Do you have financial worries or feel as though you would like to understand personal finance better? You’re not alone! According to the 2013 Financial Literacy Study, 40% of adults gave themselves a grade of C, D or F on their knowledge of personal finance. Join Prism Insurance Agency with our guest to discuss managing your finances during each stage of life from teenager to retiree.
JIM: According to the 2013 Financial Literacy Survey sponsored by the National Foundation for Credit Counseling 77% of respondents admitted to having financial worries and with us coming up on April as Financial Literacy Month we thought we'd discuss today managing your finances through each stage of life with Bill Hardekopf, CEO of LowCards.com. Welcome Bill.
BILL: Well thank you guys for having me on.
JIM: We're really looking forward to that and with April right around the corner and being Financial Literacy Month we thought what better guest to have than someone who helps people manage their debt and more specifically you help people get a good deal on credit cards with your website is that right?
BILL: Right, Lowcards.com is a free consumer resource that really has everything you want to know about credit cards, the best ones, what the pros and cons are of each one, what all the rates are. It's a very confusing industry and we try and simplify it for everybody.
JIM: One of the biggest challenges today is that financial literacy and I know there was a survey done by the National Foundation of Credit Counseling where something like 40% of Americans when surveyed gave themselves a grade of C, D and F for their knowledge on personal finance and when it comes to managing debt, I mean we've all read the stories about consumer debt and all the challenges and problems that there are so let's talk about some financial management tips for each stage of life and things we can do better to teach our kids, what we can do for ourselves and maybe become a little bit more financially literate, so tell us about the teenagers and that stage of life what things they can do to be better stewards of their money.
BILL: Well I think it really starts with us as parents. I think we do a terrible job in general of training our kids to be financially responsible. You know when you think about it we train our kids to ride a bike and drive a car, we even potty train them but we don't do much training when it comes to financial management, how to save money with their allowance, how to earn it, how to spend it, we bail kids out when they get in trouble. I think one of the best things we can do as parents even before they get to be teenagers is to train children to be financially responsible if we do that I think some of the problems that they encounter in their lives typically speaking would be eliminated.
TONY: You know it's a great point and I guess the only thing that concerns me about that reality Bill is when we go back to that 2013 financial literacy survey I think I saw in there 77% of respondents admitted to having financial worries themselves. There might be that parental generation that may not understand money themselves.
BILL: Well, that's very true but you know I think we can turn that negative into a positive if you have experienced credit card debt and you are a parent, and your kid is about to get a credit card, there is nothing wrong with saying hey these are the problems that I encountered in my life, here's how I got into debt, learn from me and my mistakes, have an honest conversation with them about some of the problems that you encountered and what the consequences of those were. I think that could be a good learning experience.
TONY: Yeah I'm just thinking about my own daughter who is 15 and she is a high school student and through her French class they are taking a trip to Quebec and of course you are dealing there with financial issues of foreign cash also we're making sure that she has a debit card and understands what that means versus a credit card. It gave us a great opportunity to talk about many things. We are establishing a budget for when she's on the trip, we are obviously talking about how we can make sure in an emergency if we had to we can transition more money into that debit card. So there was a lot of opportunity to have that discussion. Now being a financial advisor of course we also hope we want to believe we take more time than maybe the average American to educate our kids about money and we talk in our household about the importance of savings so maybe touch on that, where does that teenager start as far as saving now?
BILL: One of the best things that a teenager can do is start a savings account right off the bat. If you get into that mindset if you get into that habit that will carry on throughout your young adult and adult life and I think you will save a lot more. If you earn money from an allowance or a job that you have, put some money into savings right off the bat and start to develop that habit. As you mentioned earlier about your daughter's trip, make a budget, that's one thing that we as adults don't do a very good job of much less kids but learn to make a budget right from the start, figure out where your money is going, how much you have coming in, where you spend it and keep a list of those expenses so you can start to track it and I think you will be able to save more.
JIM: Now let's talk about young adults. I just met with my daughter this weekend and she's a college student and we were spending a lot of time talking about these same issues of having a budget and saving and not spending more than you make. It was kind of scary some of the things she told me because she had somebody she knew in college had their car repossessed, some of them have maxed out on all their credit cards and student loans, and they kind of look at it as just kind of free money and then when it is time to pay, they never really took the time to figure out what the impact of all these loans was going to be so what kind of tips do you have for young adults?
BILL: Well, you are very right. Young adults do not do a very good job of realizing some of the expenses that they might be racking up and the debt that they are incurring and what that might do to them in the long-term. That is why a budget that we talked about for teenagers is so good is that you start to track your spending. When it comes to being a young adult you need to 1) not only save but start to put money into your retirement. It sounds crazy that somebody right out of college would start to put money into a retirement account that's probably the farthest thing from their mind but one of the beauties of it is the compounding interest that will take place over that next 40 years. It sounds crazy now but it will be so beneficial when you reach the retirement age. The other thing to really concentrate on is building your credit score. You need to do everything you can to get your score as high as possible because if you get your credit score high when it comes time to say getting a loan for a car or a house, the higher your score is, the lower your interest rate could be and that could result in saving a great deal of money in the long-term.
JIM: It's interesting because I think the credit score thing is something that most people just don't realize how important that impact is. Sometimes you will have employers that will actually check a credit score before making a hiring decision, I know we have had auto and homeowners insurance specialists saying that a lot of those policies to get into their preferred rates might check the credit score and might actually go into the rating system so it goes well beyond just even getting a home loan and I know there was supposed to be in January a much more stringent to get preferred loans for a house where the best rates were only going to be available to the very highest of scores and if you don't get on that early it's really sometimes can be very challenging and difficult to repair especially if you've got yourself so overwhelmed in debt that you might just dig yourself such a deep hole it is hard to every get out of it and if you are always paying a much higher interest rate because you had a lower credit score it is really hard to get that debt paid off so now you can qualify for maybe a higher credit score is that right?
BILL: Well you're absolutely right. One of the things that happens to a lot of young adults is they do incur quite a bit of credit card debt and once you dig yourself in that hole, not only are you paying tremendous amounts of interest but it is lowering your credit score and when you do lower your credit score you are going to pay a tremendous amount, more money in future loans so what you need to do is increase that credit score, be very diligent, very persistent in that, pay all your bills on time is one way to raise your credit score. Don't ever, ever make a late payment. Pay as much as you can if you incur any debt say on credit card. Pay that debt off as quickly as possible. That lowers your debt utilization ratio one of the major components of your credit score. Don't hop from one credit card to another just opening up new accounts. One of the attributes of your credit score is the longevity of you being a customer with a particular issuer. Those are three quick things you can do to increase your credit score but mark my word that's one of the most important numerical scores that you will have the rest of your life.
TONY: How does coordinating with your school debt for example, because young adults are challenged with I keep hearing the common theme and I am sure it's true with every stage of life, you still really have to go back to that teenage year of establishing that budget habit because now you are trying to decide what do I pay down towards school debt, do I have any credit card balances, now I am having to absorb some expenses of lifestyle that maybe my folks covered before plus I want to start saving for retirement there is no doubt having 30 to 40 years to accumulate money, maybe using a Roth IRA or other long-term tax-deferred tax preferred accounts makes a lot of sense. What's that impact, or what comments do you have about dealing with the school debt and how fast they can pay it down.
BILL: If you have incurred any kind of debt, what you really need to do is take out a spread sheet and write down all the different accounts that you are indebted to. If it's a credit card account, if it is a student loan, if it's whatever it might be write down the amount that you are in debt, what the interest payments are, what the minimum payments are each month just so you can see it at a glance where all your debt is. Then what you need to do it becomes financially prudent to pay the highest debt, the one that you are incurring the greatest interest payment on whatever the highest APR is you need to pay that off as quickly as possible because that is the one that is costing you the most money. Typically, that will be a credit card because credit cards are unsecured loans. They have to be they are charged a higher interest rate than a secured loan like something like a car loan. So make sure you can assess what the highest APR is what loan is costing you the most and work like a dog to pay that off as quickly as possible.
TONY: That's fantastic. We are going to take a quick break and when we come back let's talk about the remaining stages of life and how to plan for those. Please stay tuned.
TONY: Welcome back, as we continue a very informative conversation today with Bill Hardekopf who is the CEO of Lowcards.com. Bill you've been sharing with us our philosophy and strategies in dealing with managing your finances during each stage of life. Before the break we were talking about the teenage, young adult phase and the importance of building your credit score, having a budget and starting to save towards retirement. It's interesting when you referenced that 2013 financial literacy survey that was done by the National Foundation for Credit Counseling, that 57% of Americans indicated that they are now worried over the lack of savings and that's really evident that people need to work with a professional today and get some guidance because they are not maybe knowing how to do it themselves so we should talk about that next phase of life which is transitioning from young adult to newlywed that certainly adds a whole another complexity to planning for the future. Share with us some ideas of what newlyweds should be doing for planning for their finances.
BILL: Well you can hear all the married people say Amen. It does get a lot harder when a second person comes into your financial picture. It's no longer you making all the calls. That could be a good thing that could be a bad thing. It depends on your marriage partner. When you do get married, one of the things you should do while you are dating and this sounds very unromantic is just have a full disclosure of all your debt and financial obligations to one another. If you walk into a marriage and you have no idea that your spouse has $50,000 worth of debt that's going to present some financial problems for you two as a couple. That can add quite a bit of stress into the marriage. One of the things you want to do is disclose in some way all the student loans, the car loans, the credit card debt, the loans you have from your parents, to your future spouse. Take a look at what your credit reports are for both of you. I can think of nothing more unromantic than that but that is something that you need to do so you know what you're getting into. Then once you have disclosed all that really have a frank discussion as to what kind of spender or saver you are. Take an honest assessment and share that with your future spouse. You need to figure out and see what kind of problems are we going to have together, what can we do to overcome those and then finally decide how you are going to handle the money. Are we going to have a joint bank account where all the money goes into one account or are we going to have individual bank accounts and you pay for this and I pay for that. Those are discussions that need to be had and they need to be very honest and open I think before you get married.
JIM: I think those are all excellent points and I know we have all read the statistics where give or take a little bit roughly 50% of marriages don't work and then beyond that I know when you look at reasons for marriages breaking apart finance usually shows up in the top four or five reasons why marriages don't work and if you don't get off on the right foot by making sure you understand each other's circumstances and have a little bit of a plan there Tony and I are always big fans of especially if you are newlyweds, sit down with a professional that can help identify what the issues are and help you work through those so you can have a successful marriage. Now let's transition Bill to mid-life. What are some of the issues that can help people or that they should pay closer attention to once they reach the mid-life stage.
BILL: Well again it gets harder when more people come into the picture. Usually in mid-life you are having kids and once you have kids there are a lot more expenses, and then you start to think about their future and gee how are we going to pay for college. One of the things that you need to do is have a plan for how to save enough money for some of those expenses that will come throughout the children's life. Whether that's college, whether that's a daughter's wedding or a son's wedding. You need to start saving for college probably the day you bring the kid home from the hospital. There are all sorts of 529 plans and educational savings accounts that are available now. As you mentioned you might need to get some help from a financial planner or a consultant. If you do inherit money sometimes your parents passed away leaving you money, you should have a good idea of what to do with that money, how to set up an emergency fund that I think every couple should have because you never know when a child might get sick or you may get laid off. You need to have money in an emergency fund in case something tragic happens.
TONY: What about at this phase of life the importance of just teaching kids I mean this is a theme that really should be throughout life but there's got to be ways for parents to share with their kids about finances versus we know that's it really not being addressed in schools as much as it should be so do you think there is that presumption that parents believe that it is being covered at school or maybe just their own lack of knowledge that they don't take that time to educate their kids.
BILL: Well I don't think it's being covered in many schools at all and even if it is, it's your responsibility or our responsibility as a parent to get our kids properly trained to tackle this for the future. As we talked about earlier this is one of the most important responsibilities we have as parents because so many problems can result in the future for our kids if they are not properly trained on how to handle money so open up a bank account for them, give them an allowance, but make them earn it. It shouldn't just be given, they need to earn it just like you would in a work place and let them save and spend their money. If they spend money and they blow it on something stupid like we all did as kids, let them suffer for awhile. They don't have money a week from now because they blew it on something stupid, well they have to forego buying something else. Don't bail them out. That will teach them that there are consequences to making bad financial decisions. I think there are so many teachable moments that we have whether it be on a vacation, whether it having to do with allowances or spending money or our own mistakes it's very good to take those teachable moments and drive some of those points home.
TONY: One of the methods we use in our house is when I talk to my kids about a process I call Earn, Tax, Share, Save, Spend. Those are different phases just like we are going through today. Obviously when you earn a buck or in some of my kid's cases, they are getting a gift that money generally when its earnings first has to be taxed. So once you earn it then it has to be taxed while just jokingly right now in my household I am my children's government so they send me 10% so I have to teach them something. After they have earned it, they have to pay some tax on it. Then they Earn, Tax, Share the next phase is can you commit to 10% of that to an important organization your church or charity and so it's teaching giving back at an early phase, then after Earn, Tax, Share then it's Save. Can we allocate 10 to 15% of your earnings to savings? I would challenge any young adult if they are able to do that they will be very financially sound well into retirement to be able to allocate 10 or 15% of their savings gosh for a long time America had a negative savings rate so anything towards the positive makes sense. Then finally the category of Spend. If we can talk about how to appropriately do that needs versus wants. It just gives us kind of an outline to stick with each time that they have some money come in and walk them through a process of reality and how life works today. Maybe that's a takeaway some parents listening today can use with their children.
BILL: When my wife and I we have three kids and when we would take a vacation one of the things that we got a kick out of is we would give our kid a daily packet of money and that would be their meal money and a little bit of spending money. So many times when you are on vacation you get those dreaded questions, hey can I buy this, can I buy that, can you buy me this? What we did is we thought it out ahead of time and if we were gone for five days we would have five different packets for each kid of meal money and that's their daily spending money and they would have to buy their meals. We didn't give them too little to spend. They didn't go hungry, but what it did is it made them manage their money. They couldn't buy the most expensive thing on the menu every time because they had a certain amount of money to work with. Then if they wanted to save some of that money they could for something that might come up later on in the vacation. What we found is not only did it help them manage their money but they started pooling their money together so they could buy a packet of candy rather than an individual bar, or something and it became a very interesting way for them to learn how to manage their own budget at a very young age.
TONY: That's a great idea. I am thinking back to a recent vacation we took and we were focused more on the weekly budget so dialing it down per day is you make a great case that makes a lot of sense because ultimately that's how we live everyday. So let's talk about that last phase, we've only got a few minutes left preparing for retirement.
BILL: We are all going to face it and as we mentioned you should start to save at a very, very early age and that will benefit you greatly when you turn 59-1/2 or 65. When you are getting closer to retirement you need to max out your retirement savings. Take those IRAs or those 401(k)s put as much money in as you possibly can toward the latter years and also when you do come close to retirement, do as much as possible, pay off your debt. You do not want to have debt when you enter retirement whether that is credit card debt, whether that is a car loan, whether that is a house loan, pay all those loans off before you retire and you will make your retirement a whole lot easier. As we talked about when it comes to throughout every phase of your life it's sometimes good to get the worker and the tips from a financial advisor especially when you are going into retirement. That's kind of a hazy time no one knows how long they are going to live and exactly how much money they need and financial consultants or advisors can sure lend a lot of support and open up your eyes to what you may need.
JIM: What's really interesting and I have to emphasize this because I have had quite a few clients over the last couple of months that reached out that were contemplating retirement wondering if they could retire now. What's amazing when you look at the threats to retirement, longevity, healthcare, inflation, market volatility all these things sometimes just working another year or two can make a huge swing as to the viability of that retirement and that money lasting as long as you do because it's a huge swing when you are drawing on accounts versus letting them grow with things like social security being able to maximize that by maybe putting it off a little bit longer and if we think about retirement when it was first invented the odds of us even living to retirement age those statistics show that life expectancies ended before 65 even when they invented social security. As long as you are able bodied some people might want to consider working a little bit longer. We really appreciate Bill that you took this time today to share some of these tips for not only financial literacy but also getting on the right step financially for people and different things they can consider at different stages of life. Why don't you just share with our listeners a little bit, you've got a very unique website that allows people to shop credit cards. Tell us a little bit about that and how can people get more information.
BILL: The credit card industry is a very complex one. There are over 1000 different credit cards out there. They all have different terms and fees. They have different features and benefits. It is pretty confusing to people and I think there is a stigma about it that credit cards are a very bad thing. Well if they are used properly i.e., you pay off your balance each and every month on time and in full, credit cards can actually make you money and that's what our website does is it kind of gives you tips on how to use a credit card properly and prudently it gives you tips on how to analyze the 1000 different credit cards that are out there. We rank order them in different categories so it's really a consumer resource site it's absolutely free to people and its Lowcards.com.
TONY: Thanks so much, that's a great tool and hopefully our listeners will check that out because I cannot imagine the sea of different features and options that are out there of course most of probably default to the few that trickle to us in the mail, sometimes more than we want but better to have a resource like you offer to really sort through all the different various options out there. Bill, this has been a pleasure today. We really covered all those stages of life in significant considerations, doesn't mean you should go it alone, don't forget you always can seek the counsel of a professional advisor and we would love to have you back someday so thanks for joining us.
BILL: Well Jim and Tony thank you so much for having me I really appreciate it and you guys have a great day.
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