Wednesday, March 4, 2015

Teaching Illiteracy

Lord Redbrick: Oh! I don't like what you're incinerating.
Lady Bluebury: The proper word is "insinuating", illiterate.
Lord Redbrick: I am not illiterate! My parents were married!

My sons were asking me about credit cards, debit cards, cash and checks on the drive home from school today. At first I was pretty excited that they were getting some financial education from school as well as from home. Then I looked at the homework.  I've included their homework in this post, along with the answers I would give (just click on the homework pages below to see the actual questions and my answers).

The first question that caught my attention started with these statements:
Walter has a part time job at the local discount store. He has a checking account and a small savings account. He struggles to pay his bills because he does not make much money.
Wow. That last statement floored me. Poor Walter does not struggle to pay his bills because he does not make much money. Walter struggles to pay his bills because he spends too much money.


Don't get me wrong, I understand there are people that struggle. They struggle to find employment, as poor Walter only has a part time job. However, whatever your income, you need to cut expenses to fit within it, or you will start going backwards and fast.

After going over the boy's homework, it made more sense to me why Texas is 46th in poverty rate in the United States. This is not just the teacher's choice in homework. The pages bear the logos of Texas Council on Economic Education and Teas Credit Union Foundation. I love Texas, but the poverty rate is something that I wish would change and this homework is doing just the opposite.

The rest of the homework went into the advantages and disadvantages of various forms of payment: credit card, debit card, check and cash. It all felt like it was one of those coloring books you can get from the bank extolling the virtues of getting into debt.

And that was just the setup. The two questions that followed were equally amazing:
How should Walter pay for dinner at a restaurant? How should Walter pay for a new television set?
No wonder Walter has a hard time paying his bills. He should be at home opening a can of Campbell's and reading a good book, instead of spending money eating out and buying electronics. In fact, instead of spending all that money, I would recommend he invest $25 in the book Financial Fitness to read with his tomato soup.

I see so many people that have the latest iPhone, cable TV, big screen TVs, eat out fairly regularly and can't seem to make ends meet. This type of homework seems to assume this mentality, the keeping up with the Jones' at any cost.

The next page of homework was a little better. Here is the setup:
Max has a good job. He has a checking account and savings account. Max pays his credit card bill on time and he pays the entire balance each month.
Terrific! Max pays his full credit card bill each month. On the surface this looks like a person in a solid financial position (and I would have thought that 6 months ago). The problem here is the first sentence. What does a good job mean? Does it mean he is guaranteed not to be fired? That the company he works for won't be acquired or go under?

Here is the problem with Max's situation. He basically has an interest free 30 day loan for all the purchases. Every month. If something beyond Max's control happens, like his company being acquired and his division being let go, Max might have a period of time where he has to live on his savings. To add to the problem, he would need to take a month's worth of expenses from his savings to pay off his card, or face high interest rates that will start eating into his savings more than he thinks.

This was pretty much the situation my wife and I were in before we started going through Financial Fitness Pack. We always paid our credit cards off every month. What hit us was an unexpected monthly expense that we took on caring for a relative. We thought everything was in hand, but the credit cards masked what was happening. We had a slow leak that, over two years, caused us to push the envelope on being able to pay off the credit cards.

After hearing about the Dunn & Bradstreet study that found that people spend 12%-18% less when they use cash versus cards, we decided to finally use the cash-envelope system. This is when it struck me that I had a constant 30-day loan from the credit cards. We had drained our savings and couldn't pay off the credit cards and also pay cash for our expenses. 

The Financial Fitness Pack had an answer for that too. We've been following the system prescribed, but more importantly, we're receiving a first rate financial education (CPAs can get 22 credits of continuing education with the pack). Since using the cash-envelope system and the debt paydown, we have a plan to not just pay off those credit cards (and medical debt), but also pay off both mortgages (again with the relative, oi).

The rest of the homework was a page each on the Pros and Cons of the various payment methods; credit cards, debit cards, checks and cash.

The Credit Card page seemed pretty straightforward. One of the advantages/disadvantages plays right into the idea that debt is a good tool if you are broke.
If there is an emergency and no money is available, a credit card can be used to pay for the emergency.
Robert Kiyosaki says, "Only borrow money when you don’t need it." And there is a good reason for that. It is natural for people to assume that this is just a bump in the road and they will be back on their feet soon. However, borrowing money when you are in financial straights only worsens the problem and often the bump is a little longer than expected, especially with high interest rates of credit cards.

The Convenience category had me going back and forth as to if it is an advantage or disadvantage. This is possibly why people spend 12%-18% more when using credit cards. It is a little too convenient.

Checking seems to be a bit of a relic. There were elements of checks I had forgotten about (proof of payment). However, I haven't written a check in quite a while. I use online bill pay to replace a lot of the checks I used to write. There are a few downsides they do gloss over. 

It seems that the homework assumes that with checks you need to balance a checkbook. The problem is that mistakes are common, which leads to overdraft fees.

And the biggest gloss-over is that you need to trust the person you send the check to. Checks have your account number and the banks routing number on it. A decade ago that wouldn't be a big deal. But with all the innovations in banking these days, identity thieves often find holes in new services which allow them to drain bank accounts with just those numbers.

I'm not as familiar with Debit cards, so in filling out this sheet I had to do some homework. I knew you had the added security of needing the card and a PIN number. You don't have the same guaranteed fraud protection that you have for credit cards. I thought that the "limit" for the card was what you had in your account. It turns out there are some bad debit cards out there, that will allow you to overdraft a debit card.

That limit can also cause some problems, specifically when renting a car, hotel room, getting gas or purchases at a bar. In these cases, these merchants put a hold on your card for expenses that you might incur. For credit cards, which usually (or at least should) have a limit far beyond what you normally charge, it's not a big deal. However, for debit cards this can lock up your funds for days. So for the road trips, use cash or credit, or you could have your entire checking account tied up with holds.

And then we come to cash. For cash they didn't have any pre-filled advantages/disadvantages. I thought that was interesting. For advantages, I had that it is nearly universally accepted, and by human nature you will typically spend 12%-18% less than with cards. For disadvantages, once you lose cash, it is lost. So don't lose your cash. 

A bit of a stretch on the disadvantages, I put down that cash is a bit less convenient. I think cash is more convenient than checks (a bit of a pet peeve at the grocery store, but I digress).

My recommendation? Put together a program written by someone who has financial success. Don't let the banks write the curriculum (fox watching the hen house?) 

If it were up to me, I'd have them study the book Financial Fitness for Teens. When I bought it, I thought it was going to be a watered down version of the Financial Fitness book. Boy was I wrong. Financial Fitness is meant for adults that have made financial mistakes. It gently takes them through a systematic path of getting grownups back on track.

Financial Fitness for Teens, however, is a hard hitting, direct work that is meant to prevent youth from making those mistakes in the first place and setting them up to live their purpose, instead of working for the debt providers.

So this is where parenting comes in. Parents, make sure you are watching what your schools are teaching your children. But more important, invest in educating yourselves so you can then educate your children. The schools are not responsible for your children's education, you are.