Day #4 Teaching Your Child about Money

Financial obligations are a commitment and it's important to drive this point home to your children. Mother of four, Alicia Vargo, could not have driven this point home even better with her four children (ages 16, 17, 19 and 21).

"I have always made certain that if anything were to ever happen to me that they would know how to take care of themselves. Examples of this are each one of them saved for their cars, we matched down payments, but we put the cars mainly in their names so they could build their credit, pay their car payments and their insurance," says Alicia.

Alicia and her husband have downsized significantly in their "things" as an example for the kids in being financially responsible while maintaining quality of life. Alicia and her husband have tried to teach their children not live for their mortgages, but rather to purchase a home they can afford to pay for each month. Circumstances in life can and do change quickly, so teach your child to have a realistic view of what quality of life means and that bigger isn't always better.

Alicia's daughters are 19 and 21 and already have a substantial and positive credit history, strong savings accounts, and can rent an apartment or house on their credit alone.

Alicia states, "We have taught them how to pay their bills and build their credit."

It just goes to show that no matter what age you start, it's imperative to teach your children that when they use a credit card, take out a car loan or use a mortgage to buy a home that they are responsible for making the payments--each and every month--so they need to make wise purchase decisions and buy what they can afford to pay for.

Is Credit Card Counseling the Way to Go?

Especially if you are in credit card debt, you may have heard of or investigated working with a credit card counseling agency. A credit card counseling agency helps consumers to consolidate their credit card debt, lower their monthly payments and make it more affordable for credit card holders to pay off their debt. These counseling agencies negotiate with your credit card companies for you to make this happen, but is it worth it to work with a credit counseling agency to get your debt under control?

The cold hard truth is that it may not be worth it at all.

First of all, it can damage your credit, which may sound like the direct opposite of what you would expect. Using a credit counseling agency to help you consolidate your debt is the equivalent to writing your future creditors a letter stating that you are financially irresponsible and can't manage your own money. Therefore, you have to turn to professionals for help in getting your finances in order. This means that it can harm your chances of obtaining credit in the future when creditors see that you had to turn to a credit counselor for help in the past.

Second, you don't need a credit counseling agency to negotiate better rates on your credit accounts or to consolidate debts. These are steps you can take on your own. Call each of your creditors, explain your situation or financial challenge and see what they may be willing to do. Most creditors would rather work out an arrangement with you than not get paid at all.

So before you throw up your hands in defeat and turn everything over to a credit counseling agency, be sure to measure some of the disadvantages of working with this type of agency. Once you take a look at both sides of working with an agency, then decide if it's still something you want to pursue or if it's something you can handle on your own.

Teach Your Child Amount Money by Limiting their Access to It

It's Day #3 on how to teach your kids what they need to know about being responsible managers of their money. No matter how wealthy or poor your family is, the only way to teach your children how to budget and manage money the right way is by limiting how much money you give to them. This is not an encouragement to let your child suffer. It's fine to give your child an allowance in exchange for doing household chores or completing tasks, but make sure that the payment fits the duties.

This helps children to learn how to save and spend their money according to how much they have. If the latest video game has hit stores and your son is saving up his allowance to buy it, then he knows he has to forgo buying a shirt he wants and hitting Starbucks everyday with his friends after school for an iced latte. Otherwise, he won't have enough money to buy the game.

Providing an allowance to college-age children is OK too, but you'll better prepare them for adulthood by keeping this amount within meager means as well. When they hit the real world, they are going to have to start at an entry-level job, probably not making a ton of money. They need to learn how to live within their means and by not overindulging them, you're preparing them for their financial future.

Teach Your Child about Budgeting

Today it's time for Tip #2 about how to teach your children about money. The old adage, "Money doesn't grow on trees," probably isn't enough to teach your children that money is a limited resource. Instead of giving them a visual of a money tree, share the family budget with them instead.

Depending on your child's age, you can accomplish this in a couple of different ways. With a set of jars and a pile of change, you can easily show small children how limited money can be. Label each jar with a sticky note or piece of paper that describes a household expense.

Some categories may include mortgage, food, electricity, water and clothing. Start out with a pile of money (can be bills, coins or even monopoly money in order to illustrate the point).

Tell the kids how much money in income you have every month and then go through expense by expense as you drop the money in the appropriate jars. At the end of the expenses list, explain the money that is left over can be used for other purchases such as going to the movies, on vacation or buying "extras" such as candy or other things your children enjoy.

Older children probably don't need the jar exercise, but sit down with a spreadsheet on the computer or a paper and pen list of income and household expenses. You can illustrate the same point--money is limited and "fun money" can only be spent after all of the necessities in life are paid for.

Teach Your Children about Personal Finance

If you've been paying attention over the past few years, then you know that your child's college savings plan doesn't have as much money as it used it. Maybe you or your spouse lost their job in the past year or two and you don't have enough money coming in to even cover the cost of saving for your child's education.

Whether or not it's about sending the kids off to college is irrelevant. It's more important to note that you have to teach them how to manage their personal finances. Unless, that is, you want them to live with you for the rest of your life. Since the answer to this is probably no, over the next few weeks I'll be running a series on how to teach your kids about personal finance so they can manage their own finances and become financially independent and responsible adults. Some of the tips may need to be modified slightly depending on how old your kids are, but the earlier you start teaching, the better it will be for them and for you.

Tip #1 Create a plan

The only way you can teach kids about managing their money is to make a plan that helps to guide them in money management. Children typically earn money in a couple of ways--chores, birthday and holiday money and a part-time job when they become teenagers. So instead of letting them spending every dollar they earn or receive as a gift, create a plan where some of the money has to be used to pay for one of their own expenses or put into a savings account that they are not allowed to use.

For example, a teenager may be required to pay for a portion of her car insurance payment or put gas in her car with her own money rather than money from Mom and Dad. Pre-teens may be required to put 10% of the gift money they receive in a savings account, mutual fund or stock. You can have them buy a fun stock such as Disney, which will even mail them a really cute stock certificate with Disney characters on it.

Child wants an expensive pair of designer jeans that are too much? Offer to pay for a certain portion of the jeans and then the child has to find a way to come up with the difference or they can't have the jeans. When the child has a vested interest in making a purchase, it helps them to appreciate the value of money better than when you buy everything for them.

Financial Knowledge is Power

It's no wonder the American economy is in the toilet. According to a recent survey conducted by the Center for Economic and Entrepreneurial Literacy:

1. Only 47 percent surveyed knew what the Dow Jones Industrial Average is

It's an index that measures the performance of stock for 30 American companies.

2. Fifty-seven percent knew that their credit score is the most important factor in whether or not they can get approved for a loan.

3. A mere 48 percent understood that one of the primary benefits of investing in an IRA is that the contributions are tax-deductible.

If you don't find yourself in the know about these and other important financial factors, then start reading articles and doing some of your own research to bone up on your finances. It may make the difference from having a healthy financial life or a miserable one.

Loan Modifications: Helpful or Harmful?

Before the foreclosure rates started to reach an all-time high, many of you may not have even heard of a loan modification. Most mortgage borrowers think that establishing a mortgage is a binding contract (which it is) and that the only way to change your mortgage is to refinance it. For the most part this is true, but in extenuating circumstances and on a case-by-case basis you may be able to to modify your existing mortgage.

What is a loan modification?
A loan modification occurs when a lender agrees to modify an existing mortgage because a borrower can longer afford to pay on the mortgage. This is a long-term inability to pay because of an extenuating circumstance (loss of a job, huge interest rate and payment adjustment of an adjustable rate mortgage, death of the bread winner). A loan modification typically involves a decrease in the interest rate of the mortgage, a lower monthly payment, a change in the type of mortgage or an an extension in the term (or length) of the mortgage. A mortgage lender typically agrees to a loan modification because it's less expensive for them to modify the loan than it is to foreclose on the home.

It sounds good so far, right?

Where the Problems Creep In
While hundreds of thousands of homeowners heading down the foreclosure path have been saved by loan modifications, there are just as many that have been adversely affected by the loan modification process.

Some of the disadvantages that loan modification borrowers have experienced include higher mortgage payments and a higher balance due on the mortgage than before the modification. So how does this happen?

What many loan modification borrowers do not realize is that many lenders are rolling costs such as late fees, the amount of unpaid back taxes on the home and other administrative costs back into the balance of the mortgage. This is leaving some borrowers with a higher mortgage balance and monthly balance payment than before the modification, which is the direct opposite effect they were looking to achieve.

This is not always the case. There have been many borrowers that have come out ahead and saved their home with a loan modification. For example, 80% of the borrowers that modified their loans through Wells Fargo are now enjoying lower monthly mortgage payments than they were before the modification took place. At Citimortgage, 92% of its loan modification customers have benefited from a loan modification.

The moral of the story is that it could go either way. Mortgage modification is not the panacea to the foreclosure problem. You need to speak with your lender and make sure that you fully understand all of the terms, conditions and fees associated with a loan modification to make sure it puts you on the beneficial side of the equation.

Commercial Mortgage Defaults To Rise

Are Commercial Mortgages Suffering Too?

I met with an old friend yesterday, who also happens to be a commercial real estate agent. He cried (not literally) that the commercial real estate market was feeling the ill effects of the economy too, so it got me to thinking, how are commercial mortgages fairing in this economy? Are commercial mortgage borrowers in the same dire straights as residential borrowers. Are foreclosures on commercial properties the same, lower or higher than residential properties?

According to Deutsche Bank, the increase in the unemployment rate and the increase of business failures has caused the number of defaults on commercial mortgages to rise. In fact, in the second quarter of 2009 the delinquency rate on commercial mortgages almost hit 3 percent and totaled $750 billion in delinquent debt.

To add insult to injury, the tanking of the housing market also led to a loss of mortgage brokers, real estate agency offices and a multitude of other real estate professionals. The unemployment and closures of real estate businesses also caused the commercial spaces once filled with these businesses to empty out.

In total, this has left $3.5 trillion in commercial loans with more than $2 trillion in commercial mortgages maturing between now and 2013. The short answer is that it looks pretty grim for the commercial mortgage industry, so even as the residential market seems to be heading toward a recovery, there is a lag in the commercial industry that means it'll take longer for this market to catch up.

Your First Car Loan

Financing a new or previously owned car for the first time may seem like a scary experience. It will be less scary if you know what you're doing before you step foot in the financing office of the dealership.

Know your credit score
If you don't already know your credit score, then find it out by ordering it from one or all three of the credit agencies (Experian, TransUnion and Equifax). Your credit score plays a huge role in whether or not you get car loan approval and it's also a factor in the interest rate and term (length) of the loan you can get. Shoppers with higher credit scores (usually above 700) get lower interest rates than those with lower credit scores.

Comparison Shop
As you would with any major financial purchase, you should shop and compare at least three auto lenders before going with one of them. Interest rates can vary from lender to lender and you want to make sure that you're getting the best deal possible--no matter what your credit score is.

Shop with approval in hand
It's possible to get pre-approved for an auto loan before you've even started shopping for the car. It's also a good idea because it gives you a price range to stick with. This prevents a crafty car salesman (or woman) from up-selling you into a more expensive vehicle than you may not be able to afford. Pre-approval also cuts down the time you have to spend at the car dealership while the finance department pulls credit and tries to put together an auto loan through the dealership.

It can also give you some negotiating power. Some dealerships offer cash rebates or low interest rate financing. If you already have low interest rate financing setup for your auto loan then have the opportunity to take advantage of the rebate--and you'll still get a low interest rate from the original lender.

Shopping for a car loan isn't brain surgery by any means, but if you're prepared you are more likely to come out ahead in the deal.

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