Four Money Lessons for Parents and their Children

Mommy I want that new video game! Dad I want the new I-Phone! Grandma I want the new Mac Book! Most parents have heard some variation of the above statements. Parents usually are the primary financial educators for their children. Time after time, I have seen young people receive sizable allowances or inheritances, without a base of knowledge in financial planning. Consider the following four points to assist the children in your life to have a responsible attitude about money.

1) Be a Role Model - The way parents spend money and the way children view money has a significant correlation. Consider discussing the family's financial goals and plans with the children. How much you share is to your discretion, but include the younger generation in at least a portion of the monthly management. How parents deal with money issues, from the monthly bills to planning family vacations can be important in teaching the children money management and the value of money.

2) Encourage Savings and Investments - To encourage children to save money is one of the simplest ways to encourage a responsible attitude about money. This could include designating a portion of a child's allowance to a saving account, or making gifts of cash directly to an account in their name. Parents can discuss the account statements with the children and introduce the concept of "paying yourself first".

3) Develop a Sense of Financial Empowerment - It is important that parents develop responsible spending habits by well thought-out choices. In order to guide and direct rather than dictate the savings and spending. Take children on window-shopping trips to compare prices and products and adopt the mind set that every trip to a store is an exercise leading to a potential purchase. For example, consider limiting impulse buying by implementing a rule that prices and products are compared at a minimum of three locations. I learned this technique working with a local municipality who mandated 3 quotes before a purchase.......Even if the first quote was from the manufacturer!!!

Go figure!

4) Give Unto Others - Involve children in the financial decisions regarding philanthropy. By helping children contribute time or money to a charitable cause, it can teach them that money is important in ways others than personal consumption.

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Investing Pitfalls can become Quicksand in Time

During these turbulent economic times, it has been difficult for many people to invest. However, investing is an absolutely imperative exercise in order to achieve your various financial goals. Here are five common pitfalls investors face and solutions to help you avoid them.

1) Getting a late start. Few investors start investing when they can, but wait until they must. The earlier you start, the easier it will be to achieve your goals. Let's compare an investor who starts investing $2,000 a year, at age 16 when they first start working versus the person who starts investing at age 26, when they have steady employment.

Assuming this practice is continued until age 65, with an ARR (annual return rate) of 10 percent, the early investor will have accumulated $2,114,379. The procrastinator will be left with a relatively paltry sum of $802,895. The difference is astonishing. Even if all you can afford to do is invest $25 a month, you should still put it to work for you, sooner rather than later. The extra time can provide spectacular results.

2) Not doing your due diligence. Many people will put more time into purchasing a stereo than they will into selecting a suitable investment. It should be the other way around. Do the proper research, and make sure you understand what it is you are buying.
Another point is to be objective. Emotions have no place in investing. A stock price will increase because of the fundamentals as portrayed in the financial statements, not because you have a gut feeling that it will take off.

Performing your due diligence is also relevant when it comes to selecting a financial advisor. If someone else is going to select your investments, you better make sure they are competent and experienced enough to do so.

3) Confusing investing with speculating. Many people believe they are investing when in fact it is more like gambling. It is OK to speculate with a portion of your funds, but you must realize that is what you are doing. The first speculative concept to avoid is day trading (i.e., trading very rapidly in and out of a stock). If it were as easy as it seems, then professionals with more time and better resources would be doing it. Since very few do, it is a sign that you should not pursue this path.

A similar concept is investing over a short period of time in risky stocks. Investing in equities with an expectation of making a big gain over the next six months or year is more along the lines of speculation than investing. To truly be investing, you need quality investments over a substantial period of years.

Perhaps the most devastating mistake an investor can make is listening to a "hot tip." If it sounds phenomenal, then get all the information, and do your research. If you still like it, then proceed. Rarely will the "investment" be deserving of your capital. Simply because a friend's uncle says that a stock will soar does not make it so. Once again, do the proper research.

4) Not diversifying adequately. Investors have a tendency to overweight their portfolio with a specific company, industry or investment type. A balanced portfolio should consist of all three of these. Too many people put all of their eggs in one basket, and get burned badly with a market reversal. There are professionals who have used focused portfolios successfully, but they are rare, and should not be imitated.

This does not mean you should be invested evenly between bonds and stocks, but it is a commendable to have a variety of both. With that being said, it may be advantageous for most young investors to contemplate owning predominantly equities. This can be helpful in overcoming the obstacle of keeping up with inflation. However, proper portfolio diversification needs to be made on an individual basis, after considering your risk tolerance.

5) Buying high and selling low. All too often, people take a position in a stock after the price has gone up, and sell out when the inverse occurs. It should be the other way around. Lack of conviction can make it tough to invest during challenging times. However, if the proper research has been done, this should not be a problem.

Ironically, recessions and market crashes provide excellent opportunities for investors. Often times, these apocalyptic and euphoric manias are driven by the media and analysts' reports, which simply follow the herd.

A contrarian (i.e., an investor who behaves in opposition to the prevailing wisdom) mindset, with the proper research, can often prove ideal to finding the best values during chaotic market movements. This is especially true for young investors who have time on their side to allow for a market turnaround.

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Take control of financial fears

In her book ‘The 9 Steps to Financial Freedom’, Suze Orman asserts that at the root of issues many of us have with financial planning and money management is our fear of money. These fears have their groundings in our childhood memories of how the persons around us dealt with money and the power it seemed to have over their lives.

Based on our own personal circumstances and reactions we may become very unwise about money, spending beyond our means, or we may be overly cautious in our investment strategy. The first two steps in the aforementioned book force readers to take a look at their attitudes to money.

In addition to a lack of courage in money matters, there also appears to be a lack of knowledge. Despite the many “economists” our nation has, evidenced by the number of persons who call the radio talk shows with their solutions, few of us really understand how many of the financial instruments that are available work. This lack of knowledge may be due to our perception that the subject is too difficult and technical to understand, or it may be that our fear has made us avoid learning about the topic.

Money matters and financial planning in general can have persons cowering, but preparing for the day when the individual is no longer able to work appears to be the scariest scenario of all. Working as a Financial Professional I have deduced that there are three major attitudes to retirement planning. One belongs to a group of people who see retirement as death’s waiting room, the last bench on which they will sit before seeing their final doctor. These people not only avoid planning for their retirement, they may also avoid buying life insurance or writing their wills. (We will address the issues of the other groups — persons who believe that they have insufficient income to plan for their retirement and thus believe planning to be pointless, and procrastinators who view retirement as a long way off — in subsequent blogs.)

There is nothing wrong with having a fear. Being afraid of the unknown, of appearing foolish, or of our own mortality is normal. Yet because ultimately we wish to enjoy financially independent lives and not be a burden to others, we need to face our fears and take appropriate action. Our families and our children depend on us to be responsible. Writing a will for example, an important part of long-term financial planning, makes life that much easier for our loved ones. Seeking to understand the investment instrument that we have purchased, why it is the best for us, and the benefits and risks, will ultimately have an impact on our families. In being responsible for our financial well being we are being responsible to our loved ones as well.

Each of us needs to examine ourselves to discover what our fears are. What is stopping you from planning for your long term financial security? Some signs that maybe you are allowing yourself to be hindered by money fears include: (1) large sums of money placed unnecessarily in low interest bearing instruments such as savings accounts; (2) lack of a will; (3) chronic bank overdrafts and overspending on credit cards; or (4) not owning anything even though you have money to do so. Some of our fears will be dispelled with information.

I suggest a lot of research and there are many books and articles readily available in the market place today. Once you’re ready to put your plan together, you should speak with a financial advisor or a Consultant. They are not that scary.

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Get in while you fit into Real Estate

Happy Labor Day!

I know the economy isn't doing as well as we all would like which is why we probably all know someone who is taking advantage of the current housing market. Notice, I did not say "bad" housing market because of the subjective nature of the word "bad".

If you are joining the millions of opportunists "good luck" If you are waiting on the market to hit rock bottom before you get started try not to wait until it's too late. By the time sources confirm the market has hit bottom, prices and interest rates are already on the upswing. Many people tend to sit back and watch before taking action, but if you watch too long, opportunities are missed.

The time to buy is now, but it should be done carefully. Investors need to purchase with the long-term returns in mind. With the right tools and/or the expert advice of an experienced property manager, it is easy to crunch the inventory of available properties down to a short list of homes that would make a truly great investment. Once you have a short list, you can shop for the best deal without compromising long-term investment ROI. This strategy will put you ahead of the masses that are getting a great "deal" on bad investments. Good Luck!

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Insurance from your employer?

I think it's time to set the record straight about buying life insurance from your employer. First and last tip: Do your research! No one has your best interest in mind more than you. I have yet to see an employer buy the best benefit plan for their employees available. Trust me if they can get you to work for free, they would try it. The same for your benefits..... Take the free stuff/match if it's available, but otherwise get your own ASAP.

Always accept free life insurance if your employer offers it. But if you are healthy and buying life insurance through payroll deduction, you may be paying too much. As a group life insurance plan participant, you are pooled with the unhealthy people in your company who are also buying life insurance and paying the same price. Also for tax reasons, since you paid for the life insurance before tax, your death benefit may be taxable. On top of that, the price of your group plan life insurance increases as you get older. With that being said, get your own policy outside of your employer as fast as possible. Lock in your good health while you have it.

Find out particulars if you already have life insurance through your company. Most life insurance policies you buy through your company will get more expensive as you get older and group life insurance is generally not portable when you retire or change jobs. Find out if the group plan does allow portability, or how the conversion features are handled.

Untill next time, let me know what you think.

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