How Do You Decide How to Spend Your Money?

As we move through the holiday season, your parents may be telling you to think about what you want versus what you really need. It can be very confusing to understand how your family spends its money. To determine how to spend money, your parents may have set up a family budget.

Ask them to tell you about the budget, and show you how they allocate their income. They may talk about paying for utilities and other necessities and then how they determine what they have to spend on things that the family wants.

Then think about how you can use that information to set up your own budget with sections for what you earn and what you want to spend and what you might save, invest or donate. If you don’t have enough money to pay for all the things that you want or want to do, think about how you can earn the money.

Parents: A good way to answer children’s questions about how the family budget is determined is to explain where the money goes. Read How Can I Keep My Money from Slipping Away? to learn more.

What Would You Do?

Here's an idea! This Thanksgiving, while you are sitting around the table with all of your family and friends, play this game. Ask everyone at the table, “What would you do with $1?” After everyone has answered, then ask, “What would you do with $100?” Finally, asked everyone, “What would you do with $1 million?” This kind of game can really get you thinking about what is important in your life and in the lives of the people you love. Notice if anyone starts to change their mind about what they would do with the money after they’ve heard ideas from others. Are you surprised or inspired by anyone’s answers? Money is not the end game. It is a tool to help you achieve what you really want to do in life.

This holiday, think about what is most important in your life and be thankful.
Happy Thanksgiving!

What’s the Difference between a Bull Market and a Bear Market?

You may have heard the terms Bull Market and Bull Market and wondered what they mean.

The stock market goes up and down all the time in little amounts and sometimes in big ones, but then it will go in the other direction for awhile. This is why the stock market is considered a risk when investing. Say you buy your bike today but it goes on sale tomorrow. That would be an example of what can happen in the stock market. Of course, you could also buy your bike on sale and pay less than someone who buys a bike a few days later when the sale is over. You can read about how the value of stocks change in our earlier post, How much do stocks cost?

But, sometimes the stock market goes in one direction, either up or down, pretty consistently for a few months. If the stock market goes up by 20% for two or more months, it is said to be a Bull Market. Most investors are excited about Bull Markets because it means that the value of their investments is going up. This is like you buying your bike and being able to sell it to your neighbor later for more than you paid for it.

If the stock market goes down by 20% for two or more months, that is called a Bear Market. The most famous Bear Market was the Great Depression in the 1930s. Most investors believe we are in a Bear Market right now because we are in a recession, and unemployment is high. You may have heard about this on the news or from your parents. Some people like Bear Markets because they can buy things at a low price and then wait for them to go up in a Bull Market.

Doesn’t it make sense to buy something when it is cheaper and then sell it when it is worth more? Things like bikes, tend to go down in value (you will probably have to sell it for less than you paid for it), but some things, like rare baseball cards or other collectible items can go up in value as time goes by. The problem with the stock market is that nobody knows when the value of stocks (or bonds) will go up or down.

This is why it is a risk. The best way to invest in the stock market is to invest for the long-term, for many decades instead of many years. That way you go through a lot of Bear and Bull markets before you sell your stocks.

The market goes up and down for a lot of reasons. We covered some of these in an earlier post. What causes the stock market to go up and down?

There are many theories about why the terms Bear and Bull are used. One of the most popular is that Bears rise up above their prey and come down, while Bulls use their horns to thrust up.

What are the Risks of Investing?

We’ve recently spoken about the importance of saving for the big (and small) things you want and need in life, from a new bike, to a college education. Investments can be one way to grow your savings, but there are a lot of risks that you should be aware of before you begin.

Inflation is the increase in the price of products over time. Inflation rates change every year. Right now inflation rates are low. That means that purchasing power is relatively stable, but there is a lot of fear that that will not continue. You want the return on your savings and investments to be higher than the rate of inflation.

Interest rates also vary over time. When interest rates are low, as they are now, stable investments increase in value, but when interest rates rise, the value of these investments fall.

Parents:   As you help your kids learn about investing, help them be aware of the potential risks.  Read What Investment Risks Should I Know About? to learn more.  

What is a Stock?

Let’s say that you and your friends decide to bake cookies to sell. You decide that each of you will bring one ingredient. Jayden brings the flour, Bethany brings the sugar, Emily brings the eggs, and you bring the chocolate chips. When the finished cookies are sold, you all share the profits. You know that you won’t get anything back until the cookies are sold. And if no one wants your cookies or they don’t want to pay what you are asking then you may not get much or anything back. You accept the possible risks and possible rewards when you put in your chocolate chips.

In the same way, a company can sell a portion of itself in order to raise money. This portion is called a stock. Owning a stock means you own a piece or a share of a company, just like you contributing the chocolate chips means you own a piece of your friends’ cookie-making business. A stock holder or shareholder doesn’t actually have to run the business, but because they own a piece, they have a claim on the company’s assets and earnings.

If the company does well it may pay a dividend to the shareholders. Each stock is worth a certain amount when it is sold. That amount depends on a number of factors including how many stocks were sold in total. In your company there are four shareholders. In the real world, a company may sell millions of shares. A company may decide to reinvest its profits back into the business in order to grow the company value. Stocks can be bought, traded, or sold, on the stock market. There are many variables that determine the value of a stock in the market. A stock may increase in price and the owner can sell it for more than they bought it. But a stock may also decrease in price and then the owner will lose money.

Because the market can go up or down, there is always a risk when investing.

Parents: Reading about stocks and how they relate to business can be a great learning experience. Read What is a Stock? to find out more.

What About Scholarships?

We’ve talked quite a bit about how to save money for college. But keep in mind that scholarships can also help pay for your college expenses. Although there are more options available for students with top grades, academic scholarships are not your only option. Scholarships are offered for a variety of factors in addition to academic performance, such as athletics, volunteer work, minority status, field of study, or even overcoming adversity. Typically, you do not have to repay scholarships and grants.

There are numerous Web sites with information about scholarships and financial aid. For example, fastweb.com and finaid.org contain information about thousands of scholarships. In addition, fafsa.ed.gov provides an overview of federal student aid programs, including Pell Grants, campus-based aid programs, Stafford Loans, PLUS Loans, and others. Also, scholarshipexperts.com offers a free scholarship search targeted to the student's profile. Don’t forget, your local library and high school guidance office may have information about state-sponsored aid programs and scholarships sponsored by local organizations.
 

Parents: Financial aid can be a valuable source of funds to help finance your child’s college education. Don’t assume you won’t qualify. Read “What About Financial Aid for College?” to learn more.

I’m Just a Kid! How Can I Save For College?

Adults have been told that they should have begun saving for college costs as soon as you were born! Well, I suggest it’s never too early for a kid to start saving money for his college expenses either. Here are some things you can do:

• Start earning your own money with a part-time or summer job. (Look at my old posts for ideas about how kids can earn money.)
• I’ve talked about how you can divide your money into categories to Save, Spend, Invest and Donate. Set aside a portion of the money you save for college expenses.
• Ask your parents for help opening a college savings account. You might even ask them to consider making a matching contribution each time you deposit your own money from work or gifts.
• When asked for gift ideas, suggest money for your college savings account.

Parents: Evaluate the potential benefits of contributing to tax-advantaged college savings vehicles, such as a 529 plan or a Coverdell Education Savings Account. Read “529 Lesson Plan: High Scores for 529 College Savings Program” to learn more.

What’s It Going To Cost To Go To College?

As most of you know, or should know, the cost of going to college has become very expensive and the costs are increasing every year. If you are going to be responsible for paying all or a portion of your college expenses, the first step is to find out what the actual cost is going to be.


Start by visiting:
• The College Board
• The U.S. Department of Education
• A High School Guidance Counselor

If you are fortunate enough to know that your college expenses will be paid for by your parents or grand-parents, discovering the actual costs will help give you a deeper appreciation for your family's financial sacrifices in order to send you to college.

Parents: There are college investment options to fit almost any investor. No matter how modest or how ample your income, careful planning is the best way to “find” the money for college. The key is to start early and remain consistent. Read “What College Investment Options Do I Have?” to learn more.

What Can You Do To Start Planning For College?

Most likely, your parents have already started saving for your college education. But how have you gotten involved in preparing for college? Working together with your parents to be part of the planning process can be very educational. Although you may not have the same amount of money as your parents do to save for college, there are other ways you can help your family plan for college.

• Maintain good study habits which can help you achieve good grades. Academic scholarships are an excellent source of money to help pay for college.
• Take college preparatory classes in high school and start thinking about possible career choices. What you want to be when you grow up may strongly influence your choice of college. Most colleges prefer to accept students who have taken more than the basic requires for high school graduation.
• Set aside money from part-time jobs to save for college expenses. Tuition is just a part of the cost of going to college. You have to buy books, pay for room and board if you go away to school, travel costs and general living expenses, as well.

Parents: Start talking to your kids about college planning and get them involved with the process. This will help them take ownership of their educational goals. Read “How Can I Save for My Child’s College Education?” to learn more about financial tactics for college planning.

Kids Finance Coach Donates $1,000 to School During Financial Literacy Month

I recently gave a presentation to about 900 high school students at Oaks Christian School. We talked about the basics of money management; including budgeting, responsible spending, charitable giving and investing. The energizing presentation was complete with music, a T-shirt launcher and prize wheel! The students were tremendously engaged and informed, which made for a really exciting time. (Click here if you want to find out how to bring The Kids Finance Coach to your school or group!)

While at the presentation, my team and I awarded a $1,000 check to the non-profit school. According to the school's headmaster, the donation was the first time the school had actually received a donation from one of its speakers. But for those of you who have been following my blog regularly, you know who committed I am to charitable giving as one of the four building blocks of money management: save - spend - donate - invest. What better way to teach those students about giving back, than by showing them how it's done?

How have you been giving back, lately?

Pay Attention, Parents. This One’s for You!

Who are our children’s first teachers? That’s right…parents. April is Financial Literacy Month, so I’m doing what I can to help kids understand and become comfortable with financial concepts. Here’s a list of things YOU can be doing to help teach the valuable skill of money management to your child.
Ten Tips for Teaching Kids about Money

1. It’s never too early to start talking about money with your kids.
2. Don’t make personal finance topics taboo from kids. Talking about money is a learning opportunity. Any discussion is better than silence.
3. Consider giving your kids an allowance. Set expectations about spending, saving and giving to charity.
4. Encourage your kids to make their own money. That way, they connect work to money. Money is a means to an end, not an end in itself.
5. Teach your child to ask, “how can I earn that?”
6. Make sure saving is a habit. Reinforce it. Don’t forget to do it yourself.
7. Don’t say “we can’t afford it”, say “we don’t need that right now.”
8. Keep talking about issues like debt and credit with teenagers, even if they act like they are not listening. Credit/debit cards can feel like plastic funny money.
9. Kids remember and copy parents’ behavior. So model good stewardship of money no matter how much you have. Discuss the basics of budgeting.
10. Think of a financial planner as a resource. Just ask. They can help you talk with your kids about money.

What Does “Invest” Mean?

I talk a lot about dividing your money into 4 categories: SAVE – SPEND – DONATE – INVEST. Investing means using your money to buy something that can make you money when you sell it. You can use your money to buy stocks, bonds, real estate, collectables and more. It is important to remember that in real life, before someone can invest money, they must make sure they are saving enough money to meet their daily, weekly and monthly expenses. Below are a few definitions to help you start learning about investing:

• Investor: Someone who uses their own money in order to make more money in return.
• Interest: Payment in exchange for the use of money over time. For example, you can earn money (interest) by lending your money to a bank. In addition, you pay money (interest) when you borrow money from a bank.
• Stock: A unit of ownership in a company. The value of a stock goes up or down depending on investors guessing about future profits.
• Bond: A contract between an investor and the US Government or agency. The investor agrees to lend money to the government for a set period of time in exchange for interest.
• New York Stock Exchange: The busiest stock exchange, representing more than 3000 companies where millions of stock shares are traded every business day.
• Dow Jones Industrial Average (DJIA): 30 Stocks listed on the New York Stock Exchange. The Dow is used a scorecard to show average stock performance for each trading day.
• Diversification & Asset Allocation: How money is divided up between different types of investments.

Six Simple Steps to a Savings Plan

Build from the ground up with solid foundation!
• STEP SIX - Review Your Progress
Are you on track to reach your goals? How long will it take? Do you need to make any adjustments?
• STEP FIVE - Identify Your Earnings Plan
Will you be getting an allowance? Would you like to get a job? What other income can you expect?
• STEP FOUR - Establish a Savings Vehicle
Do you want to save your money at home? Do you want to open a bank account? Do you want to start a collection?
• STEP THREE - Set Up a Budget
How will you earn money? How much money will you need to reach your goals? How will you divide your money if you are saving for 2 budget items?
• STEP TWO: Set Your Goals
What are your financial goals? What do you WANT and what do you really NEED? What do you need now and what can wait a few months or even a year?
• STEP ONE: Get Educated
Where does money come from? How does a bank earn money? How can you make your money grow in value? What is compound Interest? (Hint: Check this blog’s archives. I’ve answered these questions before.)

Covering Your Bases - A Game Winning Strategy

As a financially savvy kid, it’s important to set short, medium and long-term goals. Then create a budget and a financial plan to illustrate how you can meet all of your goals. Consider how much money you will put into the following 4 categories:

SAVE – SPEND – DONATE – INVEST

Before you spend, you must save. You must spend on your budgeted items before you donate. With excess money, you can then invest for the future. Then it’s time to save some more!

How Can I Earn That?

So you’ve either earned or been given some money, but what do you intend to do with it? The age-old lesson of need versus want it too often lost in today’s vast world of consumerism. The newest, greatest version of everything is coming at us faster than ever, making it easy for us to get confused about what we really need to spend our money on and what is just too cool to pass up. As soon as my children were old enough to point and ask for a toy or candy bar in the check-out line, I taught them to say “how can I earn that?” rather than “I want that”. This simple little step can completely change how you view all the stuff around you. If it isn’t worth doing an extra chore to get it, then maybe it really isn’t that important to have, after all. And if you choose to put a little skin in the game (earn the money to pay for the purchase) it makes you appreciate the item all the more.

As a New Year's Resolution, I challenge you to stop asking your parents to buy you things and starting asking them "How can I earn the things I want?"!