The Amateur Financier

One thing that every couple that is planning on getting married or is otherwise involved in a serious, long-term commitment needs to think about how they will merge their disparate finances into one united financial picture.  With how many accounts many people hold today, and the increased delays many people have before they get married, the financial picture of each individual can end up being quite complicated.  (Just look at my monthly updates to get an idea of how elaborate the financial situation can get, and bare in mind that I don’t list out individual bills that are owed, the sources of my income, etc.)

Relationships can be a lot like these heart balloons; beautiful, but delicate.

But, if you’re going to have a happy and harmonious relationship together, you need to deal with money issues together, as a united front.  To try to do things on your own might seem easier, but can end up complicating your lives needlessly and end up leading to arguments.  But it doesn’t have to be that way.

Advice on Combining Your Finances

Luckily, it’s not as hard as it might seem to combine your accounts and your financial information, so long as you’re willing to put the required work into it.  You just need to follow a few simple rules, and you and your partner will be a combined financial force in no time flat.  In order to go from two sets of finances down to one, you need to:

1. Be Completely Open and Honest: This might be a tough one, particularly if you are naturally shy and withdrawn person (I can relate).  But your partner needs to know where you stand financially, so honesty is definitely the best policy.  If you have some trouble spots in your financial past (lots of debt, a poor credit score, past spending you aren’t proud of, etc.) then it might be less than comfortable to open yourself up to such scrutiny and possible criticism.  You need to do so anyway, though, if you hope to have a successful relationship (and have the same consideration shown to you in return).

2. Don’t Leave One Partner All the Work…: There is a tendency in couples to take a divide and conquer mentality.  One partner will do the laundry and the dishes, the other will handle the yard work and the cooking.  So it goes with finances; there is likely to be one partner in the relationship that loves to go through the books, figure out where to invest, and save for the future (in my relationship, that’s me, as you might guess from this blog), while the other partner tends not to care so much, or even actively dislike having to deal with money (my fiancee Sondra is firmly in this category).  This is fine, and actually pretty normal for couples.

But, even if there is one partner who enjoys dealing with money, that doesn’t mean they shouldn’t get help or input.  If your significant other is the one who does the books, you need to make sure you keep an eye on what is going on with your finances, and share your input on where the money is going.  It is your money too, and helping to handle it wisely and invest it properly is not just the responsibility of your partner.  You need to help out and contribute too.

3. …Or Keep One Partner in the Dark: On the other side of the coin, if you are the partner who likes to deal with money, you need to make sure that your significant other knows what’s going on with your shared money.  Besides helping to keep them from making poor financial decisions that hurt you both (like buying items that you can’t afford because they think you have more money available than you do), it will also help to ensure that you are on the same page about what to do with your combined fortune.  Otherwise, there can end up being tension in the future when your partner finds out that your money has been going towards goals they don’t support.  Better to say on the same page, and to explain any changes you make to the money management strategy.

4. Contribute Appropriately to Household Expenses and Shared Goals: Now comes the tricky part: how do you divide up those household expenses to be fair to both partners?  Well, there’s lots of theories; you could combine all your income in a joint account and pay all your bills out of that account, you could split the total for the bills right down the middle and each contribute half that amount, or you could each pick some bills that you will pay each month and handle those bills out of your individual accounts.  Each of these methods can work, although they have their flaws.  The first doesn’t leave any money of your own for personal spending, the second isn’t fair to the lower income partner, and the third is tricky to make fair and can result in one partner subsidizing the other’s bad spend habits.  (If, for example, you make a ton of out of the country calls to your family and your partner picks up the phone bill.)

The best method I’ve come across to handle combined bills like this was from Suze Orman’s Money Book for the Young, Fabulous and Broke.  In it, she recommends determining the amount of the monthly bills (I would include things like retirement account contributions and saving for a home here, although Orman didn’t due to the audience of her book), figuring out the proportion of your combined monthly income required to pay those bills, and each person contributing that amount.  If your monthly expenses come to $4000 and your combined monthly income is $5000, for example, each partner contributes 80% of their income to covering the household bills, and is left with 20% of their income for their own purposes.  It’s fair, it’s reasonably easy to figure out, and it doesn’t require you give up control of all your spending.

5. Keep Talking: The most important thing you can do to successfully manage your money as a couple is to keep talking.  It’s easy for the lines of communication to break down, especially nowadays as everyone tends to be so busy and occupied with their own tasks.  But, if you’re hoping to successfully manage your finances as a couple, you need to keep talking.  Share your financial goals, your hopes, and your dreams, and make sure that you know what your partner wants.  Ensure that each person knows where you stand financially, how much you have available to spend, and what that money should be spent on.  Know what your partner hopes your life together looks like in ten years, and work with him or her to make that vision come true.  Above all, just talk.

What do you think is the most important thing in order to successfully combine finances as a couple?  How much independent control over your money should you give up to meet your goals as a couple?  Are there any techniques I missed that you’ve had exceptional luck using?

I’d wager that many, if not most, of my readers have an entrepreneurial streak to them.  The fact that most of you are bloggers yourself (and personal finance bloggers, to boot) is obviously one big clue, but even amongst non-bloggers there seems to be a growing sense that starting your own business or working for yourself is the best approach to life.  Many people have taken to encouraging their children to become entrepreneurs rather than go to work for a single corporation for their entire lifetime and eventually retire with a gold watch and pension.  (How many people get a pension in retirement anymore?  For that matter, how many people work for a single employer in their life?)

But no-one is born an entrepreneur, or at least, nobody is born with the skills and knowledge that a successful entrepreneur requires.  It takes a mixture of skills, knowledge, enthusiasm, and persistence.  So if you want your kids to grow up to be the next Tim Westergren, how do you help instill the proper traits in them while they’re still young enough to take your advice?  There’s no sure way to make children grow up the way that we hope they will (although, if you manage to create one, you’ll have a sure-fire product to sell for your own entrepreneurial ambitions), but if you do you best to give them a solid footing on which to start their entrepreneurial journey, you can get them off to a good start.  Some ways to do this include:

1. Give Them a Good Background on Money and Money Management: One of my big pet peeves, one that I’ve mentioned more than once, is that the US education system doesn’t provide an education on money management at all.  (And from what I hear, it seems to be the same in most Western countries, as well.)  You’re going to have to rectify this by teaching your own children about money, how to make it, spend it, and save it; this goes double if you want them to take the initiative and start their own business.  A good object lesson for them could be…

2. Encourage Them to Supplement Their Allowance: One of the primary motives for anyone to start an entrepreneurial venture is to make more money for him- or herself.  Children are no different; if you aren’t buying them everything they want, they’ll likely jump if you point them towards a method of getting more stuff.  One way to get their entrepreneurial juices cooking is to stop increasing (or even start decreasing) their allowance when they are old enough to start a (basic) business of their own, and encourage them to build up their income outside of what you give them.

3. Give Them Some Suggestion on How to Make Money: There are plenty of ways to make money, particularly now that technology allows anyone to achieve great things from the comfort of their bedroom.  Luckily for you and your offspring, there are any number of possible ways to earn money they could try, from the classics like a lemonade stand to more modern ideas like blogging or building an app.  Try to find something that fits within their field of interest, and point them in the right direction.

Ah, the lemonade stand; how many children have tried to make money using you?

4. Share Stories of Other Entrepreneurs: One thing that can be more motivational than any other is share stories of how other entrepreneurs achieved their success.  Besides inspiring them with ideas, it can also be a great way to show the potential rewards of becoming an entrepreneur.  Some of the magazines that celebrate business and entrepreneurship, like Inc. or Entrepreneur, share plenty of stories of successful entrepreneurs (as well as tools and other resources for would-be business owners).  As a side note,  you should also share the risks and potential problems with being an entrepreneur; you don’t want your offspring to think that becoming an entrepreneur is a sure path to great wealth.

5. Provide Them the Tools They Need (At a Price): Unfortunately for many ten year old businesspeople, banks tend not to give out too many loans to people not old enough to vote.  So, if your offspring has a business plan but no other sources of money, you should take it on yourself to provide them with a loan.  That is, a loan complete with repayment terms and/or a share in their future income.  Besides enabling them to get their needed tools, they’ll also get a better idea of what doing business in the real world is like.

6. Help Them When They Have Trouble: There’s one thing that’s certain in life; trouble will arise.  Undoubtedly, your child will have trouble with their entrepreneurial attempts; luckily for them, they have you to help pick them up when they fall.  While you don’t want them to get the idea that failure is easy, painless, or *gasp* fun, you can also cushion the fall when things go wrong, keeping them from becoming too disillusioned with the entrepreneurial lifestyle (or life in general, for that matter).

There you have it, a few suggestions on how to raise an entrepreneurial kid.  As of yet, I haven’t had the opportunity to put any of these into practice (a lack of kids will do that), but when I do have children of my own, I plan to put these suggestions into practice and hopefully bring out their entrepreneurial side(s).  Good luck to anyone else attempting to

Someday, I hope to have children (although, not someday soon).  It’s one of the things that Sondra and I have discussed; we both want one or two children once we have finished our respective educations, gotten married, and have the resources to devote to raising them in a warm, loving environment.

Given this desire, and my own personal interest in money and other personal finance related matters, it’s only logical that I’ve given some thought to how I intend to teach those little whippersnappers about money and what you should (and shouldn’t) do with it) once they are old enough to understand the concept.

Teaching them to keep the family coin bowl organized will be step one.

Here are some of the lessons I hope to impart on my kids about money management (and life) once I have the opportunity:

Spending

Probably the first area where my kids will be exposed to money is when I spend it.  They won’t watch while I earn it (although, they will probably have an idea of ‘Daddy goes to work to make money’, as most young children do) and it will be a little while before I can explain properly the importance of investing, they will be watching when we go out to buy groceries or visit the mall to buy gifts, and will see Daddy pull out a handful of bills or swipe his credit card before we leave the store.

The most important lesson I’ll try to pass on when they are first getting old enough to learn about money is that, when Daddy (or Mommy, for that matter) gives the cashier money or swipes his credit card, that money is going from Daddy to the store, and Daddy can’t spend it anymore.  Given that Daddy, like everyone, doesn’t have an infinite amount of money, he has to decide what to spend it on; if he buys expensive food, he’ll have less money available to spend on toys, and similar trade offs.  When they are younger, the biggest lesson on spending is that you can’t have everything you want; you need to make choices and compromises about where your money goes.

As they get older, I’ll try to open up more on all the places where the money goes.  I’ll try, as much as is possible, to share the cost of the household expenses and what sort of income I have coming in, explaining why I use particular services for heat or electricity or water.  I’ll also try to emphasize the importance of putting some money aside, in savings accounts, retirement plans, and 529 plans (or similar education plans) to help them with tuition when they get old enough to go off to college.

Earning

I’ll admit, I’m a bit torn about whether to give my kids an allowance.  On one hand, I didn’t get an allowance as a kid, and I seem to grown up with a pretty decent understanding of money.  On the other hand, my mother (and my father, to a lesser extent) tended to buy me things out of her own pocket whenever I asked, which I’m certain didn’t help to form a link between getting something and earning the money to buy it in my mind.  As a result, I’m leaning toward providing an allowance.

What I do NOT want to do is link that allowance to performing chores.  To my mind, that creates the expectation that you should get paid to do things around the house to earn money, rather than because as a member of the household, you should contribute to making the house look nice and livable.  It’s a fine line to walk, I realize; if the children know that they will get money regardless of what they do to help the household, they might simply opt to slack off and play rather than cleaning their rooms or helping with dishes.

What I might do is try to split the differences: paying them for ‘extra’ chores, like helping with dishes, shoveling snow, or raking leaves, IF they’ve done all their ‘required’ chores, like keeping their room(s) clean.  Then, they’d learn that there are some things you simply have to do, but going above and beyond them can lead to rewards.  (I should probably consult with a parenting book or two before I commit to anything, though, to get a better idea of how children usually react to such plans; the last thing I want is for my attempts to reinforce the wrong lessons.)

As they get older, there will be changes, of course; first, as they grow, I’ll expand what falls under the rubric of ‘required’; while an eight year old might be suitably challenged by simply keeping her room clean, as she reaches ten, twelve, or her teen years (*shudders*), the level of tasks I’ll expect from her as par for the course will increase (and of course, when she has a car of her own, she’ll be expected to care for it on her own).  The list of ‘extra’ chores will also expand, as they become physically able to handle more complex and challenging tasks; I wouldn’t trust an eight year old to mow the lawn, but a twelve year old is a different story.

When they get old enough, I’ll encourage them to get a part-time job, both so they have a better idea of what the working world is like (especially if you don’t have the education/training to get a higher level position) and so they earn some money on their own.  I’ll also do my best to explain the concept of passive and alternative forms of income, and encourage them to do something like start a blog or create another website as an additional form of income.  (Now, of course, I’ll also need to teach them how to be safe and secure online, but that’s a whole new barrel of monkeys.)

Saving and Investing

One thing I definitely want to emphasize is the importance of putting a portion of your money aside, creating a fund for future spending as well as trying to grow your money so you don’t have to work for every penny you spend.  When they are younger, this might just consist of teaching my children to put part of their allowance or any other money they get (from birthday cards, Christmas gifts, etc.) into a savings account at the bank, so that they aren’t tempted to spend it and can earn a little interest.

As they age, I’ll start to introduce the concept of investing, explaining how they can earn more money than at a bank, and how important it is to invest if they hope to retire (or meet other big goals throughout their lives).  When they first start out, I’ll probably pick investments for them and have them trust that Daddy wants what’s best for them, but when they get older, I’ll encourage them to find their own investment opportunities so they learn how to research.  (I’ll check over said investments before they put any money into them, at least until they are older enough to know what sort of scams exist in the world of investing.)

To further encourage them, I will probably add some of my own money to their investment pot.  Not only can help encourage them to invest enough to get a company match on their retirement funds when they reach that point of their lives, but I can help boost the size of their investment pot to help them get a head start for longer term goals like school and retirement.

Giving Back

Perhaps the most important thing I can teach my children is how to give back to the less fortunate.  When they’re young, I’ll probably try to emphasize times when I give physical money to charity, by putting cash in the bowl at church or slipping a few bucks into a Salvation Army bucket in December.  Those are perfect teachable moments, and should be ideal for explaining why Daddy is giving money to this strange man.

As my kids get older, I’ll share more about other ways to contribute to charity, explaining how I make donations online and how I decide deserves to receive money.  I’ll encourage them to find charities to support and to donate to them a portion of their income.  I’ll emphasize the importance of finding a good, worthwhile, legitimate charity, and trying to keep those donations coming.  As with saving and investing, I’ll do my best to chip in some of my own money to help increase the impact that their donations will have (and help out the charity, as well).

Wow, I didn’t think I’d write quite so much; but money is a big topic, and trying to create an 18 year plan (or so) for sharing what I know with my children would be hard to condense into a 1000 word column.  This is a pretty good start to getting my thoughts on the subject organized, though.

Readers, what do you want to teach your kids (if you have any/desire to have any, that is) about money?

A common comment about children and the expense it takes to raise them is that such costs are ‘an investment in the future’.  As analogies go, this isn’t bad; we put money, time and effort into raising children, and expect them to grow, mature, and become productive when they get older.  But it’s not perfect, either; unlike stocks or mutual funds, children can’t be counted on to provide a direct return on our investment, either paying out money or increasing in their value when sold (particularly since selling children is frowned on in most places nowadays).  Instead, the payout is seeing our children grow, learn, and become useful members of society, with some possibility that they will help care and provide for us in our old age.  But, what are the costs and benefits of having and raising children?

The Costs of Raising a Child

It’s hard to say with absolute certainty just how much it will cost to raise the little bundle of joy you bring home from the hospital into a mature, productive, outstanding member of society.  A lot depends on the choices you make over the course of his or her lifetime and the costs associated with each one.  Do you spoil them with every toy and activity a child could want, do you teach them to live an austere and simple life, or do you try to stay somewhere in the middle?  Do you have to pay for expensive child-care services, or will you (or your spouse) be able to stay home to care for your children?  (Both options can have the effect of increasing the child-rearing costs, either from added expenses or decreased income.)  Don’t forget college; how much you contribute to Junior’s 529 plan (if anything) will have a drastic effect on how much you spend during his formative years.

With such a diversity of options that exist for your child-rearing options, estimates for the expense of raising a child are going to vary widely.  An series of tables from MSN, for example, shows total expenses from birth to age eighteen that range from a low of $125,000 to a high of $250,000.  That’s not including college, which they pegged at $25,000 each year (an additional $100,000 for a four-year program).  But that’s far from the only estimate that exists; the United States Department of Agriculture puts the cost at just shy of three hundred thousand, for example (and also makes me wonder why the USDA is responsible for reporting this data).  On the other end of the scale, a mother named Mary reports that her per child costs total only about fifty thousand each year, in part due to her frugal methods of raising them and the advantage of having many children, spreading out some of the larger costs associated with the other figures.

(Quarter) Million Dollar Baby

For me, when thinking about when I will start having kids, I’m going to assume a fairly high cost for each child, in the $250,000-300,000 range.  There are two big reasons for this: first, if I estimate too high and turn out to be wrong, the extra money can be diverted to other goals easily enough (such as saving for their college education, something not included in any of the figures mentioned), whereas assuming too little will put me into a scramble for more money at some point in the future.  Second, unlike Mary, my fiancee and I are planning to have a relatively small family with one, perhaps two children total.  The economies of scale that she has been able to harness with a fairly large brood simply won’t be available to us.

Financial Benefits of Children

Before you rush out to have various tubes tied or snipped to avoid ever becoming a parent, let’s not overlook the fact that children do have some financial benefits associated with them, as well.  Some of the most well known include the various tax credits and deductions available to parents.  While probably not enough for you to make a profit from your children, such tax advantages do make having dependents less costly than otherwise, decreasing the financial burden of having children.

Attempting to get a return on your ‘investment’ more directly, by getting your children to help take care of you in your old age for example, is much trickier.  In most cases, it will come down to your child’s personal feelings as to whether he or she will be willing (and financially able)  to provide for some or all of your expenses when you are ready to retire.  Unless you structure the monetary support you provide as a loan (complete with interest and other terms, backed up with the full force of law) or have a financial incentive like the possibility of a large inheritance to use as a motivator (in which case, why do you need your child’s help?), there are few ways to ensure that you will get cooperation from your children in providing for your retirement or any other financial support.

Non-Financial Benefits of Children

Before you go thinking that I’m saying you shouldn’t have children, that they are ungrateful whelps who will drain you of money while you’re raising them and you will never see a dime in return, stop.  That’s not the case.  Yes, I wouldn’t have children expecting that they will provide for my retirement; there’s simply so many unknowns to consider between when they are born and when they are grown that even if you raise caring, nurturing children who want to help and support you (as I hope all of you would), there’s no guarantee that they will be able to do so.  As many people in the Baby Boom generation are discovering, trying to balance caring for your children, your parents, and yourselves makes for a very tough balancing act (leading some to call the Boomers the ‘sandwich generation’, being stuck between two groups of relatives who want financial support).  By the time your children are financially sound enough to help you, they might have children and families of their own, and need to provide support to them.  Depending on your children to support you should not be your primary retirement plan.

Instead, focus on the many intangible benefits provided by raising children.  Assuming you like kids (and if not, why are you even thinking about adding more to this world?), having children of your own is instead a chance for you to pass on your values, knowledge, and genes.  Talk to any parent (or better yet, a grandparent; they get a lot of benefits from grandchildren with much less of the work) about their (grand)children, and the responses you get will generally focus on the emotions the kids invoke and the memories they generate, not the costs incurred or the loss of returns from investments.  I am firmly of the belief that children add to the joy and wonder of the world, and if they are raised in a caring, loving family, will make the next generation an even better time to be alive on the planet.  THAT is the real return on investment that children offer.