Financial Skills – How to Budget & Balance Accounts

I was surprised when I asked parents to tell me the life skills they wish their kids knew, and there was a resounding request for a few topics:

How to open a bank account
How to budget & balance accounts
How to write checks and pay bills
And how to start saving for retirement
It seems some of the things we take for granted are, as a result, missing from what we teach kids.
In the last article, we focused on opening a bank account. This article is the second article in the four-part series and will look at how to teach kids to budget and balance their accounts.

Budgeting

It’s not shock that budgeting can be boring and tedious. I’ve personally never been excited to sit down and create my budgets, but it’s something that creates wealth and pays off down the road.

So how do you get kids excited about it? How can you add a little glamour to something so dull and boring? Easy – make it a game with payoffs.

Firstly, it’s important to know how to create a budget, then to adhere to the budget.

Creating a Budget

You may have your own way to create a budget, and that’s fine. In my experience, the easiest way to make a budget is as follows:

On a piece of paper, draw a line down the middle:

Spending BudgetCalculate your average monthly gross income and put that at the top of the page, then multiply it by.80 (for example, if you earned $1,000, you would end up with $800)
Fixed ExpensesWrite down all of your FIXED expense categories (i.e. phone bill, insurance, mortgage etc… ) and put them in one column on the left side of the page
Variable ExpensesNext write in the variable expense categories (i.e. food, gas, leisure, etc… ) and put them in another column on the right side of the page
Fill in all of your expenses
Net Budget after Fixed Expenses – Subtract fixed expenses from your spending budget If it’s a positive number, you don’t need to change anything If it’s zero or a negative number, you should look for expenses that you can cut or lower
Budget variable expenses – Using your Net Budget after fixed expenses, determine what you can spend on variable expenses without overspending each month
Set a budget for each variable expense so you know what you can spend on each category in a given month
Making it Fun
OK, now that you have a budget outline, it’s time to get the kids excited.

I know what you’re thinking: “My kids will never be excited for this.”

They will if you give them some prizes or payoffs. Here’s how:

First, tell them what a budget is and show them the paper. Next, tell them that you’re going to do a contest (if you have more than one kid, this works even better).

Contest 1: Anticipating Spending

The first contest is to see how close they can budget their money to reach a break-even or $0 over the course of a month. In other words, the goal is to predict your spending as close to the penny as possible.

If you have more than one kid person that gets the closest to break-even without going negative wins a prize. With just one kid, tell them that they get $5 or $10 if they reach break-even, and every penny they are off, you deduct 10ȼ

Contest 2 – Saving After Spending

The second contest is to see how well they can budget their money over the next 30 days. If they can save money, tell them you will give them whatever they save. That means if they save $5, you’ll give them another $5 (just like companies matching a person’s 401K contribution).

If you have more than one kid, tell them whoever is able to save the most will win and get a special prize. You will obviously choose the prize since you know your kids best.

Coming Soon

In the next article, we’ll discuss how to write checks and pay bills. You will also learn how to combine check-writing with these contests to simulate the real world of budgeting for your kids.

Financial Skills – Opening a Bank Account

I was surprised when I asked parents to tell me the life skills they wish their kids knew, and there was a resounding request for kids to learn how to open a bank account.

Similarly, there was a huge call out for:

How to budget & balance accounts
How to write checks and pay bills
And how to start saving for retirement
It seems some of the things we take for granted are, as a result, missing from what we teach kids.
This article is the first article in the four-part series and will discuss the best and simplest way to get started with opening a bank account.

It seems easy, but there are several questions many people never think of that we’ll address in this article:

Which bank?
Checking or savings account?
Are there fees or minimum balances?
Should I get a Debit Card too?
Should I have my name on the account with my kid?
1. Choosing a Bank

When you choose a bank, there are a few criteria you’ll want to look at:

Location
Number of branches
Ease of access
The location should be convenient to your home, but also have enough branches so that – in the case of an emergency – you can get to your bank.
I opened an account with Elevations Credit Union when I was attending CU Boulder. It was convenient and credit unions are really great to bank with. However, after I graduated and moved, there were no branches around me, which made things very inconvenient. I ended up opening an account with US Bank since they are in about every King Soopers, where I do my grocery shopping.

This is especially important with kids because you don’t want them to have to drive too far just to bank.

Similarly, ease of access into the branch is important. I remember having a Norwest (now Wells Fargo) account, and getting in and out of the bank’s parking lot was terrible. I had several near-miss car accidents and dreaded even going to the bank.

2. Checking or Savings Account

As you’ll learn in the future article about saving and budgeting, there should be an account that is used for saving and investing.

That means it’s important to have BOTH a checking and savings account.

The reason a checking account is important, is so that kids can learn how to write checks, and have a designated spending account aside from a designated savings account.

Checking accounts are important for paying bills (be it online or via mail) and will give kids the opportunity to learn how to write checks. Even if check writing isn’t as prevalent as it once was, it’s still important.

I was shopping one day and realized I forgot my wallet, which had my credit cards and cash. I started to panic because I needed some food. Fortunately, I keep a couple of checks in the car and was able to save myself by writing a check… they still come in handy!

3. Fees & Minimum Balances

Some banks have fees to have an account and others don’t. Obviously get the one that doesn’t since your kid shouldn’t have a huge account. Likewise make sure there isn’t a minimum balance or a very small ($10 or less) minimum balance.

Just as important is how overdrafts are handled!

When I was in college, it never failed: my peers (who hadn’t learned how to balance an account) would routinely trigger their overdraft protection and the hefty fees that went along with it.

They would look at their balance online and it would show $10. Then they’d check it again a few days later and it was at $30.

It was the magical growing bank account; and they never wondered where the extra money came from. Until the end of the month when they had over $200 in overdraft protection fees!

I would suggest NOT getting overdraft protection and instead making darn sure they can balance their account (which we’ll cover in a future article).

4. What About a Debit Card?

Here’s my thoughts on kids having debit cards: it makes it much, much harder to balance the bank account while making it much easier to overspend and run into trouble.

Are ATM machines convenient? Yes, but I have never once used one in my entire life. Part of teaching kids life skills is to teach them to be prepared. I keep an extra $10 in cash plus a few checks in my car. It wouldn’t bother me if it got stolen.

If you’re determined that your kid gets a debit card, wait at least six months after opening their account so they can learn “the old fashioned way” and understand how the debit card affects their account when they actually start using it.

5. Should I Be On The Account Too?

I think it’s a very good idea for you to be on your kid’s first account so you can monitor their spending and make sure they don’t cause a train wreck.

It’s good to get statements so that you can use that as a learning experience to go over them with your kid and teach them how to properly dispose of them (in a shredder) so that they decrease their risk of identity theft.

Come up with a time frame or benchmarks until you pull yourself off the account and let your kid take on the responsibility of an individual account.

Opening a bank account is a huge step into a new world for kids and it should be a great experience. Walk your kids through the setup and look for the learning opportunities along the way.

6 Tips to Help you Find the Best Deal on Your Mortgage

When you are short on cash, it’s best to go for a mortgage, as there are banks and NBFCs that offer you loan against this collateral.
However, it is important that you find the best deal on mortgages so you don’t end up making an unprofitable bargain.

The interest rates that you would pay for your mortgage would depend on a few factors that you need to look at before applying.
In general, any investor would love to pay as little as possible and spend that money on other things.

Here are few tips to help you get the best deal on the mortgage you take:

1. Research and Shop Around

When shopping for mortgage schemes, don’t settle for the first quote you find. If you are taking the loan for buying a new home,
your real estate agent might direct you to a few set of lenders and claim that they offer the best interest rates.

However, make sure that you research the market and settle only for the best deal.Securing the best mortgage can be complicated and it can be a time consuming process. Compare the interest rates online before taking the final call,
whether you’re approaching a local lender or a big financial institution.

2. Spruce up your Credit Scores

Brushing up on your credit score is important before applying for a mortgage loan.
Your eligibility and the interest rate offered will depend on your credit score.

The better your credit score, the lower the rate and the more choices for home loans you would have.
Home loan against property is a common mortgage scheme offered by most of the banks and NBFCs.
Even if you already have a home loan in your name, you can still get mortgage loans.
You know abut the home loan eligibility criteria and need to provide the right set of home loan documents.

3. Increase the Down Payment

It’s not easy to save enough for the down payment. However, paying more for the down payment can help you get a better interest rate.
You can also save yourself from paying for mortgage insurance which is charged by many lenders if your down payment is really low.

4. Income Stability and Employment

Lenders prefer borrowers who show proof of a steady employment for at least the past 2 years. In an ideal world,a person who has been in the same company for the past 2 years or has shifted to a better-paying job is a preferable candidate to lenders have strict norms for self employed people, and you’ll need to document your business income along with your tax returns for the past two years.

5. Debt-to-Income Ratio

DTI or debt-to-income ratio can be measured in two ways.

The first is a backend ratio that measures the total of your minimum debt payments and your new housing payments on a monthly basis divided by your overall income.
The front end ratio, on the other hand, focuses only on your housing costs without taking your debts into account.
The lower these ratios are, the more likely you are to get a better deal from banks and NBFCs.

6. Lock your Rate

If you manage to find a low interest rate but still want to shop around, don’t forget to lock the rate.
This would ensure that you at least have that rate if you don’t find something lower.
Most of the lenders would allow you to lock the rate for a period of 30 days.