By John W. Schoen Senior Producer
msnbc.com
updated 6/4/2007 10:18:08 AM ET 2007-06-04T14:18:08
COMMENTARY

This week, a Minnesota mom is worried that her kids aren't getting the education they'll need to manage their finances as adults. Though there are a number of organizations that can help, kids still learn most of what they know about money from their parents — the earlier, the better.

I have three children, 15, 13 and 10. I am concerned because they are not going to be introduced to managing finances in school until 11th or 12th grade. Way too late. Are there organizations available to educate them on this subject outside of school?
—Shari S. Roseville, Minn.

Unfortunately, personal finance is not part of the mainstream curriculum at most schools. Despite the increasingly complex financial products and services available to Americans, only a handful of states have moved to reverse the gaping hole in public education and financial literacy for young people.

In the past several years, dozens of states have considered bills requiring some form of financial education in public schools. But only nine states include personal finance as part of their high school graduation requirements: Alabama, Georgia, Idaho, Illinois, Kentucky, Louisiana, New York, Texas and Utah, according to a 2006 report from the National Association of State Boards of Education.

Meanwhile, nearly half of American kids leave high school without understanding how to save and invest for retirement, handle credit cards, or understand the difference between inflation and recession, according to a survey by the National Council on Economic Education, one of several groups working to improve financial literacy. Others include the National Endowment for Financial Education, Jump$tart and Junior Achievement.

These groups also provide materials to schools and community groups that are interested in setting up personal finance courses for kids. You might consider getting together with other like-minded parents or contacting your local parent-teacher association and approaching your school about teaching personal finance.

In the meantime, you can be a very important teacher and role model for your kids. They won’t admit it, but most kids are influenced heavily by their parents — even long after they’ve made it clear they won’t be caught dead with you at the mall.

If they’re not on an allowance, get them started. How soon? If they’re old enough to understand the impulse to buy candy at the checkout line, they’re old enough to understand an allowance. Make them responsible for as much as you feel comfortable. Have them set aside money for savings and regular donations to a charity or service group of their choice.

The more spending they’re responsible for, the sooner they’ll learn how to stick to a budget. It’s not unreasonable for a 15-year-old to handle most expenses, based on a monthly number you work out, beyond basics like food, clothing, shelter and medical costs. As an added bonus, you may find you have an easier time with your own budget. (No more “Mom, can you buy me these $100 jeans?”)

Expect them to make a mistake now and then; that’s how they learn. Avoid the urge to bail them out. If they must have something that’s beyond their budget, work out a loan — with a strict repayment schedule — to teach what it feels like to be in debt. Better in debt for a few hundred dollars — to you — that to hit adulthood and go on an “easy credit” borrowing spree that lands them in debt beyond repair. Based on the mail we get every week, the problem is widespread.

As they get older, show your kids how you pay the bills. Explain what a mortgage is. Help them find part-time work. The sooner they get a job, the sooner they have a personal stake in their budgeting. At the end of the year, walk them through the basics of a tax return.

If they plan to go to college, make it clear that they’ll have a stake in those costs too — either an on-campus job or some level of student loans that will give them a first-hand feel for debt — without burying them in loans when they graduate.

Most of all, teach them early about the predatory lending practices of the financial services industry, which is reaching younger into adolescence for new customers. Many college freshmen now pass a booth on their first day on campus, set up with the school’s blessing, offering credit card accounts — complete with a $50 “starter credit” just to them hooked on the habit of using the card. If your child is approaching adulthood and hasn’t figured out how to manage credit, make sure you get to them before the card companies do.

What should my husband and I do with a $400,000 inheritance? We are 56 years old. We need to do something that will allow us to have a substantial amount at retirement, and yet pay off student loans and fix up the house. What would you do?
-- Name and address withheld

I’d put it in Treasury securities while I got used to the idea of having $400,000 that I didn’t have the day before.

Then I’d ask around and find a financial adviser I liked and trusted. If you trust the lawyer who handled the estate that generated this windfall, you might get some names there. It’s like finding a doctor: Get referrals, set up a get-to-know-you appointment, ask lots of questions —and if it doesn’t feel right, by all means move on to the next name on the list. Rinse. Repeat.

In the process of shopping for an adviser, I’d also read up on investment basics. Maybe take a local continuing education course, but be wary of ”free seminars” taught by brokers passing themselves off as “personal finance experts.” Ditto any cold calls you get offering a "free investment review."

The reason you have to do your homework is that you’re going to need to start off by asking this person a lot of questions. You need to figure out what those questions are. And if you go in knowing a few answers, you stand a better chance of finding out how truthful this person is early on.

You also need to think of buying financial services the way we all think of buying a car or a new TV. People will read up forever and scour the Web for information and reviews ahead of a $2,000 electronics purchase — and then hand over $400,000 to someone they’ve barely met without asking the questions they really want to ask.

The reason for this is that the financial services industry has cowed us all into thinking that what they do is so complicated that there’s no way you or I could understand it. That’s why these folks speak in jargon; it’s designed to remind you how dumb you are in their presence. (Which is one reason we started writing this column.)

The biggest sleight of hand usually takes place when you get to the issue of what this advice  is going to cost you. Over the life of the typical retirement savings horizon, a difference of 1 percent in management fees can mean the difference between an annual vacation in the Caribbean and a bus trip to stay with friends. These fees are tucked away everywhere. Think of them as the “rust proofing” car dealers used to try to sell you.

There are some very fine, honest financial advisers out there. Unfortunately, the modern financial services industry is set up to make a profit for itself, not you. Making money for clients is also good, but losing other people’s money never got a broker or adviser fired. The way the law is written, you have to show evidence of deliberate fraud. And most of the contracts governing brokerage accounts prevent you from taking your complaint to court anyway; you’re required to go to arbitration in front of a panel that includes representatives from the financial services industry.

No matter what you do with your windfall, go slow. If you don’t like the risk of stocks, that’s fine. Some very smart people have all their money in municipal bonds and they sleep very well at night.

It’s true that you probably need to put some money in stocks to beat inflation over the long run. But you can do so very cheaply with index funds, and eliminate the risk of a stock-picking manager picking the wrong stocks.

In other words, no matter how much good advice you get, you’re on your own. The sooner you realize this, the better your chances of making investment decisions in your best interest — and not in the interest of the financial institution you’re working with.

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