Are You Teaching Your Kids to Follow Your Financial Habits?

My oldest is 10, and he does chores around the house to earn an allowance.  He works hard, and we’ve taught him to set aside a percentage for investing (10%), for saving (20%), and for giving (10%).  That leaves him to spend 60% of everything he earns.

And spend he does!

He finds it extremely difficult to let his spend money sit and grow so that he can buy something bigger.  Instead, as soon as the money hits his hands, he wants to spend it even if it’s a fairly insubstantial amount and can’t buy him much.

He just can’t seem to save up for the things he wants.

Instead, he’s enticed by advertisements.  He reads the newspaper and magazines to find free catalogs to send away for, and then he wants to spend his money on any little thing.

Teaching Financial HabitsIt’s driving me crazy.

His money, his life.  I should let him spend the money and be disappointed when he has no money to spend later.

Actually, that’s already happened.  When we first moved to Arizona, he saw a 2015 calendar at Costco for $15.  This calendar had scenic landscapes of Arizona and was quite pretty.  I told him to wait because as 2014 came to a close, he could get calendars cheaper.  But he couldn’t wait, and then in December and January, he was disgusted to find how cheap calendars got.

Still, his behavior hasn’t changed.

As a parent, I wonder how much I should interfere.

You see, when I was young, I was just like my son.  I spent every Saturday at the mall, my money burning a hole in my pocket.  I HAD to buy something, even if it was just a pair of socks I didn’t need.  Every week, I walked through the same stores, buying stuff I didn’t need, just like my son buys the stuff he doesn’t need now.

However, my mom never stepped in.  She gave me a wide amount of freedom.  Whatever money I earned was mine to spend how I liked.   She didn’t even ask that I set aside a portion of it for savings.

I was a responsible kid and bought my own car, paid my insurance, paid for gas, and also bought my own clothes.  I think she figured that I was handling my money well, so it was up to me to decide what to do with the rest.

When I was a teenager, my friend and I used our money from our job to go out to eat and see a movie every Friday.  Sometimes we’d go out to eat on the weekdays, too.

What a waste!

Imagine if I had instead invested just a small portion of that in a Roth IRA.  Or if I had saved it to pay for part of my college education.  Maybe I wouldn’t have graduated with $25,000 in student loan debt.

Even now, I have a hard time saving, though I am getting much better.  I’m finally able to stick to a budget and make saving a priority.  It’s taken me 40 years to break bad spending habits that I learned in childhood.  Let’s be honest, getting a hot deal isn’t really a deal if you don’t need the item and it robs you of the ability to save.

I want to teach my son this lesson now, so he can be more financially responsible than I was for many years.  But that lesson is oh so hard to teach.

How much do you guide and interfere in the way your child chooses to spend money?

 

How Much Leveraged Risk is Too Much?

On January 15th, 2015, the Swiss National Bank eliminated it’s cap on the Swiss Franc in regards to the Euro.  What does that mean?  Well, up until that day, the SNB had said that the value of a Franc would be tied to the value of a Euro.  Under that policy, they had maintained the Franc at a value of 1.20 Francs to 1 Euro.

Disclaimer: This post is being sponsored by ETX Capital.  The content is mine, however, and isn’t influenced by their sponsorship.

Artificial Currency Valuation

In other words, they were artificially changing the value of their currency.  And when they stopped artificially changing the value of their currency?  The market corrected, and the Franc rose to a more reasonable exchange rate. At the same time, the Euro dropped.  The big problem with all of that?  There was no warning that it was going to happen.  And as we all know from the housing crash in 2008, when there’s no warning, bad things can happen.  Banks across Europe immediately felt the pressure.  Within a day, it wasn’t just banks.  It reached all the way down to many small investors around the globe.  Most of those investors were FOREX investors. You see, FOREX investors invest in foreign currency with the expectation that the currency will increase in value.  For years, the Franc was artificially stuck in one place.  And then it wasn’t.

Leveraged RiskSNB Change Cost Many FOREX Traders

Many FOREX traders trade on margin, or leveraged investments.  They’re required to keep a certain percentage of their overall investment in a cash account.  Say $200 on a $10,000 investment.  And when that $10,000 investment tanks and is suddenly worth only say, $1000?  It’s not like they just get to walk away from that.  They still owe the $9,000 they lost to the brokerage.  But, just like in the housing crash, where many of the investing houses were over-leveraged on sub-prime mortgages, many of the investors simply didn’t have the cash to make up the difference.  And many of the FOREX brokerages were left holding the bag, which left many of them in the same situation as the banks in the housing crash.  Suddenly without much in the way of liquid funds and headed for bankruptcy.

Much like the housing crash, there were a few brokerages that had been cautious with their leveraging, and actually managed to escape relatively well from the SNB issue.  One such brokerage was ETX Capital in London. Not only did they come through the fray,  but, according to LeapRate, they’re buying up some of the brokerages that didn’t make it through so cleanly.

Limited Leverage and Risk Aversion Saves the Day

So, how did ETX Capital make it through the SNB fiasco?  According to a LeapRate interview with the CEO of ETX, it’s because they’re a more risk-averse brokerage.  In other words, they put additional limits on the leveraged investing of their users.  That risk-averse, limited leveraging, allowed them to take far smaller hits in the markets and recover much more quickly.

What can we learn from ETX?  Some risk might be good for us, but we have to be really careful about how much risk and leverage we have.

Limiting Leveraged Risk is Good for Personal Finance Too

Let me put it this way.  How many of you reading this have less than $1000 in the bank right now, and over $100,000 in mortgage, student loan, and credit card debt?  That’s leveraging.  Your credit score is a numerical indicator of the likely hood that you will repay a debt.  The higher the credit score, the higher the likely hood that you’ll repay the debt.  When you take on a mortgage, or use a credit card, you are leveraging your credit score (and future income) for that “investment” debt.  (*note: Debt is never really an investment.  Don’t treat it as such, please.)

Why do we leverage our credit and income for debt?  Because very few of us will ever have the patience or will power to save up for years so that we can pay for a house with cash.  Most of us can’t make it a year to save up for a good used car.  So, we leverage ourselves out to buy the things we can’t buy with cash.  The more debt we accumulate, the more leverage, and thus risk, we have.

What happened to people who bought houses with those sub-prime mortgages before the crash?  We all know the answer.  We saw it streaming across our televisions and the headlines of our newspapers for over a year.  They were foreclosed on.  The economy dipped so hard that there was serious discussion about it becoming another “Great Depression”.  And those people lost their homes.

What if we were more like ETX Capital and other brokerages and banks that self-limit their leveraged risk?

What’s Your Financial Weakness?

We all have a financial weakness.  That one area where we struggle to do the right thing.  We might even struggle with deciding what the right thing is.  If we remain unaware of our financial weakness, it can wreak havoc throughout our financial life, as my weakness did mine.

However, knowing your financial weakness, your financial Achilles’ Heel, so to speak, can help you become a better manager of your finances.

My Financial Achilles’ Heel

Me?  I like to squirrel things away for the proverbial rainy day, but when the rainy day comes, I don’t like to dip into my stash.

My husband and I have an emergency fund.  True, it’s smaller than we’d like, but we do have one in place.  Considering 28% of Americans don’t have any emergency fund (CNN Money), we’re glad to have our small one.

Financial WeaknessThere are other ways I squirrel away things.  We buy produce in season at lower cost by doing creative things like renting an apple tree.   Then we store it away for the cold winter months.  (It makes me feel a bit like a pioneer.  A pampered pioneer, but a pioneer, nonetheless.)  Right now we have a deep freezer in our basement that is filled with plums, grapes, blueberries, strawberries, and applesauce.  If we didn’t have money for groceries, we have enough fruit to easily last us for two to three months.

Having an emergency fund as well as a stocked pantry doesn’t sound like a problem, right?

Right.  I’m being financially responsible and preparing for a time when money will be tight.

Here’s the problem.

I don’t like to dig into my stash.

If I have a financially lean month and I’m faced with a large expense like a car repair, I don’t do what would be logical–dip into my emergency fund.  Instead, my first inclination is to put the repair on my credit card and leave the emergency fund intact.

If I have a month where I don’t have as much grocery money, I’m more likely to put groceries on my credit card than make a significant dent in our food stash.

My behavior makes.no.sense.  No sense.

And yet it took me years to figure out that I do this and to realize that I have to fight the natural inclination to go in debt rather than dip into my reserves.  Part of why my family struggled with credit card debt is because of this irrational behavior.  Now the credit card debt is paid off, and I have a chance to start anew, well aware of my weakness.

What’s Your Financial Weakness

So, what’s your financial weakness?  What completely irrational behavior do you exhibit?  Are you even aware of what it may be?

Honestly, finding the chink in your armor, so to speak, may take years.  I think it took me nearly 15 years to figure out mine, and I made a lot of financial mistakes during that time.  I’m not sure why I exhibit this behavior except that perhaps growing up, I always saw my parents struggle with money.  They never had money to create an emergency fund.  Credit cards were their emergency fund, and they had to use them frequently.

I’m guessing for most of us, the experience is the same.  Financial behaviors we saw in childhood and learned as normal become the basis for some of our adult decision making.

What is your financial Achilles’ Heel?