The Best Free Debit Cards For Kids To Teach Them About Money

The Best Free Debit Cards For Kids To Teach Them About Money

Giving your child a debit card can be an excellent way to teach them about money and budgeting early in life. With consumer debt in the US growing to over $14 trillion, according to CNBC and the Fed, any step you can take to help promote financial literacy early can go a long way.

However, not all debit cards for kids are created equal.

Some have higher monthly fees. Others are free but have ATM and card reload fees. And a few cards offer features above and beyond the competition.

It’s important to understand your options before choosing which debit card to get your kid, especially when it comes to cost. So below, we compiled a list of some of the best debit cards for kids, including a couple of free options you should consider.

What Debit Cards Can Teach Kids About Money

There are a lot of money lessons that kids can learn when using a debit card. Though, the one skill that they will likely pick up above everything else is budgeting.

By allotting them a predefined amount of money, you put the power in their hands to decide how they want to spend their cash.

Rather than saying they can purchase one toy when at the store or one candy bar when at the grocer, they have to look at each item’s price and decide what’s worth it and what’s not, just like the rest of us. They have to consider much more in terms of opportunity cost.

Plus, I think using plastic over cash can have some advantages. It’s like using training wheels before getting their first credit card.

With a kids’ debit card, you can put limits on how much they can spend. You can essentially make it impossible for them to overspend, and they might start to learn those boundaries.

Then, you take the training wheels off when they get their first credit card, and I think they’ll have a higher chance of not maxing out the credit limit right away because they have built the habit of sticking to a budget when using a card.

If we were following Dave Ramsey’s Baby Steps, teaching someone about money early would be like step 0. Although, he’d probably frown against the credit card training…

I digress. At the very least, giving your kid a debit card and talking about money will help promote financial literacy. Hopefully, that will go a long way in stopping them from contributing to that multi-trillion consumer debt number mentioned above.

What Defines a Kid Debit Card

Before diving into the list of the best kids’ debit cards, I wanted to define what a kid’s debit card is to me. Generally, I think it must comply with three rules:

  1. A kid (under the age of 18) must be able to use the card on their own
  2. The card must be accepted at most retailers and online
  3. There must be spending controls and parental controls, including transferring preset amounts to the card from a checking account

Also, there are usually features that allow you to track and monitor spending and manage chores.

Most of the best debit cards for kids are prepaid cards that you can load money onto. Since they are prepaid, you avoid the need to open a checking account and eliminate any possibility of overdrawing an account. The card being “prepaid” is the training wheels from the example above.

The 6 Best Kids Prepaid Debit Cards

Before diving into the list, I wanted to call out that the first two options are free! Meaning, there is no monthly fee associated with them.

The rest are still good options, and in some cases, better options, but there will be a monthly fee associated with them.

1. Akimbo Prepaid Mastercard

  • Monthly Fee: $0
  • Card Purchase Fee: $0 (first sub card free, after that $4.95)
    • Reload Fee: $5.95
  • ATM Fee: $1.98

The Akimbo prepaid debit card is technically free. However, even though there is no monthly or annual fee, there is a litany of other costs.

On top of the hefty $5.95 cash reload fee, there is also a $4.95 card replacement fee and a $5.95 inactivity fee (if your card is unused for 12 months).

I like the card because it’s free, and creating sub cards for your kids to use is relatively easy and only comes with a one-time fee of $4.95. Still, the other expenses associated with this card add up fast (especially the fee to transfer money onto the card).

Learn more about the Akimbo Prepaid Mastercard here.

2. Movo Digital Prepaid Visa Card

  • Monthly Fee: $0
  • Card Purchase Fee: $0
    • Reload Fee: $0 (in most cases)
  • ATM Fee: $2.00

The Movo card outshines Akimbo as a free debit card for kids in a few ways.

For one, there is no reload fee if you opt for direct deposit or other approved methods, which is head and shoulders above the Akimbo card. Imagine reloading $20 onto a card for a kid’s monthly allowance and having to pay $5.95. That’s over a 25% fee!

Even if you loaded $100 at a time, Akimbo is still taking nearly 6% from you.

With Movo, it’s free, which is a massive advantage if you plan to load small increments of money onto the card frequently.

However, there is a $4.95 inactivity fee that kicks in after only 90 days (compared to 12 months for Akimbo). If your kid is a good saver and doesn’t use their card often, you may face this fee from Movo. Like many other cards on the list, you have to watch out for ATM fees with this one as well.

Learn more about the Movo Virtual Visa Prepaid card here.

3. Current Visa Debit Card

  • Monthly Fee: $3 ($36 billed annually)
  • Card Purchase Fee: $0
    • Reload Fee: $0
  • ATM Fee: $0 (for in-network ATMs)

The Current card is not free, but it does offer transparent pricing and a one-month free trial. For only $36 a month, you add money to your card as many times as you’d like, worry-free.

Plus, Current offers more than just a debit card. They offer a mobile app with a whole suite of products, including teen banking. It’s one of the most technology-forward options on this list.

Also, for what’s it worth, the card looks cool and wins style points there.

Learn more about the Current Visa Debit Card here.

4. FamZoo Mastercard Reloadable Prepaid Card

  • Monthly Fee: $5.99
  • Card Purchase Fee: First four cards free, then $3 per card
    • Reload Fee: Free when using a qualified bank transfer or direct deposit.
  • ATM Fee: Varys by ATM

The FamZoo card is probably the most popular kids’ debit card option on this list. That’s because it was designed to be a kid’s debit card, whereas some other options on the list are just prepaid debit cards that happen to be good for kids.

Because the card is designed for kids, it offers a lot of neat features, including:

  • Setting up payments for chores
  • Monitoring and tracking kids spending
  • The ability to set savings goals for your kids

The monthly fee is $5.99 per family – so the value gets better the more kids you have using the card. Plus, there are methods to reload your card for free to help keep costs down.

Learn more about the FamZoo prepaid debit card here.

5. Gohenry Prepaid Mastercard

  • Monthly Fee: $3.99
  • Card Purchase Fee: $0
    • Reload Fee: $0 (when loading via debit card)
  • ATM Fee: $1.50

Gohenry offers a free 30-day trial. After that, it is one of the more expensive cards on the list, coming in at $3.99 per month per child.

The premium price could be warranted depending on what you are looking for in a kid’s debit card. Gohenry is designed for kids, similar to FamZoo, and offers a sleek app intended to help teach kids about money.

Last, the ability to personalize the card is a nice touch and could help your kid get a little more excited about learning about money. However, it costs $4.95 to get a customized card.

Learn more about the gohenry card here.

6. Greenlight Kids Debit Card

  • Monthly Fee: $4.99
  • Card Purchase Fee: $0
    • Reload Fee: $0
  • ATM Fee: $0

Rounding out the list is Greenlight, another card designed for kids.

In fact, their tagline is “the debit card for kids, managed by parents.”

The pricing is set up similar to FamZoo, where you pay $4.99 per month but can have multiple kids on the account. It also offers countless great features to promote financial responsibility for kids, including:

  • Chore management
  • Allowances
  • Real-time transaction notifications
  • Parent-paid interest on savings
  • And more…

Learn more about the Greenlight card here.

Bonus: Open a Joint Checking Account

  • Monthly Fee: asdf
  • Card Purchase Fee: asdf
    • Reload Fee: asdf
  • ATM Fee: asdf
  • Rewards/Perks: asdf

The bonus option on this list is to opt for a regular (non-prepaid) debit card.

You can do this by opening a joint checking account with your kid, giving them access to an FDIC-insured bank account and a debit card at the same time.

The two watch-outs with this option are:

  1. You need to make sure that you won’t get hit with any overdraft fees
  2. You need to check the minimum age to open a checking account, which can vary by bank

If you can get by those two hurdles, this could be a great option because it’s free. There are typically no monthly fees associated with checking accounts and debit cards, and you don’t have to worry about “reload” fees either.

Pros and Cons of Getting Your Kid a Debit Card

Kids Debit Card Pros

Teaches Kids to Budget: As mentioned at the beginning of this article, giving a kid a debit card can be one way to teach them about budgeting and enforce good money management practices.

You Can Set Spending Amounts: Most prepaid cards put the parent in the driver’s seat to set spending limits and monitor accounts. You can start to let your kids spend money on their own without completely letting them loose.

Avoid Overdraft Fees: Using a prepaid card, you eliminate the risk of having a kid overdraft a debit card and rack up hefty fees.

Multiple Other Features: From setting interest rates in “savings accounts” to incentivize savings to rewarding kids for doing chores, many of the best prepaid debit cards for kids come with additional useful features.

Kids Debit Card Cons

The Cost: There is no getting around it; whether it’s a monthly fee, reload fee, ATM withdrawals fee, or another type of fee, kids’ debit cards are expensive. The high price you have to pay takes away the risk of overdraft fees, and in some cases, the cost is offset with fun features to help you manage the card and teach your kid(s) about money at the same time.

No Rewards: Unlike traditional credit cards, most debit cards do not offer the ability to earn cash back or rewards.

Age Limits: The age limit to open a card tends to vary by company. This is another thing to keep in mind and look up before moving forward with a card.

How to Choose a Debit Card for Your Kid

Choosing a debit card for your kid is easy once you know your options.

In general, I think there are three questions you should answer to make the decision.

1. Do You Want a Prepaid Card?

If you want the safety and security that comes with loading money onto a prepaid card, then you have started to narrow down your options in the direction of the six cards listed above.

If you are okay with taking the risk of overdrafting an account or are familiar with a bank that stops overdrafting in the first place, going the route of a traditional debit card might be a good fit for you.

2. Do You Want Added Features?

If you want a card and app that comes with many bells and whistles, then opting for the FamZoo, Greenlight, or gohenry card (or something similar) is probably a good choice.

Each card’s website details exactly what it can and can’t do (such as monitoring spending). Before signing up, it’d be wise to read those details over carefully.

3. How Often Will You Reload the Card?

If you plan to reload the card monthly or even weekly, you’ll want to pay extra close attention to the reload fees and methods for reloading a card.

If you only plan to load up the card once a year, the monthly fee associated with the card is the cost you will want to keep lower.

Final Thoughts: Best Free Kids Debit Cards

Getting a debit card for your kid to use can be a great way to help teach them about money and budgeting.

Though it can also be a great way to simplify your finances, instead of doling out an allowance in cash, you can manage money digitally, just like most of us do when paying our own credit cards or monthly bills.

The key when choosing a card is to make sure the benefits outweigh the costs. As you saw reading through this list, these cards are not cheap, and the monthly costs and fees can add up quickly!

This article originally appeared on Your Money Geek and has been republished with permission.

Why Liquid Net Worth Matters

Why Liquid Net Worth Matters

“Liquidity is a good proxy for relative net worth. You can’t lie about cash, stocks, and bond values.

Mark Cuban

Understanding your net worth and how to calculate it is hugely important for measuring your financial health at a particular point in time. It is simply the difference between assets and liabilities. However, it doesn’t consider the liquid nature of your assets.

For example, stocks and bonds tend to be more liquid than other assets as they can be quickly and easily converted into cash. Other assets like your house or car take time and negotiation to sell if you need money. Net worth remains a helpful benchmark but depending on the type of assets you have it may be a less accurate picture.

Liquid Net Worth Is A Realistic Snapshot Of Your Financial Condition

Liquid net worth is what really matters. It is a far more realistic reflection of your financial condition should you face an immediate need for money such as a medical crisis or a business opportunity. While liabilities remain the same for both calculations, your liquid assets have more significance when unforeseen events occur.

Those assets for readily available as cash with little or no loss of value to be counted in liquid net worth. Having liquid money provides a sense of financial security for disasters and opportunities alike.

Asset Rich Cash Poor Can Be Uncomfortable

To a great degree, when you need to take money out to pay for an unforeseen event, would it be easier to take $15,000 out of your savings account or sell your land? Depends if you have $15,000 in the bank. The expression “asset rich cash poor” comes to mind. Often, people have economic assets like land or other economic interests but are not able to easily liquidate them for money.

Land and antiques are assets we have owned and enjoyed. However, you can’t count on those assets to pay for a costly emergency in your life. When I think about mistakes I have made, those purchases stand as major regrets. You sleep easier with access to liquid assets.

What Is Net Worth?

Your net worth is your personal balance sheet that provides a snapshot of your financial position at that time. Net worth is all that you own less than all that you owe. For an expanded explanation, see 10 Reasons Why You Need To Know Net Worth.

The  Formula: Net Worth =  Total Assets less Total Liabilities

Using an excel spreadsheet with different assets/liabilities is an excellent tool for you to put all of your categories in one place that can be periodically updated. You should do it on at least a quarterly basis. However, if you are true to your monthly budgeting, reviewing your monthly net worth is better.

Try putting it on a spreadsheet first. You can use Personal Capital’s net worth app for tracking your investments. Frankly, any way you can keep on top of your net worth with an eye towards building the amount will work.

Knowing Your Net Worth:

  • is a crucial benchmark and report card at a particular time.
  • will allow you to set near-term and long-term goals.
  • track its changes for better money management.
  • highlight your liquid asset balances.
  • helps you to get a loan for a house, car, college tuition, or new business.
  • pay down high-cost debt.
  • refinance your mortgage loans.
  • encourage you to save and invest more.
  • buy your own home, rather than pay high rent.
  • is a great road map to building your wealth.

 

What Is Liquid Net Worth?

Although net worth provides a view of your current financial condition, it doesn’t differentiate the assets that can provide you with liquidity quickly and easily. When facing a medical crisis or an opportunity to buy a business, getting access to your money matters. Sure, you can sell your car quickly but likely for less than the estimated value. Understanding what assets are more liquid means they can be readily converted into cash with little or no loss in value.

The Formula = Liquid Assets Less Total Liabilities

You can either remove non-liquid assets from your total assets or discount their values from their appraisals. Additionally, you need to recognize that tapping certain assets too early such as retirement accounts could result in paying penalties and taxes. More than that, you lose momentum when you withdraw assets that were benefiting from compounding growth.

 

Your Liquid Net Worth:

  1. Understand the differences between your net worth and liquid net worth. Liquid net worth is what you need to count on for immediate funds.
  2. Liquidity varies among our assets which have different growth rates. Money market accounts are liquid but typically have lower returns than stock investments long term.
  3. Consider costs involved in the transactions such as penalties, taxes, fees, and such

 

How To Calculate Your Liquid Net Worth?

Liquid Assets:

  • Cash
  • Cash-Equivalent Securities
  • Brokerage/Investment Accounts

The most liquid assets are cash, cash-equivalent (or money market) securities, and investment or brokerage accounts. These are either already in cash or are those financial or monetary assets that can easily turn into cash with little or no loss in value.

Cash is the best form of liquidity but of course, doesn’t grow unless it is invested.  This category broadly consists of cash on hand, prepaid cards, savings accounts, checking accounts, money market accounts, certificates of deposit (CD), savings bonds, and emergency funds. If your CDs are in a fixed term like 6 months or a year, you may need to pay a small prepayment penalty but this is fairly accessible money. Separately, you need to have an emergency fund earmarked for unforeseen expenses.

Brokerage/Investment Accounts

All types of financial securities can be bought or sold in your brokerage account. Typically, they are stocks, bonds, REITs, mutual funds, and ETFs that are in these taxable investment accounts. While these accounts are liquid in a matter of three business days, you do pay taxes on price appreciation based on the time you held the security. Holding the securities for over one year is taxed at a lower 15% capital gains rate. Otherwise, you pay taxes at the same rate as ordinary income.

Less Liquid Assets

The cash value of your life insurance policy is fairly liquid but you may have to absorb small fees. Depending on the company, it can take more time (eg. 10-20 days) than access to financial securities. On the other hand, access to pensions and investments in real estate such as multifamily homes are less liquid.

Retirement Accounts

When withdrawing money from your retirement accounts before you turn  59.5 years,  you will likely be hit with a 10% penalty and immediate payment of taxes, losing the deferred benefit on that amount. Generally, if you withdraw early from a 401K plan or IRA account you will pay taxes at your marginal tax rate. The marginal tax rate is the tax rate paid on the dollar of earnings (eg 22%-24%).  On the other hand, Roth IRAs are treated differently. For those accounts, so long as you have had this account five years or more, you may withdraw contributions you made to your Roth IRA anytime tax-free and without penalty.

While you may have access to your retirement savings, these are not considered to be liquid. You should not dip into your retirement accounts unless needed as a last resort. By withdrawing these funds, you lose the compound benefit on this money for your future when you are less likely to earn money at your job.

A Temporary Exception

The federal government had waived the 10% penalty if you made a withdrawal between January 1 and December 31, 2020, for those impacted by COVID. Qualified individuals that put back this withdrawn money within a three-year time frame will be excused from paying taxes on the money.

If you are including retirement accounts in your liquid net worth, you should discount your retirement balances by 25% to be conservative.

529 College Savings Accounts

Like retirement accounts, withdrawal of money saved in a 529 college savings plan may be subject to a 10% penalty and you will have to pay taxes. The exception to this rule for 529 savings is withdrawals made for qualified education expenses such as tuition, fees, books, computer, and related costs.

If you are including 529 accounts into the liquid net worth, I would use a similar discount of 25% off the account balance.

Other  Assets

The cash value of your life insurance policy is fairly liquid but you may have to absorb small fees. Depending on the company, it can take more time (eg. 10-20 days) than access to financial securities. On the other hand, access to pensions and investments in real estate such as multifamily homes is less liquid.

Tangible assets

These assets are real and personal property that reflects your lifestyle and is harder to liquidate for funds.

Your Primary Home

If you own the primary home you live in, this may be your largest asset. While the home is an investment, it is not a liquid asset like financial securities you invest in. You cannot count on liquidating real property for quick conversion to cash. You need to figure out how the real estate market is faring in your area using Zillow Zestimate and other sources.

Selling your home is a complex process that can take several months or more to accomplish. An appraisal value is not necessarily your sales price which is often lower. Also, to complete your sale, you are responsible for fees and costs including broker fees of 5%-6% on the sales price, closing costs of 1%-2%, and attorney costs.

Most likely you are carrying a mortgage that is picked up in total liabilities. Upon the sale of your home, you will pay off your mortgage in full from the proceeds of the sale of your home, reducing your liabilities.

Your primary home as an asset should be discounted about 25%-30% off its estimated value for purposes of liquid net worth.

Other Real Estate

Besides your primary home, you may own other types of real estate, including vacation or second home, timeshares, land, and rental property. Having just sold a plot of land, I can tell you that we took a 30%-35% hit from our cost basis in an ugly market after putting it on the market over a year ago.

Use current conservative market values for real estate. Appraised values may not reflect actual sales or liquidated values. You should not be inflating your liquid or net worth unrealistically.

You would need to approximate the value of your home, cooperative, condominium, cars, boats, and any other large items. To approximate real estate values, you can look at Zillow Zestimate, Redfin, Chase Home Estimator, or real estate websites for your zip code.

Your Business(es)

If you own businesses outside of your primary income, it is tricky to calculate a value let alone consider it to be a liquid asset. While you may want to include in your net worth statement a discounted multiple of annual revenues, it doesn’t make sense to include for purposes of liquid net worth unless you had the business appraised and a ready buyer.

Personal Property Is Tricky To Value

Unless you have a meaningful fleet of cars and boats, you should not add these to your assets for your net worth or liquid net worth.  These assets depreciate too fast and sell too slowly to add fairly to your liquid net worth. If you do have that fleet, for cars, you can look at Kelly Blue Book, Edmunds, or AutoTrader. Similarly, for boats, you can consult Boat Trader.

What Else Goes Into Total Assets?

Art, rare books, rugs, and antiques may be a large part of the net worth of wealthy households handed down to the next generation. Unless they are highly desirable or rare, these assets tend to be wildly low liquidated values to count on if you needed money in a pinch. Musical instruments have their value, but again, they are very difficult to peg and their sales are less predictable to raise capital.

This category has a lot of sentimentalities but its value may be very difficult to ascertain. In my opinion, these assets should not be counted on unless you work with an estate professional steeped in knowledge and who has a terrific network to help you sell the items.

My Own Personal Experience Provides A Valuable Lesson

When I worked on Wall Street, I was restricted from making investments in financial securities. If on that rare occasion I was able to buy certain securities, I was often not allowed to sell that security when I wanted to. So, on either side of the trade, I was burned and finally abandoned investing until I left my career as an equity analyst.

So what did I invest in?

A large part of our assets was in art, rugs, rare books, and antiques. What was I thinking?

These assets are on our walls (art), in our bookcases (rare books such as the first edition of the Federalist Papers), on the floors (ancient rugs), and antique furniture (signed in the mid-1760s by the cabinetmaker).

Ever try to sell an 18th-century Tiger Maplewood card table? We have! And we are still waiting for that sale.

Beautiful stuff, but they can’t pay the bills! So I don’t include these personal assets. The few pieces we have sold were at prices 70% below what we paid for them.

I digress but a worthwhile lesson for those who are collectors.

List all your Liabilities By Current Balances

 

Mortgages

  • Your mortgage loan balance is probably your largest liability.
  • The home equity loan balance.
  • Separate mortgage loan balances for the other real estate property (listed above in assets)

Other Loans

  • Student loans at the current balance.
  • Loans associated with the business(es) even though you aren’t including the value of the businesses.
  • Personal loans
  • Credit card account balances (you should break these out individually).

Related Post: Pros And Cons of Credit Cards

Total Liabilities

As mentioned earlier, the formula is fairly easy:

Total  Liquid Assets minus Total Liabilities = Your Liquid Net Worth

Depending on the composition of your assets, it is possible that your liquid net worth may be negative, especially when you are conservatively discounting large assets like your home but including the full mortgage balance. It is important for you to consider whether you need to adjust your investment strategies, spend less, save more, and make sure you have money for emergency purposes.

 

How Can You Build Up Your Liquid Net Worth: Make Good Trade-Offs

Track changes in your liquid net worth statement as early as possible to make sure you are making progress towards your goals.

Track your spending, review for areas you can reduce and produce savings

Have an ample emergency fund of 6-12 months for unexpected events like a lost job. Invest this fund in a liquid account like money markets.

Put more of your money into investment assets like stocks that can expand wealth rather than in personal possessions.

Add to your retirement accounts to the contribution limit. Avoid withdrawing money from these accounts which trigger penalties and taxes. The same goes for 529 plans.

Making more money at your job or a side gig to boost income.

Consider buying recently used cars than luxury fast-depreciating vehicles.

Choose to invest based on your appetite for risk and where you are in your life cycle.

Related Post: How To Make Better Trade-Offs

Where Should I Invest My Money To Maximize My Liquid Net Worth

Stocks are riskier but generate higher returns than keeping your savings in bank accounts at low returns.

According to Bankrate, the best annual percentage yield (APY) which is your effective annual return as of August 28, 2020 ranges from  0.60%- 0.91% for the top ten banks. Those paltry rates which do not provide much in the way of income. Typically, banks may require a minimum balance from $1 to $25,000 and have monthly fees up to $15.

The younger you are, the more able you are to ride out the greater risk found in stock investing, with the benefits of compounding effects.

Homeownership remains a worthwhile investment with currently low mortgage rates. But your home is less liquid than financial securities.

Decreasing your loans or debt liabilities will increase your liquid net worth.

Your Mortgage Loan Deserves Your Careful Attention

Look into refinancing your mortgage if you carrying a mortgage with more than 5% loan rates. You may realize savings.

Target carefully what you borrow, for how long, and at what rate. Look at taking out a 15-year mortgage loan versus a 30-year mortgage loan. While your monthly payments will be higher for the 15-year loan, total borrowing costs will be lower.

Taking on a mortgage loan is a big cost but home prices have generally kept pace with inflation until 2008-2009 when subprime mortgages played a huge factor in declining home values.

Lower Your Debt Where Possible

Pay off your credit card debt in full. It’s likely your highest cost debt so use extra savings, bonus, or tax refund to lower this amount. Otherwise, slow your spending.

Pay off your student debt as soon as you are able.

Final Thoughts

While net worth is a more common benchmark, refining your assets for liquidation purposes gives you a more realistic picture. Tracking liquid net worth helps you to understand your ability to deal with a crisis or an unexpected opportunity. When facing an immediate need for cash, you don’t want to withdraw funds that are earmarked for retirement.

Thank you for reading! If you found this of value, consider reading other articles on our blog, and join us by subscribing to The Cents of Money. Please let us know your thoughts!

Saving For Retirement In Your 20s

Saving For Retirement In Your 20s

Saving For Retirement Yet?

Savings, investing, and retirement are very related, yet the topic of retirement planning gets pushed off to the side.

We fear dealing with the unknown, or we are neglectful.

Instead, planning early and often for retirement will empower you to control for a stage of life that could quite exciting if done right.

It is always an excellent time to start thinking about saving some tax dollars long term.

Start As Early As Possible

You can start planning for retirement at any age, but the earlier, the better. Start in your 20s to take advantage of tax benefits, compounding interest, and peace of mind when you are older.

According to a 2017 study, 12% of Generation Zers are already saving for retirement. Another 35% of the participants plan to start saving when they are in their 20s. Gen Zers, also called iGen and Post-Millennials, seemed to have gotten the strong message that controlling your destiny, including retirement planning, should be in your hands.

A Mini Case Study 

As a college professor, I teach Gen Zers, but I learn so much from them. Recently, I opened up a discussion on marketing, lifestyle, and status with a question about how millionaires live.

Not surprisingly, many students volunteered with images of luxury cars, mansions, yachts, but one student yelled out, “They have lots of savings and invest more.”  Suddenly, the class took a turn, and others shared how they had “put some money away” while another had opened a retirement account.

One of my quieter students hesitated and then forcefully shouted out, “Professor, I am 18 years. There is no *#!^$ way I am saving now for retirement !” A hush came over the room, some students giggled, and suddenly several students started sharing their thoughts about saving, investing, and starting early on retirement.

My students said that their parents hadn’t saved much “for anything.” The students wanted to do better for themselves by planning for retirement early. They intend to put money into their retirement accounts. They don’t think Social Security will be there for them.

I always recommend books to my students and offer points toward their grade if they write a short essay. They seemed eager for points, so I suggested: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy: Thomas J. Stanley, William D. Danko. If you haven’t yet read this book, it identifies the key traits of those who accumulate wealth by emphasizing that putting away money for your future is paramount.

By the way, a surprising number of my students have taken up the offer, read the book, and submitted an essay for their extra points.

 Why You Need Retirement Planning Early

  1. Life expectancy has increased significantly since 1960. Recent forecasts point to further increases to 83-86 years for men and 89-94 years for women in 2050. Assuming you retire at 65-66 years, you will need 20 years of savings at a minimum.
  2. There could be challenges for Social Security retirement income benefits. About 65 million, or nine out of ten Americans, aged 65 or older received $1 trillion in social security benefits in 2020.  These income benefits represent 33% of the income of the elderly.
  1. Defined pension benefits have a long history but were a 20th-century cornerstone for retirees. A defined benefit pension plan promises a specified pension payment or a lump sum payment from your employer when you retire. It is a particularly desirable compensation perk but declining in use like rotary phones (a now antiquated way to dial a telephone). Today,  only 4% of private-sector workers only participate in pensions, a significant decline from 60% in 1980.

 Retirement Goals You Should Consider

  • Start saving early in a retirement account even if they are initially small amounts. 
  • Raise your contributions accounts as you receive salary boosts and bonuses.
  • Put up enough dollars to earn your employer’s match.
  • Aim to contribute up to the limit allowed for your 401K employer-sponsored 401K and your Roth IRA plans. 
  • Borrow from retirement accounts only as a last resort. 

 

Retirement Accounts are Really Investment, Not Savings Accounts 

By saving early in your retirement, you are investing for the long term. Through the benefit and magic of compounding, you can have substantial funds by contributions, even if you begin with a relatively small amount in your 20s. 

 For example, Emily is 35 years old and puts 6% or $4,200 of her annual salary into the plan. Her account balance would be $279,044 with a 5% yearly return and 30 years until she retires at age 65. That amount would jump to $397,000 if she opted for a more aggressive fund at a 7% return along with higher risk. These amounts do not reflect an employer’s potential matching contribution.

Have Tax Advantages 

There are different retirement accounts, but they have a few things in common: they have tax advantages with varying growth scenarios depending on your preference. They have contribution limits set by the IRS that have increased over the years.

The best known of all retirement plans is the traditional 401K.  They have primarily replaced the defined pension benefit plans.

Most, but not all, employers provide the 401K plans for recruitment and retention purposes.

Small companies, which typically have resisted offering these plans because of cost concerns, often have many part-time or contract employees. They have been slower to adopt these plans and can choose to provide SIMPLE 401 K (see below).

Varying 401K  Plans

If you consider employment between two companies, examine the competing offers based on their sponsored plans for employer matching of your contribution.

Typically, a company will match 50% of every dollar you annually up to a percentage of your gross income, usually around 6%. Some companies match on a dollar to dollar basis but at a low rate of your salary.

Your contributions are on pretax dollars up to $19,500 in 2021, with an additional $6,500 contribution allowed if you are over 50 years as a catch-up measure.

Using pre-tax dollars, defer your federal and state taxes paid upon withdrawal, beginning age 59.5 years. Withdraws before that time will usually result in a 10% penalty. If you are retired, you must begin withdrawing required minimum amounts (RMDs)  by age 70.5 years. 

Greater Participation In Retirement Plans Can Happen

About 70% of all US workers have access to employer-sponsored plans, including 401K, 403b, 457, and the federal government’s Thrift Savings; 55% are participants. As more companies offer automation of contributions directly from paychecks, more employees will likely participate. 

If your company offers a 401K plan and will give you some kind of employer match contribution to add to your own, you are robbing yourself of that gift, and the compounding benefits for the many years you have until retirement. You are just leaving money on the table! 

Surveys have indicated that some employees say they don’t participate in their employers’ 401 K plans because they get overwhelmed by the possible choices they have and then postpone signing up for the program. Employers have encouraged employee participation by providing more information about investment choices and transitioning to opt-out offerings, rather than opt-in.

You can make changes in your selections if you think you picked a too aggressive or too conservative investing approach. Pick one and read your statements, familiarize yourself with the other choices if you want to make a change. Just make sure you start your plan and put in enough to qualify for and trigger your employer’s contribution. 

Roth 401K is similar to the traditional 401K but uses already taxed dollars, so your withdrawals are tax-free.  Roth 401K’s began in the retirement lexicon in 2006 after the introduction of Roth IRA.

Other 400 Plans For Different Organizations

403(b) plans are for employees of non-profit organizations.

The 457 plans are for state, local government employees, nonchurch, and other tax-exempt organizations. No employer contributions are allowed for this plan.

Employers with 100 or fewer employees offer Savings Incentive Match Plan for Employees or SIMPLE 401 K. Employers must choose between making matching contributions up to 3% of each employee’s pay or nonelective contributions of 2% of employee’s pay.

Traditional IRA

If you don’t have access to a 401K plan, or even if you do, you can personally set up your retirement account with a traditional IRA or a Roth IRA.

Your contribution to a traditional IRA is in pretax dollars. You defer tax payments until you make withdrawals at age 59.5. If you take out money from your IRA before age 59.5, you will pay taxes and may trigger a 10% penalty plus tax. You may contribute $6,000 in 2021, or $7,000 if you age 50 or older.

IRA withdrawals begin at age 70.5 as required minimum distributions or RMD.

The logic behind paying taxes at an older age is that you may be in a lower tax bracket. However, the reason may be in reverse, and that’s why Roth IRA’s have increased in popularity. Of course, your tax brackets will reflect how well you do in your career, and it is not likely you know that in your 20s.

Roth IRAs

With Roth IRAs, you contribute after-tax dollars, and your money grows tax-free. Your withdrawals are tax-free after 59.5 years. 

Roth IRAs have no required minimum distributions like their older IRA counterpart. You may be able to withdraw your contributions, not your earnings, before age 59.5 years without penalty if your Roth IRA has existed for five years or more.

In many ways, Roth IRA has been the preferred vehicle for personal retirement accounts and are more tax-friendly longer term.

Arming yourself with both 401K and IRA retirement accounts is the minimum planning you can do when you are in your 20s and 30s.

Borrowing Money From Your Retirement Savings Is The Last Resort

There are times when you face financial hardship and consider borrowing from your retirement plan.  Your 401K plan (not your IRA plan) allows you to borrow from your retirement assets and repay the amount with interest to your account rather than to a financial institution.

One of the most significant drawbacks of using your retirement assets is the loss of tax-deferred compound growth for the loan duration. Taking assets out of a retirement account should be a last resort. We discussed withdrawals, and if you do so too early, you pay taxes and penalties.

Final Thoughts

You have long years in front of you. Starting early in your planning, even with small amounts, allows you to benefit from compounding growth through the years. Earning interest on interest adds significantly to your retirement fund. 

Do it early so you can avoid the real angst of not planning. Procrastination is not an answer for anything! You’ll be glad you are getting a headstart!

Thank you for reading! 

 

 

 

Credit Card Alternatives Have Benefits

Credit Card Alternatives Have Benefits

Do you really need a credit card? Most people believe so. I have had a love-hate relationship with credit cards, admittedly using cash and alternatives more often than most people I know. Credit cards can be a valuable tool, allowing you to make purchases with credit from the bank or retailer, as issuers. You must pay these debts back.

For disciplined cardholders, who pay their monthly bills in full, credit cards are a convenient tool. However, Americans carry an average balance of $6,354 at the average 16.28% interest rate. These folks are borrowing to spend money, growing their balances at fast rates while incurring exorbitant interest costs. It is a toxic formula.

Many people believe a credit card is essential. Roughly 83% have at least one credit card in their wallets, and 52% are carrying a balance.

The Benefits of Credit Cards – Can They Be Found Elsewhere?

 

Convenience

Credit cards are more convenient than paying with cash or checking accounts. Many retailers do not accept cash, and it is tough to carry a wad of bills in your purse or pocket. With credit cards, you can make fast payments, transfer between accounts, have more shopping options, and track your spending. Some alternatives like debit cards, share this convenience factor.

Building Credit History 

More than most alternatives, credit cards can help you establish your credit history and boost your credit score. When you make purchases with a debit card, the funds are deducted from your checking. You can improve your creditworthiness by paying your bills on time with checks like rent, utilities, car loans, or even a loan through the Lending Club. You can set up an Experian Boost for free, linking certain payments like your cell phone and streaming service to lift your credit score a few points.

Perks

Credit cards offer many perks to their cardholders, such as cashback, points, discounts, and other rewards. Keep in mind that higher fees may accompany better perks. Charge cards and even debit cards may offer some of these benefits. If you link PayPal to your credit cards, you can still get whatever points, miles, and rewards associated with your specific card.

Savings and checking accounts do not offer these awards, but you can earn some interest income, admittedly at low yields these days.

Borrowing Capacity

Credit cardholders may be able to get cash advances by borrowing money using the available credit limit to take out a short-term loan. This double-edged benefit is a more comfortable and quick way to borrow money than getting a personal loan, but it is also more expensive.

Its costs have two components: first, there is a $5-10 flat charge or a percentage of your borrowing, and secondly, your interest rate on the advance will likely be higher than your regular purchase APR.

If you borrow for immediate needs, advances may be faster. However, it is ideal if you have an emergency fund when you need funds in a hurry. You may tap into other alternatives to get various loans reasonably quickly from Peer-to-Peer (P2P) lenders like the Lending Club. Otherwise, you can go to a traditional bank for a personal loan but it may be a slower route.

Fraud Protection

Credit card protections for holders come from the Fair Credit Billing Act (FCBA).  Your card has protections if lost, stolen, used without your permission, and potentially fraudulent transactions. Holder liability for unauthorized use is limited to $50, which may get waived at some banks.

The Electronic Fund Transfer Act (EFTA) covers fraud associated with an ATM or debit card. Liability limits are a bit more complicated for debit cards. If you report your card lost or stolen, your liability is:

  • Zero before any unauthorized transactions, 
  • or $50 within two days; $500 within 60 days; and no protection after 60 days.
  • However, there is zero liability if there is evidence of fraud transactions without a stolen or lost card.

For online purchases, PayPal may be an attractive alternative to credit cards as it has an added layer of encryption technology to avoid fraud.

11 Alternatives To Credit Cards

 

1. Debit Cards

Debit cards provide the convenience of making purchases with a plastic card emboldened with a Visa or MasterCard logo. They are widely accepted at retailers and can give cashback and rewards.

You can withdraw money or transfer funds and make purchases via point of sale (POS) with a PIN. Some people do not like entering the PIN for security purposes, and especially during the COVID pandemic. They can bypass the terminal to complete the transaction by signing for their purchases.

Your debit card purchase amounts are deducted electronically from your checking account in days. Make sure you keep some balance in the checking account to avoid overdraft fees from overdrawing.

Debit cards don’t provide the user with the same temptation or danger of overspending as credit cards. As such, debit cards are useful for those who overspend, aren’t creditworthy, or have little experience using cards like teens. You can get a debit card without a credit history. The first card I carried was a debit card because I didn’t want to have cash.

It Won’t Help Your Credit History

However, debit cards do not appear on your credit history or positively affect your credit score, as you are making payments from your funds. Unlike credit cards, the credit bureaus (Equifax, Experian, and TransUnion) do not receive reports of your debit card activity. Therefore, debit cards won’t help you build up your credit history. There are other ways you can improve your credit history outside of using a debit card.

2. Prepaid Debit Cards

To avoid overdraft fees that may mount up from debit cards, some people prefer prepaid debit cards. It has all of the benefits (and drawbacks) the debit card has, but it has an increased limitation. You can only spend up to the amount on a  card. Like debit cards, it is safer and more convenient than cash or checks. Prepaid debit cards are a good option for parents who have children in high school or college-age. These cards can help students learn how to use a card with spending limits.

3. Charge Cards

A charge card (e.g., American Express, gas companies) requires you to pay your balance in full each billing cycle. Typically, to be eligible for a charge card, you need to have a good to excellent credit score of roughly 700 or higher. Unlike credit cards, you have uncapped spending abilities and do not pay interest.

High annual fees range from $100 to $550, and these costs go up quickly. The higher the fee, the more significant and tailored are the features.

The  American Express Platinum card is top of the line, is metal instead of plastic, and a status symbol for many. I have this card for years which I originally used for my traveling work schedule. It has tremendous benefits and flexibility, some of which I don’t fully use, and I think a change is in order.

Plastic or metal aside, it is your responsibility to manage this significant charging power well. You will incur a steep late fee if you missed the payment date, and it will be reported to the credit bureaus, impacting your score. You can easily overspend, so it is up to the user to recognize that you have to pay your balance down to zero during the cycle.

4. PayPal

Paypal is a payment app, has the convenience of a credit card when shopping in stores, online, or as a mobile application. You can use this Instant Transfer service to send money to anyone, make fast payments, and refund faulty goods options. While PayPal may not be yet as widely accepted as credit cards, that gap will likely narrow over the next few years.

Essentially, PayPal connects to your bank checking account, debiting each amount instantly. You can link PayPal to credit cards and continue to get points, miles, and any rewards available from your card. You can get cash from PayPal if you participate in surveys.

5. Secured Credit Cards

A secured credit card is usually the best card for those who have already had financial challenges such as bankruptcy or managing a traditional credit card. It can also help those with limited or no credit history. Unlike debit cards, secured cards can help you build or rebuild your credit history.

They are easier cards to qualify for than credit cards, but they will look at your credit background and employment situation. Also known as a collateralized credit card, it requires you to deposit money in a bank account equal to its credit limit. The security deposit is your collateral.

You are usually setting the credit limit by your deposit amount. Start with a small deposit, say $300, manage your spending, and pay your bills on time so that you can build up a positive history. Typically, the issuer reports your purchases to the credit bureaus. There may be fees to pay to apply for the card and its processing.

6. Become An Authorized User

If you don’t have a card for various reasons–too young, limited, or poor credit history–, you can become an authorized user of another credit cardholder such as a parent, a sibling, or a close friend. If you go this route, make sure that you become an authorized user of someone with a good-to-excellent credit score and manages their bills well.

You are piggybacking on their credit profile (for which you should be immensely appreciative), but, as an authorized user of someone with poor credit, your score will reflect that person’s score on your credit. In other words, you will not be doing yourself any favors in that situation.

Authorizing your child as a user on your card is a good option for creditworthy parents. They can teach their children how to handle credit cards responsibly, set limits, keep track of spending, and take away authorization if the cards are misused. It may be a more challenging situation to set boundaries for an older adult as an authorized user.

7. Store Credit Cards

I am not a fan of retail (or store) credit cards, nor have I ever been. It’s the sales pitch at the point of sale where you are most vulnerable to getting a credit card you don’t need. It’s the retailer, not the clerk at the checkout, who I fault for the technique that turns many people (myself included) into silly putty.

Typically, the sales clerk will often talk to their customers at the point of sale, asking if you have their branded store card. Your arms may be holding a significant load of purchases and a credit card, but before you answer their question, they are offering a 10% discount on your purchases. Oh, and it will only take ten minutes more. It takes longer than that as the clerk tells you to look around since you are getting money back into your pocket.

The discount and future discounts in a store you tend to visit us often can be worthwhile. However, I don’t recall receiving any deals that were greater than 15%.

The negatives of having a store credit card far outweigh any positives, at least in my experience. Store cards carry higher interest rates than traditional credit cards, which are high enough. Applying for the card will impact your score slightly.

My personal experience years ago (the late 1990s) with a store credit card, which I used probably twice, lingers with me still. I signed up for the card. After getting the 10% discount on a warm coat, raincoat, and a few other garments, I did get their card. It was a higher bill than usual as I was shopping in a hurry, leaving my office to get these items for an overseas work trip. As is my practice, I paid the bill before its due date so I wouldn’t forget.

Months later, we applied for a mortgage refinancing but, I found an error on my credit report. It indicated that I had an outstanding bill from the retailer, where I had my one and only store credit card. Without identifying the retailer (it’s a Fifth Avenue behemoth), I called and wrote letters, receiving no answer. I visited their credit department, but no one would reverse the notation.

Ultimately, as we ran out of time for our refinancing application, I paid the bill twice! The second mistake I made regarding the store card, I closed the card. Later on, I realized you never close any credit card, just put it in a drawer.

8. Gift Cards

A gift card is a stored-value card containing a specific dollar amount for future discretionary spending. There is usually an expiration date that can be short term. Once the card’s sum is spent down or has expired, the card no longer has any value. Gift cards represent a retailer and potentially its affiliated businesses.

You can buy the gift card with cash or a credit card. Gift cards are on display on checkout lines, sold physically or online as an eGift such as an Amazon card. It is an easy way to give someone a present, especially during holiday times. We gave and received many gift cards through the years, especially for countless children’s parties, ours and their friends.

Besides the impersonal nature of gift cards, they are easy to lose, forget, and expire, so that it may be a waste of money ultimately. When these cards expire, the money you spent on the card is gone for the person you were gifting. On the other hand, the retailers do well from the gift cards as the unused dollar amount goes straight to their bottom line.

People spend roughly $100 billion on gift cards, with about $3 billion going to waste. National Retail Federation reported more than 59% of people surveyed in 2019 preferred a gift card for their holiday present. Another survey said that 80% of the gift card funds are spent within a year, leaving 20% on cards. Looking back, I regret giving cards, preferring more memorable gifts.

9. Apple Pay

There has been a significant rise in mobile commerce, ushered with new technology in recent years.  Electronic mobile wallets like Apple Pay and Google Pay are widely accepted digital cards linked to your credit and debit cards. They are a mobile payment service that works off your smartphone device, allowing you to make contactless, secure services in retail stores, in apps, and online.

It is convenient having a card on your phone, limiting the need to carry a lot of cards or cash in your physical wallet. You can track your spending like traditional credit cards.

If you lost your physical wallet or someone stole it, you would lose cash and need to contact each of your credit and debit card issuers. Your stored information is with a third-party provider. Each transaction must be approved by the user using a PIN or a fingerprint as a security measure. It may offer rewards or discounts but in exchange for fees.

Among its disadvantages, there are spending limits, and it may be even easier to pay, and your phone is readily available. At least with credit cards, you can leave them behind and window shop. Your phone needs charging, which may temper some of its convenience. As far as security goes, it may depend on how you manage your phone security.

10 Cash And Checking Accounts

They say cash is king, and for many, it remains an essential alternative to credit cards. It doesn’t provide points, miles, or rewards and may not be accepted everywhere. Cash is not convenient to carry and is easily lost and stolen. When cash is gone, it is gone like a home run over a  New York Yankees’ fence or wall.

Its significant benefit is in serving as a limit to spending and as an emergency fund. Cash has a tangible feel, and you can put it into your savings and checking accounts, which will not generate much interest in this low-interest-rate environment, but you may pay fees if you don’t maintain the bank’s minimum.

You can invest your money from assets you can convert to cash in your retirement investment accounts to watch your cash grow through compounding. You can use your checking account to pay your bills, at some retailers, and to everyone who will accept a check as payment.

I use cash and checking accounts for discretionary spending where possible.

Overdrafts

Overdraft protection is a personal line of credit you can get from the bank to cover your checking account. This credit works when you spend more than you have on deposit in your checking account. By arranging this, your check will not fail for insufficient funds. A bounced check is embarrassing and a red flag. You can’t withdraw money from an empty checking account depending on overdrafts.

You should not rely on this protection except in an emergency. If you are prone to a miscalculation of what is in your account, you need to remedy it by handling money with care.

The bank will either charge an annual fee or $25-$30 for each overdraft. That can add up. How much coverage you have from your bank depends on you and your creditworthiness. You should not rely on overdrafts except as an emergency, such as when your car broke down, and you only had a check with you but not much in that account.

 Final Thoughts

Credit cards are a valuable tool if you pay your balance in full, avoiding debt accumulation. Used the wrong way, credit cards can be toxic. For those who need more discipline, there are alternatives that can limit your spending but still provide the convenience you don’t get from carrying cash around. There is a range of credit card alternatives that provide benefits and serve various purposes that can reduce your reliance on credit cards.

Thank you for reading! Please visit us at The Cents of Money for other articles of interest, and consider subscribing and get our weekly newsletter.

Dealing With The Awkwardness of Money

Dealing With The Awkwardness of Money

Ever have difficulty talking about a money situation with your friends, family, colleagues at work, or significant other? Sure, you have, and you are not alone. Money, along with politics and religion, can be taboo topics. Being awkward in money situations with others can be uncomfortable, cause envy and add stress in relationships. In extreme cases, distrust may lead to financial infidelity, marital discord, and even divorce.

However, it may be helpful to gain comfort in dealing with financial issues in common situations without breaking too much of a sweat.

When You Are In A Different Economic Situation Than Your Friends

Post-graduation from high school or college, your friends, may take different paths. Some pass on going to college and head straight to work after high school. Others work after college, with plans to go to graduate school. Some commit to going directly to a graduate program, like business, law, or even medical school. You may be in different economic circumstances and make different choices. When you earn less than your friends, don’t shy away from being together whether eating out, shopping or going on a vacation. Prioritize what is most important to you.

Be honest with your friends if you recognize that you cannot afford to spend as they do. There are several things you can say upfront to thwart any embarrassment for you. You can be direct, saying, ” I am not able to spend X for dinner, but I will order what I can afford” or “I am saving money to do X, and I am somewhat limited now.” Make suggestions like outdoor experiences when your friends are making plans to do something.

When your group is picking a restaurant, splitting the bills can be challenging, you can opt for a small salad. Tell your friends ahead of time of your preferences if there is a better dining choice for you. Make sure you can cover your bill with cash. I had experienced awkwardness in both spectrums when I earned too little or was the higher earner. Being with my friends was what mattered most. It takes some finesse to navigate, but good friends are worth being with. Find out ahead of time and learn how to reciprocate such as having friends over for dinner.

Shopping With Others With Different Spending Habits

Ever go shopping with friends for clothes you have no interest in? I have and I will return items that I know I won’t wear. However, when I was younger I was often afraid to hurt my friends’ feelings so I would keep the clothing. Later, I realized they wouldn’t care a wit if I ended up not buying their suggestions. The point of shopping is to have a fun afternoon with friends. Overspending for the sake of an outing will be a regret later on.

We are particularly prone to overspending when we shop in a group, especially being with people who have more ease at purchasing high ticket items. It is easy to get that shopping buzz and justify that impulse. That said, know who you are going with and whether it will be a good experience or a waste of time. Shopping with like-minded friends can be helpful and less stressful. Other times, when I need to get a specific dress or outfit in a hurry, I prefer shopping alone, with my daughter or a close friend.

Holidays are a particularly stressful time to go shopping for gifts for family, friends, and coworkers. Take a list and be careful when shopping in a group during this time.

Making A Loan To A Friend Or Being A Co-Signer

Being asked for a loan by a friend or family can be awkward. Just because you are earning more money does not necessarily mean you have to make a loan. You may have many uses for your money, notably savings and investments. Sometimes it is a small amount, such as when a friend forgot a credit card or their card didn’t work. It happens to everyone. Usually, your friend will pay you promptly back, or it is for a negligible amount.

On the other hand, a friend may be having significant money problems. Now you are being asked after his or her family or other friends have declined. Continually borrowing from others may be a red flag. I have been in this situation a few times and it is never easy. There are several things you can do:

You can politely and promptly say no. It may be your rule or that of your significant other not to make loans given your situation. Consider the relationship you have with this person and this person’s character. There may be other ways to help a friend resolve their debt or money issues, such as creating a budget or recommending a financial counselor. The following story is instructive from one of my favorite books.

Should Rodan Lend Money To His Sister? Ask Mathon

In The Richest Man In Babylon by George S. Clason, Rodan, the old Babylon spearmaker, has a dilemma. He earned fifty pieces of gold as a reward from the King. For Rodan, this was an absolute fortune he had never held in his hands before. He went to ask the advice of Mathon, the gold and jewels lender. Rodan’s sister is having financial difficulties and has asked him for a loan, but Rodan doubted her lazy husband would repay. Mathon told Rodan how he decides when to lend money:

  • Safest loans are when the borrower has valuable possessions that could serve as collateral;
  • When a borrower can earn money because of a particular skill or talent; or
  • The person seeking a loan is honorable or has a guarantor to pay back the money. 

Recognizing that he was letting his love and emotions for his sister get in the way, Rodan pondered and realized his brother-in-law would put him in a worse financial situation.  Ultimately, Rodan declined his sister’s request.

If you want to help this person, it would be essential to work out a budget and a timetable for repayment. The agrement should be in written form and signed by both parties.

Alternatively, a friend may ask you to co-sign a loan because you have excellent credit. You could be on th hook, and your credit score could suffer if your friend as the borrower fails to make payments on time. While co-signing for your child’s student loans is probably a given, you should not feel the same obligation for a friend. I would advise passing on such a situation.

Once making a loan to someone, it is essential to remember not to pass judgment on how they use or spend the money. Better to find out ahead of time.

Roommate Agreements Will Spare You Some Discomfort About Money Issues

Living with roommates can bring out inelegance when dealing with money. While sharing an apartment or house is a great way to save money and have independence, there will inevitably be challenges. Everyone’s name should be on the lease so that the responsibility is somewhat split.

Before taking an apartment, pick your roommates wisely and make sure you all agree to the place, its rent, and requirements. Good friends don’t always make the best roommates and vice versa. Find out about your prospective roommates by word-of-mouth or social media. Consider each person’s financial ability to pay for the place you have selected and whether it is affordable for all. Everyone’s name should be on the lease and respect due dates for rent and related bills. Do not agree to be the sole account holder as your credit will be at risk, not the others.

A roommate agreement (RA) may be an excellent way to divvy up responsibilities, accept rules and set up a protocol for known issues. An RA may not be legally binding as your lease. They are relatively prevalent in colleges. Among problems that can be covered by an RA are:

  • Paying of bills (rent, renters’ insurance, gas, electric, internet, cable) by the due date;
  • Communal space;
  • Sharing of groceries and meals, especially if someone is a competent cook;
  • Chores, keeping space clean and rotation schedule;
  • When friends/significant others stay over;
  • Dealing with a roommate who lost a job, and can’t contribute;
  • Parties and reasonable noise levels; and
  • Roommates are paying for damages to the apartment.

You won’t consider every possible conflict you and your roommates will face but an RA will help put a framework in place. Recognizing everyone has their habits, foibles, stresses, and needs for personal space is essential for making a living together with a good reality.

Asking Your Boss For A Raise

Finding out your peer is making more money than you doing the same job is frustrating. It may also add some resentment towards that colleague or, at the very least, be awkward for you in dealing with that person and your boss. Rather than obsess over it, it is time to ask for a raise. However, when doing so, be thoughtful, calm, and without anger..

Being informed about the gap in your compensation should be used as motivation to speak to your manager. Whatever you do, don’t throw the person who is making more than you under the bus. It may look petty and nasty for you. There may be legitimate reasons for those differences that aren’t visible to you. You do not want to be rash about the conversation with your manager. You don’t want to harm or undermine the relationship you most depend on, at work.

HR First Stop

Instead, it is better to arm yourself with more information ahead of time. Consider whether it is a serious enough gap. Certainly, if you believe it is a gender gap, you may have more ammunition. Going to HR first may be a good strategy and be less aggressive. They usually have a handle on compensation in your department and for various pay levels. Your inquiry is an appropriate way to educate yourself about future compensation.

When you go to see your boss, make sure you say how much you enjoy working at the organization and with them. Rather than name the higher paid colleague, you can say, “It has come to my attention that others are making more than me for doing the same job, what can I do to get a raise?” Depending on the answer you receive, you may want to ask for possible benefits, such as working from home, if a raise is not in the cards yet. Alternatively, it may be time to look for another job. Sometimes having another job is the best way to negotiate for higher compensation, but only if you are ready to leave.

Learn negotiating skills so you can strengthen your ability to ask for a promotion, higher compensation, or better benefits. Women especially need to take steps to enhance their negotiating abilities. This post provides the steps to take to achieve what you deserve.

Don’t Hire Someone You Know… It Can Be Awkward

When working at a desirable company, A friend may ask if you can put in a good word for someone or get them an interview. Think carefully before you do so. It can sometimes be better to pass if you know of their shortcomings or lack of experience for the job.

One of the worst mistakes I made in the past was hiring an associate for my equity research team on a friend’s recommendation. It was a desirable job with high pay at a significant investment bank. I could not confirm the person’s background independently. I interviewed the person who was likable enough and felt more obligated than I should have at the time. I had always told interviewees the worst parts of the job: long hours, tight deadlines, and sometimes crazy pressure.

I hired this person to start soon after because of the upcoming demands for our group.  Within the first couple of weeks, he would leave in the early evening during the busy earnings season. 

Following many conference calls with company management, reports, and models had to be done. He had ignored the job description and the needs of our team. He was a 9-5er in a job that required significant hours.

While he was intelligent but he didn’t try to fit with the other associates. I felt awkward that I made a wrong decision by putting too much weight on someone’s recommendation that solely wanted to do this person a favor. I gave him a more extended trial period than I should have, putting our whole group in a difficult position. Ultimately, we mutually agreed he didn’t fit with us. While this happened years ago, I still feel wrong about this hire.

Talking With A Significant Other About Money 

When you are first dating, you don’t usually talk about what you earn or how you deal with money. As you become more serious, however, you may want to find out about each other’s values, including financial priorities. How financially compatible you both are matters in the short and long run. It is alright if you both earn different incomes, but you should share your life goals. Your financial goals are very much a part of that. You want to avoid financial infidelity, which is damaging a valued relationship.

However, the more I talk to others about money, it is clear that couples are very awkward when discussing money. They may not know each others’ salaries, savings amounts, or debt levels. Yet money accounts for many of the decisions you will make over a lifetime with your spouse or significant other. My husband Craig and I have very different attitudes about money, which have caused many financial issues. This requires us to have awkward or even difficult conversations.

Are your credit scores compatible? While I wouldn’t recommend you share each others’ scores on the first date, how you both manage finances is a serious topic to broach down the road. Couples with different credit scores can live together but poor financial habits can cause significant marriage friction. Some 72% of Americans say they’d reconsider a romantic relationship because of another person’s debt, according to the latest findings from Finder.com.https://www.finder.com/unacceptable-partner-debt. 

A Not So Funny Conversation

Couples often lie about their money, whether it is lying about their purchases or paying the bills on time. I had a funny (not so amusing) conversation with my dentist the other day about another awkward situation he once faced. He treated two spouses in his office but always separate as most couples don’t usually come on the same day.

One day, the wife and husband came together for dental work they needed to be done. The dentist was working on the wife who had a problem with her denture. The door was partially open, and the husband came in to see how much longer the wife would be as he had to leave to go back to work. When he saw his wife of 30 plus years with her teeth removed, something he never knew about, he went ballistic. He was angry at his wife’s sudden transformation, that is, being toothless, but he also demanded to know how much it cost and why hadn’t she told him. They left this office, apparently a very unhappy couple!

The bottom line is that you need to be open, transparent, and honest about your significant other’s financial issues. Hiding financial problems could lead to different circumstances, distrust, and, potentially, divorce. Deal with it gracefully and early so you can resolve the issues together.

When People Tell You How To Spend Your Money

People usually mean well when they give you advice on your clothes, weight, or working too hard. One sensitive area is money and how you should spend it.  After some success on Wall Street, I still lived relatively modestly.

However, I recall getting a few comments that made me wince, such as:

What are you doing still in such an apartment?”  That apartment was a convertible 3 bedroom co-operative apartment on the Upper East Side. We had plenty of room for my husband and me before we had kids and our dog. We did move to a bigger apartment, but I still miss that “smaller” one.

For sure, I thought you’d be living at least on Fifth Avenue, why aren’t you?” Same apartment as above and from my mother’s best friend. She came to our home after my mom’s funeral. She thought my apartment did not convey the image of success she expected.

“Why do you work so hard if you are not going to spend what you earn?” My boss, also my mentor, spoke to me with concern after he gave me a promotion (to managing director) and a sizable bonus. I had a look of worry rather than glee, and he was disappointed. I explained that the higher the compensation the more that would be expected of me. I had been previously viewed as an underdog and wanted to remain so. He lectured me on my lack of a second home, not taking vacations, and driving a sh***y car.

Parental Influences on Our Money Values

I chuckle now when I recall these awkward moments. However, I didn’t like hearing it at the time. I remain happy to be frugal about prefer spending wisely. I should have answered with grace, “We are happy living here now and will see where the future takes us.”

Regarding my work ethic, that is working too hard or buying something I could afford was a different topic. My boss was somewhat right, but I loved my job. Longevity on Wall Street is relatively short, akin to being an athlete. I guess it was my cautious nature to save and invest.

Also, I never had a lot of free time to shop or take off from work. I had relatively little debt and liked spending below my means. I wanted experiences over material things at the time. My brother, a very successful physician, was as frugal as I was, if not more so. Monetary values learned during our upbringing often influence our adult attitudes.

An NBER study found parents’ attitudes toward debt can significantly influence children about their approach to spending and borrowing money. As an adult, they tend to adopt conservative views towards debt. Tendencies go the other way as well. If your family tends to be splurgers, there is a good chance you will be one too. We can always learn better financial habits to counter inclinations towards overspending and higher debt accumulation. It may take effort and more conscious behavior to change, but it is doable. Parents should talk to kids about money.

Frugality means being more conscious of your spending and getting what you most value. It should not mean obsessing over every dollar to the point of not being able to enjoy your life and be happy. Keep the right balance in your life that you can maintain. Yes, money can buy happiness if spent the right way.

Giving To Charities At Work

Friends or coworkers may ask you to contribute to their charities at work or on social media. It may be small amounts or to a worthwhile charity. However, sometimes there are too many people asking for support at the same time. You may have several charities on your list. Just let others know that you appreciate that they are asking but you are giving money to your charities.

Don’t feel pressured into giving to others unless you ask them to support yours. If you don’t want to give to others, tell them you have your list. In an Awkward Money Moments survey by CouponCabin.com, 34% of people felt pressured to donate to a charity on behalf of a coworker, family member, or friend, making them very uncomfortable.

Final Thoughts

We experience awkwardness when dealing with common money situations. Talking about money is a sensitive topic but frequently arises with our friends, families, coworkers, and bosses. Be open, direct, and honest when you can with others.  Learn to say no when people ask for money if you aren’t able to make loans or give to charities.

Your own financial situation should be in harmony with your own beliefs, values, and abilities and doesn’t have to be compromised when you are with other people. Don’t shy away from asking for a raise but learn the power of negotiating for yourself. The awkwardness of money can be stressful, provoke distrust, and ruin relationships. Always deal with money problems head-on with significant others. Like Robert Frost said, “The best way out is always through.”

Thank you for reading! Please visit for other articles of interest.

 

 

 

 

 

How To Grow Your Potential For Financial Success

How To Grow Your Potential For Financial Success

“It doesn’t matter how many times you fail, you only have to be right once.”

Mark Cuban

 

What Are Your Chances Of Reaching Success?

100%! (If you want it!)

Growing up, I heard snippets like “do the best you can,” “apply yourself,” “be productive,” and “accomplish things daily.” Sounds so easy.  If I follow this advice, I will be successful. But, successful at what? Ah, that was the hard part! You need to define your own goals in your field, finances, and life. Make sure they are reasonable and achievable.

You Don’t Have Mark Cuban’s Wealth To Be Successful

Being rich is not necessarily a sign of success. Understand what you want in life. Set and align your goals with a plan to achieve specific results. If you plan to reduce or eliminate credit card debt or student loans, getting to a lower balance is quite an accomplishment, and then set your sights on a zero balance. Once you have a lower debt balance, take steps toward your future by establishing your retirement savings plan.

My college students feel great when they are able to get better grades in the hopes they will be able to complete their degree and get a good job. Today, I often guide my college students in picking the “best” majors, careers, and how to succeed at work. Rather than share my successes, I enlighten them by sharing my failures. Failure is a likely outcome of taking risks but worth a try. People at the top of their fields have often failed many times before achieving financial success. We need to learn from our mistakes.

Related Post: What Every College Grad Should Know

How To Grow Your Potential For Success:

 

Take Risks Early In Life And In Your Career

When you are young, take risks that will add to your portfolio. Step out of your comfort zone. What is easiest is not necessarily a good choice. Seek challenges to expose yourself to different environments. In the early stages of your career, build character, skills, and experience. That matters more than how many “A’s” you had on your transcript.

Employers will ask you about the greatest risks you have taken. How did it work out? Working hard is simply the minimum. They want to know how you dealt with challenges and failure. Failure is acceptable if you learned from it. Those experiences provide valuable benefits. There are no linear courses to success but learn how to deal with obstacles.

Don’t Feel Locked Into One Major And Career If Not Suitable

Many successful people have changed career paths. I was a liberal art major. It was a safe choice for someone who was 16 years old at the time. I didn’t explore any other areas of study until I went for an MBA several years later. Even then, I chose an accounting major, but I added finance and investments to my studies. My business career went through some modifications. Then I became an equity analyst at an investment bank, which I enjoyed for many years.

Pursuing one field shouldn’t stop you from exploring peripheral or different areas. Michael Jordan was among the greatest scorers in NBA history, winning a record ten scoring titles and averaging 30.1 points per game. Then, at age 30, he retired and pivoted to professional baseball. He signed with Chicago White Sox’s minor league system for a short time.

Could Jordan have succeeded as a professional baseball player? Many experts believe he was promising and had the potential to remain, but he returned to the NBA a year later. We will never know. At least he challenged himself by making a career move.

Love What You Do

It is easier to work hard and find success if you enjoy what you do for your career. Steve Jobs said, “The only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” Finding purpose and meaning in your job increases motivation, engagement, and self-worth.

According to a Gallup Poll in March 2016, only 34% of the US workforce were engaged at work. Be committed to your work or consider changing jobs you may be happier doing. It is hard to be successful if you are spending so many hours of your week not engrossed in your work.

“Building A Cathedral”

There is an old parable about three bricklayers. It dates back to the great fire of 1666 that leveled London. Asked what they were doing, the first bricklayer said, “I’m putting one brick on top of the other,” the second bricklayer replied, “I’m building a wall,” and the third bricklayer smiled and added, “I’m building a cathedral, a House of God.” That bricklayer had found his calling.

Find meaning in your job and career. Valuing how you spend your time provides satisfaction. Successful people often tell others that they felt most happy when making contributions to society, whether in medicine, technological developments, entertainment, raising capital, teaching, crafting glass, wood or leather.

My mom told me a story about when she worked in a shoe factory. Having just arrived in America, she sat next to a woman who had sat at virtually the same sewing machine for 40 years. This woman was engaged as she put the sole, toe straps, lining, and other materials on the shoes with outright pride. Her job gave her meaning, just like Anthony Mancinelli, the world’s oldest barber at 108 years. I have spoken of Mancinelli in the past as someone who enjoyed cutting hair for decades. Spend your time working on what will make you happy.

 The Evolving Workplace As An Opportunity For New Employees

Changing workplaces is happening far more rapidly than ever before. Those days of staying at the job for 40 years seems prehistoric now. The work environment is different as well. Thanks to digital technology, robots may eliminate some jobs, while other areas are emerging in digital marketing, artificial intelligence, software architects, and robotic engineering. These emerging areas may create more jobs and be a good opportunity for tech savvy Gen Zers entering the workforce now.

Employability is a moving target. You need to stay fresh and up-to-date in your field. Keep abreast of upcoming developments in your company and industry. Make yourself invaluable by accepting challenges in your department or a neighboring one. Seize every opportunity that adds skills, knowledge, and recognition of your abilities.

Embrace Learning New Skills

Adopting new skillsets will make you more valuable. Business leaders point to growing needs in their companies that remain unfilled because they can’t find the right candidates for specific skillsets. They refer to soft skills–interpersonal communication, initiative, problem-solving, critical thinking, collaboration with others in an organization.

Developing soft skills in school and at work makes you an attractive candidate. With the rapidly changing landscape, employers recognize that prospective hires may lack the experience needed. Therefore, they are seeking potential over performance. Adapting some of these skills is a massive opportunity for young people in college, those newly entering the workforce, or people willing to adopt new skills.

 Business leaders are seeking young people with soft skills to serve in their companies. It has become clear that companies are more open to looking for personal and academic characteristics with less experience than they had been in the past. The workplace needs to change to fit the macroenvironment that is digital, connected, and global.

In Deloitte’s 2016 Global Human Capital Trends report, 92% of those surveyed said reinventing the organization is a top priority. Digital technologies are disrupting business models. Companies need to be embrace innovation, greater diversity, a learning culture, and upgrade skills. Those positioned to fill these growing needs will be successful. Flaunt your strengths such as being multilingual, understanding diverse cultures, working well collaboratively, or understanding data analytics.

Age Is Not A Limiting Factor To Finding Success

Young and old, success can be rewarding. At age thirteen, Alina Morse is CEO and founder of Zollipops, a candy company with sales in the millions. The idea of lollipops started as an idea when Alina was seven years old. Alina’s early success is a far more unusual example than the press would have us to believe. Yes, in specific careers like sports, people peak at young ages due to physical limitations.

On the other hand, many have become highly successful later in life and perhaps not even in their planned careers. Stan Lee created Marvel Comics at age 39 years. Vera Wang entered the fashion industry at age 40 after failing to make the Olympic figure skating team she had targeted.

Age should not be a limit to success. How about John B. Goodenough? At age 97, he won the Nobel Prize in Chemistry and is its oldest recipient. He still works, developing new polymers in his lab. Upon winning, he said, “Don’t retire too early,”

Enjoy The Sweet Smell of Success

Sometimes we work so hard and stress about the next stage of our career. We may feel guilty, having just earned a big bonus or promotion that your co-worker hoped to get. Concerns that we won’t get that chance again worry us. How may we further preserve a good reputation that we forget to come up for air?  We don’t even stop to realize that we are in that sweet spot of success. If you are at the pinnacle of achievements, learn to enjoy that moment and sustain it. Money and success can make us happy.

I have heard authors say they wished that their first hit novel came later in life. Young actors who get early recognition in the form of an award find it hard getting another. You can find one-hit wonders in many fields, not just in music. This refers to those who achieve mainstream popularity for one piece of work and gain momentary success.

Sometimes your brief success comes so early that you didn’t have time to be mature. Avoid the arrogance that may come with your achievements. Sustain your success by recognizing those who helped you and that you were fortunate. Keep up with learning in your field, evolving technology, and changes in demand. Keep a long term view and be patient.

Behavioral Science: Perseverance, Resilience, And Grit

Generally, success doesn’t just appear out of the blue. You need to work at improving your skills and nurture your abilities over long periods of time. Behavioral scientists pointed to certain factors such as perseverance, resilience and grit that lead to successful accomplishments.

Growth Mindset

Carol S. Dweck, Professor of Psychology at Stanford University, has researched the mindset psychological trait. She points out that people who believe they can develop skills through hard work are far more likely to be successful than those who don’t. They have a “growth mindset” and benefit from being “can do’s” and are often reliably great employees.

Practice Makes Perfect

Work hard and persevere despite setbacks. Endurance is reflected by those who strive to increase their abilities, who optimize performance through intense practice over the years, whether practicing an instrument or experimenting in a lab. In a 1993 study, K Anders Ericsson, a behavioral scientist, found that certain factors, such as prolonged efforts of practice propel people to reach high levels of performance.

Success usually doesn’t happen without the occurrence of failures. Achieving success usually happens to those that are more resilient. They can bounce back from disappointments or failures. The trick is knowing how to dust yourself off and move on.

Grit= Passion + Perseverance

Angela Lee Duckworth, a behavioral scientist expert, published Grit: Power of Passion and Perseverance. The definition of grit is the tendency to sustain interest and effort towards long term goals. Grit is associated with self-control and deferring short term gratification.

Delaying gratification was the basis of The Marshmallow Test, conducted by psychologist Walter Mischel at Stanford University in the 1960s. He studied children offering them a choice between one small reward given immediately or two rewards if they waited a short period. The reward was either a marshmallow or a pretzel stick and up to the child’s pick. Those willing to delay gratification correlated to success.

In follow-up studies decades later, Mischel found correlations between delayed gratification and competence and higher SAT scores.

Having Money Is Not Necessarily A Sign Of Success

Ayn Rand famously said, “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” There are countless ways of having money– earning, investing, inheriting, and winning–and losing it. Examples of poor money management, bad investments, and squandering fortunes are plentiful. They are often what derails our achievements.

Signs of success are everywhere. Most importantly, it is how you measure it and over what time frame. What did you accomplish today, this year, or in life? What did you set out to do? 

There are many ways to succeed and feel satisfaction. You can feel success by publishing a book, finishing a project, paying down debt, cleaning out your garage, raising good children, or even winning the Nobel Prize at age 97 years.

 

Final Thoughts

Your potential for success is a matter of pursuit. While luck often plays a role in achieving success, you have some control in realizing your potential. Leverage your advantages, take risks and learn new skills. Don’t play safe just to avoid making mistakes.  Find and enjoy your sweet spot of success in your field, finances, and life.

To sustain success, use sound money management as your financial engine. Sometimes we derail our achievements by overspending, delaying retirement savings, and not recognizing the importance of investing for the long term.

Put a sound financial plan in place to properly handle raises and bonuses when you realize success at work. See our post on avoiding lifestyle inflation. Spend within your means, save for retirement, and make investments, and use debt sparingly. These are all ways to stay on the path to a comfortable life. It is a good idea to measure financial success to see where you stand.

Related post: Reaching Your Goals With Better Money Habits

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