Advanced Personal Finance

Brooke at Dollar Frugal just lost one of her four RSS readers today and she’s feeling down.  Can somebody besides me, her grandma, and her boyfriend please stop buy and subscribe?  Thanks.

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Flexo at Consumerism Commentary posted the latest inflation numbers the other day. I’d forgotten they were coming out until I read his post and then, later, saw articles in the paper.

Like you need to be told, inflation was up this past year - 4.1% to be exact. And that’s if you believe the federal government’s numbers, which I believe underestimate true inflation.

Take a look at the following figures for 2007 and see if you can spot what’s wrong with this picture.

Food +4.8%
Health insurance +10.1%
Gas +8.2%
Electricity +3.9%
College tuition +6.2%
Clothing -0.4%
Natural gas -1.4%

Average weekly earnings +0.9%

Awesome! The average person in the U.S. is getting poorer! (I say this because for the vast majority of Americans, non-wage income is miniscule.)

I gotta lighten up my posts. This is getting depressing.

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I’ve always rejected the notion, made popular by personal finance guru Ric Edelman, that you should always carry as large a mortgage as you can.  It’s a somewhat emotional issue and I won’t dive into all my reasons here.  Suffice it to say, I am of a different school of thought.  I believe you should not carry a large mortgage.  Now I have yet another reason to say that.

According to a piece by the Wall Street Journal,  rates for conventional, conforming loans (read: reasonable size ones) are their lowest since 2005.  (I already knew that.  We’re buying a new house and mortgage rates are of keen interest to me.)  It’s a great time to refinance.  But only if you have that type of loan.

See, very large loan (’jumbo loans’ in mortgage-speak)  rates have not fallen like conventional ones have.  Refinancing at attractive rates isn’t an option for anyone with this type of loan or those without very good credit.

The Journal alludes to the reason, but I’ll expand on it.  Jumbo loans aren’t eligible  for purchase by Fannie Mae and Freddie Mac, the quasi-governmental entities that essentially make the mortgage market.  As a result, jumbo loan rates seem to be suffering a little bit more from the credit upheaval.

If you have good credit, decent home equity, and a conventional loan, now is a good time to refinance.  Of course, if that’s you, you probably already have a darn good rate.

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As if investing in currency wasn’t speculative enough, I saw a laughable ad in USA Today…um, today.

It was an advertisement for purchasing the hard currency of…Iraq. Yes, folks, you too can get in on the bonanza that is the new Iraq. By sending in your check or money order, you’ll receive actual authentic Iraqi currency.

Use it as toilet paper! Makes a great floor covering for those training their dog! Great for starting fires!

Hurry, though. Apparently “Inventory is limited.”

Ugh.

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I’ve been interested recently in teaching my kids (well, really only my daughter since my son is four months old) about money. I’ve opened bank accounts for both of them now, but that hardly counts as a start. Some commenters, though, have correctly pointed out that by simply observing how my wife and I handle out financial affairs, they’re learning. Maybe we’re doing something right, because my little girl has shown her stuff already.

Like I said, I’ve been interested in how to teach my kids about money. Like any good nerd, I turned to books to help me. When I saw The First National Bank of Dad on our library’s shelf, I thought it might be worth a look. Boy was I right.

The First National Bank of Dad, written by David Owen, is a short, fast, and often funny read about a subject that’s not always short, fast, or very funny - personal finance. The best part of the book, though, is it’s about more than personal finance. It also touches on knowing what’s important in your life and how you can help your kids figure out what’s important in theirs.

The book has only nine chapters and Owen keeps them short. In fact, at only a 190 pages, I think I read the entire book in a day and a half. In the first four chapters, he goes over how he used his First National Bank of Dad to bring the idea of saving to his children’s minds in a way they could grasp. He then goes over basic investing terminology for when that comes up as the kids get older. Owen closes, surprisingly with two chapters that at first seem unrelated to the book - one about priorities and one about reading to your kids. He makes it all fit, though, and the results are excellent.

The bank in operation

The idea of the First National Bank of Dad is that kids think shorter term than many (but not all) grown-ups. As a consequence, learning about personal finance in general, and saving in particular, has to be put into a frame of reference they can understand. Owen’s method for doing that is to offer his kids a really attractive return on their money, payable by him, if they choose to save it. He offers such a good rate that his kids can actually see a difference in their ‘balance’ from month to month.

A key component to the proper functioning of the concept is that the kids must be allowed full responsibility and freedom over their own money. Once an allowance is given, it is theirs. They can spend it immediately and frivolously, they can save it, or they can give it away - their choice.

This is where I really learned something from this book. I’d always read that the way to teach kids about money was to give them an allowance (and there are two schools of thought as to whether that allowance should be tied to chores or not) and then prescribe for them a certain formula of where that money will go. In other words, even though the allowance is ‘theirs,’ they must save 20%, give away 10%, and the rest is theirs to spend.

What Owen writes, and I agree, is that this means that the allowance isn’t the kid’s at all - it’s still yours. You wouldn’t dream of telling someone else what to do with their paycheck, yet that’s precisely what people who use this technique are doing. The kids must be allowed to do whatever they want (that is safe and legal) with their money.

The objective in teaching kids about money, of course, is for them to learn. How are they going to learn if the rules of the game don’t allow any freedom to make and learn from their decisions?

The Dad stock exchange

As his kids got older, Owen wanted to introduce the concept of investing. He did that by shutting down the Bank of Dad and opening the Dad Stock Exchange. He put nearly all of their money into his version of a money market fund and ‘invested’ some of it in the new exchange. For simplicity, Owen based his exchange on real companies and stocks, dividing their real prices by 100.

It turns out that again his kids learned some valuable lessons on investing, but didn’t have to lose a fortune to do it. They discovered stocks, bonds, and mutual funds. And they did it on their own.

The First National Bank of Dad was just the book I was looking for when I set out to learn how to teach my kids about money. I likely won’t execute as perfectly as Owen describes, but the book gave me a lot to think about and changed my opinion about allowances and giving kids the freedom to spend them however they want. If you have kids and want to get great ideas for how to help them learn about personal finance, I strongly recommend The First National Bank of Dad.

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