowd). This is your “teachable moment”. Let the tike know that if they take a nap first they can have chocolate milk and a cookie with the show. This will probably bring a cry for “cookie and Bob the Tomato now”. Be firm. The choices are Veggie Tales now, or a nap followed by Veggie Tales and a cookie later. If they pick show before nap, well then that is OK for now. You should, at some point, show them the cookie that they decided against, and then put it away. That might seem cruel at first, but it is a way to make the abstract concept a bit less abstract. Now eating the cookie in front of them, that’s cruel. Wait ’till to you get back to the kitchen to stuff your face, Mom and Dad.

Each child is different, and you will need to adjust tactics and experiment, but these opportunities will come. Another great approach that works for older children is the special savings bank. Eventually your kids will want something big (for them). Maybe it is the hot new game release or a new toy, and our instinct is to say “wait until Christmas/birthday”. Instead make the connection between savings and deferred gratification using a savings bank. Let the kids know that they can have it, but that they will need to save the money themselves (there is a use for that allowance again). Get a jar that can be made into a bank and decorate it with pictures of whatever it is that they want. Help them figure out how much they will need to save each week, and then help them stay on track. Pretty quick they will have enough money to buy that new (whatever) and off to the store you go.

As your kids grow and are able to handle more abstract concepts you can eventually leave the fancy jar behind in favor of an actual bank account (around age 9-10). Soon you will have college savings, savings for that special summer trip, and even (oh no) the dreaded car fund. This approach is designed to help children develop an ability to defer gratification. This can pay dividends in many aspects of their lives beyond childhood. If an appreciation for saying “no” now for something better later translates into their sex lives no one will be complaining.

It is important to tie these concepts (savings and deferred gratification) together. At some point there must be a pay-off for the child. If the kid never enjoys the fruit of their diligent savings all you will get is a frustrated kid, or a hoarder. Even for adults savings should have a purpose. As adults we need to maintain a reasonable reserve for emergencies, and that is an adult thing. Beyond that make sure you have a goal in mind for your savings. “A bigger balance” is not a goal, and it won’t work with kids at all. It is the pay-off, the enjoyment of the thing saved for, that will be the most powerful teacher.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

The ability to manage cash flow is an extremely important skill for everyone. If you can help your children develop this skill, you will give them something that will benefit them for the rest of their lives. The first problem in teaching this skill is that kids have no cash to manage. So how do you do it? Give them a bit of income. Yep, give them an allowance. The allowance is one of the strongest teaching tools you can deploy in teaching your children good money skills.

The allowance gives you, the parent, a way to teach basic cash management skills to even small children. There are a few things to remember. First is that the allowance is not payment for chores. Chores are a way of serving your family and not tied to payment. As I wrote in an earlier post that it is OK to pay for special projects from time to time as part of developing the work ethic, but you do not want trash duty and bed making to be a paid positions. Second: Keep the amount modest and in proportion to their needs. Five dollars may not seem like much, but compared to a five year old’s need it is plenty. Third: Saving and giving must be a part of the process, just as it is for you. I know a family where each child had three jars: one each for giving, saving, and spending. In addition, they had another jar that was kept in the kitchen. Every child had to put a portion of his or her allowance into this communal jar. Once a month the kids had to decide how that money would be spent. They called it “taxes”. Though that level of complexity and abstraction might be a bit much, the three separate jars is a good idea.

I covered giving in my previous post, and we will get to savings in the next one, so let’s focus on the spending part. Past the imposed disciplines of giving and saving, your child’s allowance should be theirs to spend. Be very careful how you manage your directions. Some kids will just grab that allowance and make haste to the corner store where it will all be converted into candy (that’s one reason to manage the amount!). Others naturally hold on to some to spend throughout the week, or maybe even a bit of reserve for next week. That bit of delayed gratification could mean the difference between the balsa wood glider and the rubber band powered balsa wood glider (I may be dating myself here but I still like those things!). This exercise will help you identify the natural spending and saving tendencies of your children. The purpose is not to force them into a healthy pattern; it is to provide an environment where they can safely learn from their own successes and failures.

There will be failures. When I was little I loved comic books (still do, nerd that I am, though today they are more of the “Firefly” and “Dark Knight” type). In those comic books there were ads aimed right at young boys like me. One ad that consistently excited me was the “100 army men in a box”. The set included trucks, tanks, and a whole bunch of riflemen. The price was so low I could save a bit and buy that set. In my head I pictured the large, three-dimensional plastic army men with all their stuff, some of which I already owned (think of the soldiers from Toy Story). My mother gently suggested it might not be what I really wanted, but I was sure. When the box arrived it was rather small. I assumed it was just the first box; maybe it held a truck or a tank. But no, it was the whole set: flat plastic toys that were not to scale and not what I was expecting. Though I played with them anyway I was seriously disappointed, and learned an important life lesson.

If your kids have certain reoccurring expenses, say club dues or comic books, the allowance is a good source. Teach them that, in order to afford to activity, they need to set aside a little bit every week. It can also be used as a way to give them spending control on bigger items. If your little fashion hound wants the $30 designer jeans instead of the $20 Kmart brand, then have them save up to cover the difference. When later they don’t have enough cash to run to Taco Bell with friends you will need to let that happen. Your kids will learn from mistakes only if you let them feel the pain a bit. However, resist the urge to say, “too bad, but you look good in those jeans”.

As to how much, a rule of thumb of about $1.00 per week per year of age (in 2010 dollars) should work. Don’t break the family budget to do this, though. A smaller amount will work just as well as a teaching tool. Remember that the purpose is to teach them about budgeting, spending, giving, and saving early in childhood. Have fun and make a game of it. Children as young as four can begin to grasp the concepts behind money. For more about delayed gratification read the column on saving.

When the youngsters obtain a solid grasp of basic mathematics it is time to introduce the idea of a ledger. You can set up some sort of reward for keeping track of their spending. If you can make this into a game they might learn to like it. Consider using a check register; younger kids will get to copy something they see Mom and Dad doing. Also, most banks will give you blank registers for free. When they hit the teen years consider introducing them to Microsoft Money or Quicken. Also check out your bank for special accounts for children or teenagers. Your bank might even turn out to be a big help in teaching your children how to manage their money.

Next time, we will take a look at savings and investing for kids.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

Teaching generosity is normally a process of reinforcing positive behaviors. Many children show up with a basically openhanded attitude. It is up to parents to create the right environment and encourage the right behaviors. The goal is to create a balanced person who has the attitude and skills to be discerningly generous.

The first step is a parent’s most important and most difficult step: modeling the behavior. If we demonstrate a “what’s mine is mine, he who dies with the most toys wins, tough luck, buddy” attitude it is not likely that our kids will grow up to be cheerful givers. Developing and modeling these habits is half the battle. The next piece is to help children understand their relative wealth. Odds are good that if you are reading this post you are in the top 10% on the wealth scale worldwide. Expressing a proper contentment with your current circumstances will help. There are certainly a number of people around that are wealthier and have more cool stuff than you, but there are many more folks (probably just out of sight) that are in much tougher circumstances. Third step: kids need to feel secure in their circumstances. If you are perpetually expressing fear and discontent your kids will internalize that emotion. If they are fearful about meals and having a roof over their heads they will have trouble learning generosity. Your next action is involving them in giving in a way they can understand. Putting money in the offering tray on Sunday morning or writing a check to the United Way is too abstract for kids. Collecting and delivering cans to the local food bank works better. Helping them pick out clothes and toys to give to somebody in need will resonate with a child.

All the standard tools in the parent toolbox can work in teaching generosity. Reinforce generosity when you see it with praise and even a reward. When your kids find themselves on the receiving end of stinginess, ask them how it makes them feel. This is one of those areas where negative reinforcement is not very effective. You want kids that are cheerfully generous, not fearfully generous. Look for ways to praise the right behaviors, and use the unpleasant moments as an opportunity to teach.

As kids grow, you can expand their horizons and work on more abstract ways. As they learn about people who live in less affluent circumstances, ask your kids how they might help. Teens can be brought into the family giving decision process. Ask them about organizations or needs they are aware of and want to help. Keep alert for learning opportunities and places where your kids have an interest. An example: if you have a kid that loves animals, you can talk about the impact of domesticated animals in third world countries. Heifer International (Heifer.org) is an organization that provides farm animals to people in very poor areas. A flock of geese can make a big difference in a family’s life (and survival) and can be had for just $20. If you are active in a church it can be a tremendous resource for reaching out. Just ask around.

Keep up the teaching and encourage your responsible teens to be givers. Listen when they talk about a need they have witnessed and ask, “What can you do about it?” Every once in a while you hear a news story about a kid that has organized a tremendous charity effort. Wonder were those kids come from? It comes from a parent asking, “What can you do about it” and then encouraging the action.

If you model generosity and encourage the same in your children, you have a good chance of giving your kids a generous heart and a better relationship with money.

Next time we will look at teaching budgeting and cash flow.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290

Early in the twentieth century John Burchard was alive, but not for long. He was ill and in need of surgery that he could not afford. John had one asset though: a life insurance policy. Though worthless to him, if he could sell it he could get the money he needed. But how much was a life policy on a dying man worth? About $100, as it turns out. Mr. Burchard sold his life insurance policy to a Dr. Griggsby for that $100, and the good doctor agreed to maintain the premium payments from then on. I assume (but do not know for certain) that Dr. Griggsby was in a position to understand John’s situation, but was not John’s doctor or surgeon. Unfortunately, Mr. Burchard died shortly thereafter and Dr. Griggsby, now owner and beneficiary of the policy, asked for his payment. The insurance company said “NO,” and sighted reasons why they did not have to pay. The doctor disagreed and off went the whole bunch of them to court (except John, who did not care anymore, on account of his being dead).

On a cold day in 1911 the Supreme Court of the United States sided with Dr. Griggsby. (I really have no idea if it was cold, but the date was December 4th, 1911 and DC is cold that time of year.) The court declared that a life insurance policy has value and is an asset and is transferable for value. The court, in declaring the transaction between Mr. Burchard and Dr. Griggsby legal, created a new branch of the life insurance market: the Viatical (or Life) Settlement market.

The concept behind viatical settlements is simple; Mr. Adams owns a life insurance policy which he and his loved ones do not need and he is either terminally ill, very advanced in age, or both. For this example we’ll say the policy has a face value of $100,000. Now Adams would like to use some of that money before he dies. Maybe he wants to pay for an experimental medical procedure, or just wants to buy a really cool car before he kicks off. On the other side of the equation is Mr. Baker. Mr. Baker has about $75,000 he wants to invest and is willing to take on some risk for a potentially outsized return. Between these two players stands a life settlement broker who puts the deal together in a way such that neither Mr. Baker nor Mr. Adams know who the other party is. Mr. Adams walks away with $75,000, and Mr. Baker will get $100,000 when Adams dies. If Mr. Adams and his advanced illness cooperate and he dies in a year or two it is a pretty good return for Mr. Baker. The risk is that Mr. Adams doesn’t pass on. If he somehow survives Mr. Baker may be waiting a long time for a return on his investment. Of course, Mr. Adams gets to live with the thought that somewhere out there is a guy who would really like him to die already. At least he can take comfort that though there have been occasional information security problems, there is no record of someone being murdered for a viatical settlement.

Those are the basics. The rule of thumb is that if the insured is expected to die soon (within two years) then it is called a viatical, if longer then the deal is a “life settlement”. There are significant complexities, costs, and tax issues with these deals; make sure you fully understand the pros and cons before signing the check (or signing over a life insurance policy). The most important point for you, whichever side of the ghoulish equation you want to be on, is to work with a reputable broker. Check out your middleman. When these deals work as they should, the situation is a win-win for everyone involved.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290

Helping your kids develop a healthy attitude toward work is an important life skill. Even though some kids seem to be natural hard workers, most need some specific parenting to develop a good work ethic. Here are a few guidelines.

1. Attitude: your attitude toward work is a key component. If you come home every day grousing about your job, your kids will pick up the lesson that work stinks. If this has been your practice (and if you really dislike your job), suddenly changing to an “I love my job” attitude will set off your kid’s fake detector. When you talk about work, focus on the positive, but don’t sugar coat reality. Develop an attitude of joy in the things you can derive joy from. It is OK to say something along the lines of, “My boss and I are not getting along, but my job allows me to do this really cool thing.”
2. Assign age appropriate chores to your children. A good initial approach is to make it a family affair. Have them help you set the table, rake the leaves, or clean out the garage. If chores start out as quality Mom and/or Dad time it changes the dynamic of chores for the better. If it seems inefficient to have two people doing a chore, it is. The purpose is not to get the leaves raked; it is to teach your child the value of work. Patience is a key here; the job your kids do will, at first, be less than acceptable. Guide them by encouragement and gentle correction. Eventually you will be able to say, “You do such a good job I trust you to do it on your own.” To your kids it will feel like a promotion. Even if you have the resources to hire household help, the value of chores is too great to not use; leave a few things for the kids to do.
3. The time will come when your child, if they have a good work ethic, will find some work outside the home. This will probably start small: helping a neighbor with yard work, babysitting, housekeeping, and the like. As they grow into the teen years this will probably shift into a regular job: Fast-food, retail clerk, stock person and that sort of thing. This is a good development in their lives, but one that requires your continued, if distant, supervision. Here are a few things to keep in mind:
   1. Make sure that it is a safe environment. Who will they be working for? What sort of environment? Parents have a responsibility and a right to check these things out. A job that requires your 15 year old daughter to work alongside a 25 year old man for extended periods without any other supervision is an example of an unsafe environment.
   2. Getting paid for their labor does not translate into getting paid to do household chores. If the new job impacts their responsibilities around the house then you, Mom and Dad, decide how, or if, that happens.
   3. Their education comes first, as do some family activities. Work can’t be allowed to interfere with education.
   4. Parents: if your child does a poor job, resist the temptation to jump in and rescue them. Getting fired is a learning experience too, albeit a rough one. If junior sleeps through his alarm clock and misses his paper route they will need to deal with the consequences.
4. If the job in question is unpaid, that is OK. Just make sure the elements of a real job are present. A child of a client was named her school’s yearbook editor. The assignment required a fair amount of time, was filled with deadlines, and had specific supervision. These kinds of activities can be tremendous growth opportunities for a young person.

Next week we will look at the other side of the money coin: learning generosity.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290

A friend of mine recently lamented, “My girls think I am an ATM”. We might be tempted to snicker about Daddy’s little girls, but the truth is we want to give our kids whatever they need, regardless of gender. The key here is what they need, as opposed to what they want. One of the things they need to learn about is how to manage money and build wealth. That may seem obvious, but what tends to escape us is that their teacher is going to be you, their parents, intentional or not. Our kids pick up all sorts of direction on how to live life from us. Our attitudes and practices have a much greater impact than our words. Think about where you learned many of your money habits, good and bad. A lot of those habits come right from Mom and Dad. So it is with your children.

Right about now a few of you are thinking, “oh my, I hope my kids are not paying too much attention; my financial life is a mess!” Your kids are not messed up for life, and you would be surprised how well they learn from your mistakes. However, if you want to teach them good habits you may need to develop a few of your own. Consider getting some help. Many fee-only Certified Financial Planners will be willing to help you develop a budget and work on habits, and they might give you a few pointers on teaching the kids, too. Either way, passing to your children a good understanding of money and wealth may turn out to be one the best investments you can make for them.

One great truth that never seems to change is that it will be easier if you start now. If your child is an infant they may not be ready to learn about money, but you can certainly work on putting your own house straight. It is never too early to plan or save, so get started now.

Before we jump into the four principles, remember that no one plan will work just as well with every child. Kids bring their own personality, temperament, and learning style to everything they do. It is OK to tweak your approach to match the kids; use their uniqueness to help you teach.

Now that you are working on setting a good example, here are the four general principles for training financially wise kids.

1. Work is not a bad word. If the first thing you do when you get home is complain about your job you may want to work on that attitude. Children will pick up on the bad vibes quickly. Be ready to give them jobs to do around the house. Make the chores age-appropriate. Younger kids can help set the table (no glass for the really little ones), with cleaning and gardening coming as they grow older. An allowance can be a great teaching tool, particularly for teaching about budgeting. Actually, we will have a whole column on the subject soon, so stay tuned. Not everything they do around the house is about money; some things you just do because it is proper (like cleaning your room). The sooner they learn the connection between work and money the better they will be equipped for life. Oh, mom and dad, please be patient with their work. You are going to need to praise a genuine but ineffective job more than a few times. Your kids are not the only ones learning patience and grace.
2. Giving, when to give and how much is appropriate, is a principle that needs to be part of raising your kids. Some kids are naturally generous, easily sharing their toys, food, and even money with friends and strangers. For these kids the job is to learn to discern between those in need and deserving of generosity, and those who want to take advantage of it. Other children are naturally conservative. For these kids saving money comes easy, but learning proper generosity will take some intentional teaching on your part.
3. Budgeting is simply planning how to spend what money we have. The skill of managing and monitoring cash flow will pay huge rewards in adulthood. During the booming parts of the nineties, nearly two-thirds of Americans lived with a negative cash flow. Less than half of those were aware they had a problem. (Golly, I wonder why we developed a credit bubble.) Helping your kids develop sound spending habits will steer them through good times and bad.
4. Savings and the value of delayed gratification is our forth principle. Your sweet, generous, open-handed child will benefit from learning the value of savings and patience. The careful, cautious, or even a little stingy; kids will reap great benefit from learning that, in the end, money is for spending. Savings should have a purpose and a plan; it should not be viewed as a way to contentment. The overly generous or spendthrift is always broke, but the miser is never happy. Helping your kids to find the right balance is a powerful life skill.

Over the next few weeks I will break down each of these principles in more detail, bringing tips and anecdotes I have picked up in my 23 years of helping people make better financial and investment decisions. So keep checking back and I will update soon.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290