There are a number of ideas about money management that you may have been taught over the years – either by your parents, a teacher or books you read. Of course, some of these are still true. For example, Ben Franklin’s old adage about, “a penny saved is a penny earned” is still true although it might be updated to something along the lines of, “$10 saved is $10 earned” as pennies just don’t seem to be as important today as they were in Ben’s days. But there are some long-time beliefs about good money management that are no longer valid because the financial landscape here in the US has changed so much.
As an example of this, the average interest-bearing checking account today offers 104% more interest income than the typical savings account. So “a penny saved is a penny earned” might better be stated, as “a penny put in a checking account is a penny earned.” In addition, there are other long-held beliefs about money that are no longer true and here are four of them.
1. Depreciation makes it better to buy a used vehicle than a new one
It has long been said that it’s better to buy a used car or truck than a new one because of depreciation. The old adage is that once you drive that vehicle off the dealer’s lot, it drops thousands of dollars in value. However, there is data shwoing that the average new car loan charges approximately 15% less interest than the average loan for a used car. Plus, this same data shows that if you plan to keep that car or truck for just three years, you’d be better of leasing. To put this another way, it’s best to begin your car shopping process with an open mind and to do a lot of comparison-shopping so that you will know exactly how to proceed.
2. It’s better to borrow from a bank
This also is no longer true. While banks used to be a prime source for vehicle loans – whether for a new or used car or truck – credit unions today are a better source. While these institutions used to limit their membership to certain people such as employees of a particular company or members of a certain union, many of them are now open to the public. They generally offer vehicle loan rates that are 40% lower than national banks. And those small local banks usually charge 30% higher rates than the national banks.
While loans from the Federal Housing Administration (FHA) used to be the best choice for many homebuyers, this is not necessarily the case today. If you have a really good credit score and a high down payment, you’ll save more with private mortgage insurance versus an FHA loan.
4. Small businesses should have business credit cards and business checking accounts.
Just a few years ago, it made the most sense for a small business owner to get business credit cards and a business checking account. However, unlike consumer credit cards business credit cards are not protected by the CARD Act (the Credit Card Accountability Responsibility and Disclosure Act of 2009). This means that the companies that issue business credit cards can raise their rates on existing balances just about whatever they want. In addition, business checking accounts are no longer really very competitive. They may have more features but they also charge 20% higher fees than standard checking accounts and offer 84% lower interest rates on the average then consumer accounts.
5. You don’t need to teach your teens about personal finances
Teenagers didn’t used to have a lot of spendable income. Most existed on allowances or small allowances supplemented by whatever they could earn in part-time jobs. Today, however, teenagers are big-time consumers. In fact they spent nearly $91 billion just in 2011 alone. Unfortunately, very few of them are not saving for college or for any other long-term goal, nor do they understand basic financial terms. For example, in one survey more than 75% of 16- to 18-year olds said they were financially savvy but only 20% knew what a 401(k) plan was and a mere 32% understood credit card interest and fees and how they work.
Since only four states require require high school students to take a course on personal finance, this burden falls on their parents. As you might guess, this comes with its own issues, as the whole subject of personal finances tends to make kids’ eyes glaze over. Plus, many parents are uncomfortable sharing information about the family’s finances or don’t know how to effectively communicate about money in ways that their children will understand. If you’re the parent of a typical teenager you probably hear a lot of, “why can’t I have that (fill in the blank).” It can be tough to respond to this question in a way that not only stops the child’s nagging but also makes for a lesson about your money values. In fact this is much harder than just saying, “no.”
Share the reason
The best way to handle this is to try to let your teenager know your reasoning for why you won’t allow that purchase. This can go a long way towards determining their values about money even if you simply say that the item is too expensive or that all of you in the family don’t buy anything just when you want it. Your teenager might not like either of these answers but he or she will eventually begin to appreciate that you at least explain why you are making the choice that you did.
Have an allowance
Also, if you don’t give your teenager an allowance you should. This can be a very good tool for teaching money values to your kids. If you introduce the allowance as a sort of paycheck and make them responsible for purchasing things on their own as well as saving for long-term goals, this can help establish good money management fundamentals. And while you might not want to use that bedtime story to discuss Roth IRAs, you could turn some of life’s little moments into teaching opportunities. For example, the next time your teenage daughter asks for a new pair of shorts you might turn this into a short discussion of budgeting and of deferring today’s wants in order to achieve a longer-term goal such as a new pair of Uggs. This is another reason why giving a teenager an allowance makes good sense because it forces him or her to make decisions.
We know of some parents who deposit money into their child’s savings accounts every month, which the child can then access via a debit card. Most teenagers learn very quickly that when the balance in that savings account falls to zero, they’re through for the month. These parents tell us that this eliminates much of the arguments over money because when the child runs out of money he or she knows it’s because of the way they managed it. Most learn how to do a better job of managing their money after just a few months and these are lessons that can help them throughout their lives.
Don’t bail them out
Finally, if your teenager runs out of money, don’t bail him or her out. This is tough but is one of the most important lessons you can teach your children. If your teen becomes overextended on credit – despite your best efforts, you need to take a firm stand. Let him or her experience the consequences of having made bad financial decisions. It’s much better to help your child take responsibility for the $500 debt now then a $5,000 debt later in life.