The Top 5 Things You Need to Teach Kids About Money

What if there was mandatory money instruction for every child in America from kindergarten on up and every adult was required to take an annual test confirming those concepts well into their senior years?

It’s a nice fantasy. But in reality, the first money lessons a child gets come from their parents, and experts agree that the way parents teach and reinforce those concepts will have a major impact on their kids avoiding major financial problems later in life.

So, a question for parents: How equipped are you to teach your kids about money?
If you don’t feel confident about creating a money curriculum for your child, don’t worry, there’s help. Start by planning your own financial future with a qualified financial planner. You can take a close look at where you need to be with your finances and gather ideas to teach your kids about money as well.

However you personalize the lesson, every parent needs to involve these five basic concepts in a child’s money education:

1. Work: It’s true. The first great lesson isn’t so much about money as what it takes to earn money. As early as kindergarten or first grade, your kid is going to have to start paying for things. Children need to understand as early as possible that a good day’s work should deliver a good day’s pay, so it’s a good idea to come up with age-appropriate chores in exchange for an allowance. The best place to start is with simple jobs like setting the table and making beds. For older kids, yard work, laundry and housecleaning are good to add to the list.

How big should that allowance be? Try to match the allowance closely to the expenses you want your child to cover and leave a little wiggle room for treats. That way, the child begins to understand choice while learning that spending requires limits. Also offer options that allow children the opportunity to earn additional money for extras – toys or privileges, for instance – then stress why working for treats is important. When kids are younger, you should keep a frequent watch over how they’re handling their cash – checking in every day or so – and then allow them more leverage as they demonstrate wise decisions.

2. Saving: Once you teach your kids about spending, help them identify larger goals they have to save for. Buy a piggy bank – young children relate very well to this tried-and-true symbol of saving. It gives them someplace to put money out of sight so they don’t spend it, and you should impress upon them that they are free to tap into it only to accomplish a goal that the both of you initially discuss. Again, as they make smarter decisions, let them have more responsibility. And this lesson shouldn’t just be about buying stuff – kids need to learn how money can be used for setting and accomplishing goals.

If it makes sense for you, you can also add incentives to save. One idea: Tell your son or daughter that you’ll give them $1 for every $5 or $10 they put in the bank. It will definitely make them think twice about an impulse purchase.

3. Budgeting: Budgeting is one of the most universally misunderstood money concepts for children and adults. That’s why it’s so important to make sure a child understands why it’s so important to write down money priorities and keep track of whether those priorities are being met. When a child gets a little older, it might be a good idea to help them establish a budget for everyday expenses with an important side goal, such as accumulating spending money for a much-anticipated family vacation. Parents might show kids a similar exercise for how they’re setting aside money for the trip. Unsure how to set up a budget? PBS Kids offers an example.

For younger kids, it might make sense to turn the budgeting process into a game. Parents might take a stack of fake money, give it to the child and ask what they would spend it on. The child would write down each purpose – toys, school lunches and special things they need to save for – and get them to write down how they’d allocate the cash. This can turn into a real exercise later.

4. Delayed gratification: If budgeting and savings are going to work, kids need to know they can’t spend their money whenever they feel like it. Parents need to lead by example here. If kids always see you paying with plastic and bringing home carfuls of shopping bags each week from the mall, they might get a sense that money is limitless. On the other hand, if they see you making lists, tearing out coupons and talking about saving for particular goals over the long term – they might start to mimic that behavior.

5. Helping others: It’s important for children to know that there is always someone less fortunate than themselves and it’s important to help, even in a small way. Increasingly, kids are involved in charitable and community activities as part of their educational process – such work even figures into college applications. Teaching your children to set aside a little for those who have less might be a good first lesson in what should be a lifetime of sharing with others. Also, don’t forget that charity isn’t always about money. Kids should also learn the importance of giving their time and labor to important causes and people in need. And if they think of unique and effective ideas to help, by all means, praise and encourage that activity.

September 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.

How Personality Traits Affect Financial Planning

The ancient Greek expression “Know thyself” carries a lot of weight when it comes to investing. Indeed, an investor’s personality can speak volumes to their ability to spot opportunities and avoid risk. If more people truly “knew themselves” when it came to money over the last decade, it’s arguable we would not have seen many of the individual excesses and mistakes that marked the recent economic slowdown.

Many companies and experts have attempted to label various money personalities over the years. And while there is no definitive set of definitions, taking a look at these efforts can at least get you thinking about where you are on the spectrum and how that’s affected your decision-making. One of the most recent high-profile efforts came from financial services firm TransAmerica in 2008 with its study revealing four basic investing personalities, including:

• Venturers take a “nothing ventured, nothing gained” attitude with their money, but their potential pitfall is that they’re overconfident in their level of preparedness.
• Anchored individuals always “stay on the safe side,” but extreme risk aversion might leave them unprepared.
• Pursuers will “try anything once” but their continual efforts to grab at new directions might leave them without a clear plan.
• Adapters take investment situations “as they come” but may not be realizing their full potential as investors.

Now even if you have a handle on your money personality, what do you do with that information? It might make sense to seek advice from a trained financial professional, such as a CERTIFIED FINANCIAL PLANNER™ professional, to review the plans you’ve made and take you in a direction that not only suits your comfort level, but your future financial success.

If you’ve never worked with a financial planner before, one of the first steps in the process will be reviewing or filling out a risk analysis questionnaire.
Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – everyone knows that. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will inform every decision you make about it in the future.

Here are some of the questions you might be asked before you start work with a planner:

1. What’s important about money?
2. What do you do with your money?
3. If money was absolutely not an issue, what would you do with your life?
4. Has the way I’ve made my money – through work, marriage or inheritance – affected the way I think about it in a particular way?
5. How much debt do I have and how do I feel about it?
6. Am I more concerned about maintaining the value of my initial investment or making a profit from it?
7. Am I willing to give up that stability for the chance at long-term growth?
8. What am I most likely to enjoy spending money on?
9. How would I feel if the value of my investment dropped for several months?
10. How would I feel if the value of my investment dropped for several years?
11. If I had to list three things I really wanted to do with my money, what would they be?
12. What does retirement mean to me? Does it mean quitting work entirely and doing whatever I want to do or working in a new career full- or part-time?
13. Do I want kids? Do I understand the financial commitment?
14. If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to afford their college education?
15. How’s my health and my health insurance coverage?
16. What kind of physical and financial shape are my parents in?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation might affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you.

However, a planner can help you do much more than control risk on the investment side. You can also work to develop an emergency fund that will support you in case you lose a job or go through a protracted leave of absence due to health or caregiving issues. A planner can also make sure you have a disaster plan in place in case you’re disabled or your home is hit by a natural disaster. Financial risk can take many forms, and a planner can help you work through those issues key to your lifestyle.

June 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.

Ingredients for Effective Change

The first newsletter entry that I would like to share this month starts with a dirty little secret. Actually, it is not so much a secret to those who really know me and my sometimes stubborn ways. Sometimes, no matter how much I know changes need to be made in my personal or professional life- I DO NOT ALWAYS LOVE TO CHANGE. I guess this simply makes me a normal person because change is something that we all struggle with at times. Some people more than others.

The financial life planning process centers itself around the concept of meaningful and effective change. Change is an extremely complex psychological process. When it comes to the topic of changing various aspects of our financial lives it is important to first start with well defined goals and objectives. Common life planning goals and objectives generally fall within the following categories:

• Family
• Career
• Social
• Physical Health
• Spiritual
• Financial
• Intellectual

If you are seeking change in any (or all) of these areas of your life ask yourself one simple question: What are the primary steps you need to take to move in a positive direction?

So what does it take for meaningful and effective change to occur? The ingredients for effective change are as follows:

1. Vision (Awareness/ Insight Into Yourself)
2. Internal Capacity for Change (Skills and Ability to Change)
3. External Pressure (Incentive/Motivation)
4. Action (Have Plan and Take Action)
5. Time (Real Change Takes Time)

How Much Term Life Insurance Should You Buy?

You may have read that term life insurance rates are at historic lows and that now is the time to buy. It's worth a quick primer on why life insurance is necessary and who should buy it before getting to specific amounts that individuals should own.

First, a quick definition of what term life insurance is. A term policy is a policy with a set duration on the coverage period - anywhere from one to 30 years - and when it reaches the end of that term, the policyholder decides whether or not to renew it. Term policies provide no cash buildup like whole or universal life insurance - it only provides a death benefit at the time the insured dies. Because term doesn't provide that investment component - the cash value that can be borrowed against - term is generally cheaper to buy than whole or universal life.

There is plenty of debate whether consumers should buy term or whole life. Some critics argue that whole life is a poor choice because you arguably could get a better return from other investments. Yet there are good purposes for these investment-feature policies - many use them as part of an estate-planning strategy.

But the first point is to decide whether you need insurance. People without dependents generally don't, while people with spouses and families generally do. The primary point of life insurance is to replace income if a breadwinner dies.

As for the decision on what kind to buy, it helps to get some advice. A financial planner can help you determine the right insurance products to buy based on your needs and other assets. Better still, he or she can help shape your insurance purchases as part of an overall estate plan.

A planner can help a buyer decide how much life insurance to buy and over how long a period. Some critical questions that should be asked when purchasing insurance:

1. How much income would your spouse and your children need to replace your income over a period of years based on your current age?
2. Will your spouse or guardian need to provide childcare support?
3. Is there a mortgage to pay off?
4. Are there substantial short-term debts, like credit cards or auto loans, to pay off?
5. What are estimated college expenses for children and spouses, and when will those expenses start?
6. How much will burial expenses be?
7. Do you have any other life insurance?
8. Are there anticipated expenses for caregiving for elderly relatives or children or family members with special needs?
9. Do you anticipate substantial estate taxes when you die?
10. Do you have any other assets that can be liquidated sensibly or will bring in income?

Most online life insurance calculators found at most business news and personal finance websites can help you address questions 1-8. The last two questions require a bit more strategic thinking in terms of what you or your spouse have done with overall estate planning. Keep in mind that youth and health will also be factors in how much insurance you can afford to buy. And keep in mind that life insurers will investigate suspicious claims, so be honest about all facts you report.

Many term life policies are both "renewable" and "convertible." Renewable means you can renew your coverage without a medical exam. The latter allows you to convert your term life policy into an equivalent cash value policy from the same carrier, should this make sense during the term of the policy. Again, the kind of coverage you choose should depend on your own personal needs and a financial planner can help you determine what those are.

Also, as you check various companies, it's important to work with the most financially healthy carriers. Insure.com provides free ratings from Standard & Poor's on various insurers, and many public libraries have subscriptions to ratings from A.M. Best.

One more thing. Don't buy insurance and forget about it. Make sure that every few years you are reviewing your insurance purchases as part of your overall financial plan. Life circumstances change - incomes rise and fall and family size changes. Your insurance holdings always need to reflect current needs and conditions.


May 2010 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.

What to Know and Ask About Disability Insurance

The commercial featuring that loud, quacking duck has gone a long way to making people think about individual disability coverage as a way to keep bills paid if the family breadwinner gets sick or injured over an extended period of time.

It’s true -- individual disability insurance is more important than ever, and every working individual should have it.

The key is shopping smart for that coverage. A financial planning professional is a good first stop for advice on that coverage, which should be considered as part of an overall financial plan.

Why is it a good idea to have personal disability coverage, particularly when most employees can buy such coverage at work for a nominal fee? That’s because most employers offer disability coverage that lasts 12 weeks or less and covers less than 60 percent of a worker’s pretax income. That might be workable for a surgery or injury with a relatively quick recovery time on the couch, but a diagnosis for even the most curable cancers can put workers with even the best financial coverage into a devastating financial bind.

And if you are self-employed, the need for the best, most flexible long-term disability insurance is even more important because other than your own resources, that coverage will be your own safety net.

Here are some essential things to know about long-term disability coverage. Remember that policy language is critical, and a financial planner can give you a second, helpful set of eyes to review what your insurance agent recommends:

If you’re considering becoming self-employed or might lose your job due to layoff: The time to buy long-term disability coverage is NOW. Insurers will base your initial coverage limits on what you’re earning in your current job, which is important since entrepreneurs and unemployed often earn considerably less – at least for awhile -- once they’ve left their current employer.

Make sure you can purchase more coverage as your income increases: Because you stand to earn more in future working years – if only based on inflation – you should make sure your benefit levels can rise to meet the demands of replacing that income if you need to in the future. Obviously, people who expect to make vastly higher salaries in the future need to plan for this.

Check for a non-cancellation feature: Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates based on the benefits you’re to receive.

Compare benefits and premium cost: Get bids from several carriers and consider going to more than one agent. The premium you pay will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they currently tend to live and work longer, for example) will be a factor in what you pay.

Go for “own occupation” coverage: Even if you are able to work in a different capacity, own-occupation disability insurance will provide you with the income replacement you need if you are unable to work in your current occupation. Make sure you understand how that coverage fits your current profession.

Know what “elimination period” means: Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. (It’s actually a big factor in long-term care policies as well.) Most long-term disability policies will kick in after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period: the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and make sure you have a cash cushion to cover that need in your emergency fund.

What’s your benefit term: For each disabling incident, your policy may pay benefits for a certain period – two, five years or until retirement. It’s all in how your policy is constructed. Many policies may pay for life if you purchase this benefit and you are disabled prior to age 60. Also, make sure there’s language that increases your benefits as your income increases over time.

See if there’s a residual benefit feature: Some policies may offer you 'residual benefits' or a partial payment if you're less than 100 percent disabled, but still can't perform all the duties of your job.

April 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.

Does It Make Sense to Get Into The Market for Troubled Homes?

In March, RealtyTrac, a leading online market for foreclosure properties, reported that February 2010 foreclosures were actually down 2 percent from the previous month.

Yet, RealtyTrac indicates this break might not last long. Even though the 6 percent year-to-year increase in February foreclosures was “the smallest annual increase” RealtyTrac recorded in 50 straight months, it believes that current foreclosure prevention programs and processing delays are keeping a lid on the numbers. If those programs end and processing glitches lift without an upswing in the economy or job market, or the foreclosure could accelerate.

For individuals with some money to spend and invest, the troubled home market has its attractions. First, there’s the possibility of attractive real estate – albeit some in need of serious repair – at a bargain price. Then there are the sellers, both banks and individuals, who are at best eager, at worst, desperate to get out from under their obligations. But the trail to ownership of properties that are under a cloud can be treacherous and it’s best to know what you’re doing. It’s wise to consult a tax planner and a financial planning professional before making a move into this risky arena. Here are some of the things potential investors should know:

How foreclosure works:
A foreclosure happens when a buyer defaults on their payments and their lender takes legal steps to take back the property. Rules vary by state and local government, but generally, when a lender decides to foreclose on a property it files a notice of default or a lis pendens (Latin for "lawsuit pending"). This document is a public record, and for buyers – including other lenders -- it's the first step in locating a property in foreclosure. A buyer looking for foreclosures can look online (RealtyTrac is a good source) for lists of properties in default, but individuals with contacts inside lenders holding these properties have a particularly good leg up.

Pre-foreclosure sales are attractive, but often tough to close.
With so many homeowners struggling with payments, “pre-foreclosure” or “short sale” transactions are currently common, but fraught with obstacles. Short sales essentially allow a seller to sell their home for less than they owe as long as they get their lender to buy their story about a lost job or other financial hardships. The second obstacle is getting a real estate agent to work to sell the property for a far lower commission than they usually get. Third, many states allow for very tight timeframes between the notice of default – the first news a homeowner is facing foreclosure, if they’re checking their mail – and an actual foreclosure notice. Deals of this variety need to close within days, not months.


How do people invest in foreclosure properties? There are three primary ways this happens. First, you will see buyers coming in at the “pre-foreclosure” stage. Second, you will see buyers going after “REO” (real estate owned) properties – literally foreclosed real estate still on the books of a lender. Third, you’ll see foreclosures auctioned off at the public courthouse or in private auctions, depending on how the lender wants to market such properties to get them off their hands. Each process has its own conventions for inspecting the properties – sometimes prospective buyers get time to inspect what they might buy, other times little or none. It’s best to learn the process as a bystander before putting any skin in the game. The most knowledgeable foreclosure investors also have good intelligence on how heavy the lender’s inventory is with troubled properties – the more headaches they want to get rid of, the faster they’ll get rid of them.

Is it wise to borrow?
Given the current state of the lending industry, such a question might be a moot point even for the most-creditworthy individuals. Buying distressed property is primarily a cash game. It lowers the cost of entry and speeds these kinds of transactions where time is definitely of the essence. Even sophisticated foreclosure investors often discover ugly surprises when buying – property with greater damage than they anticipated, for example – and they may not have the flexibility to borrow to fix those unexpected problems after they borrowed to buy in the first place.


April 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.

When Doing Your Own Taxes Makes Sense…And When It Doesn’t

Tax deadline is April 15, so if you haven’t begun gathering your annual tax records it’s time to do so. Every year, however, people’s lives change – they buy and sell houses and move, they take new jobs, have kids, buy and sell stock. Those and dozens more reasons might give you cause to hire a tax preparer.

It’s worth going over the primary reasons why some people should get help with their taxes and others can continue going it alone.

Should you do it by yourself? If you meet the following circumstances, you can probably do your taxes by yourself:

• You work for only one employer who gives you a W-2 tax form each year.
• You rent your residence and don’t own a home or vacation property.
• You don’t have kids or other dependents.
• You don’t have any complex investments such as a partnership, a trust or extensive stock holdings.
• You really like numbers, are willing to investigate annual changes to the tax code and double-check your work.
• You’re comfortable doing computations by calculator or by hand, or by using tax software on your computer or online.

For do-it-yourselfers with computers, the Internal Revenue Service’s Free File program is aimed at some 95 million taxpayers with an Adjusted Gross Income (AGI) of $57,000 or less in 2009 to prepare and e-file their federal tax returns for free. E-file, the IRS’s online tax filing service, is available to both tax professionals and individuals with compatible home computer tax software. You can learn more about the e-File program here.

Should you seek help? It generally makes more sense to get help with your taxes if:

• You’re buying or selling property.
• You own a business or rental property.
• You get regular income from a trust or partnership.
• You trade investments frequently or have a complex portfolio.
• You’ve undergone a major financial impact during the previous tax year, such as a divorce, death of a spouse, an inheritance or a move of more than 50 miles for a new job.
• You are supporting a child between the ages of 19 and 24 who is a full-time college student.
• You don’t have time to do it yourself.
• You are subject to the Alternate Minimum Tax (AMT).
• Your income has increased by a considerable amount from the previous year.

You’re still legally responsible for your return even though you have professional help, so it’s important to choose a qualified professional to help you. The IRS gives the following suggestions for finding a qualified preparer:

1. Ask how they charge: Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
2. Don’t believe promises: If a preparer guarantees results or bases fees on a percentage of the amount of the refund, be suspicious. Tax preparers aren’t allowed to charge a contingent fee (percentage of your refund) for preparing an original tax return.
3. Ask what preparers will need: Reputable preparers will expect you to provide receipts and other paperwork if they need it to justify the return they’re preparing for you. You need to keep scrupulous records.
4. Make sure you know exactly who’s preparing your return: It’s OK if your preparer has onsite staff assistance in preparation of your return, but the person you hire needs to be the person who reviews your return and signs off on it.
5. Investigate your preparer’s record: Check with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents.
6. Check your preparer’s credentials: Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.
7. Stay aware of tax scams: Newspaper business sections and news programs focus on abusive tax shelters and scams. So does www.IRS.gov. If you have a preparer encouraging you to get involved in tax avoidance strategies that are overly complex, check them out before you agree to jump in.

March 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA and owner of LifeSpan Financial Planning, LLC located in Mt. Pleasant, South Carolina.