Jude called me over for dinner yesterday. After a sumptuous meal, we were lounging and discussing our work in general and our plans for the holiday seasons. I noticed Jude’s partner forcing their son Nick to finish his meal. The ‘finish-it’, ‘I-don’t-like-it’ argument went on for a while. Finally, they had to give in to their son’s demand. Jude ordered a pizza for Nick. And the food on Nick’s platewent straight to the garbage can. At a time like now, when inflation is up, people are losing jobs and grocery bills are hitting the roof, what a waste of food and money.

I spent the night thinking whether we teach our children the value of money. When we insist on children being obedient, polite and good mannered, isn’t it also important to let them know the value of money. Here’s what occurred to me on how we can start doing that.  

1.    Take them out grocery shopping Taking kids out for grocery shopping will help in letting your child know the price of stuff that he dumps. You can explain to them how the price of a jar of mayonnaise that cost lesser last month, has shot up now. Of course, you may have to deal with pester power when you cross the toys section or cookies counter. Be prepared. May be you can tell them that they have a fixed sum, like  $3-4 or for themselves and they can shop for what they want anything. So your child can choose either from buying a box of cookies or a fancy toy.

2.    Gift them a piggy bank This is the oldest, time-tested way to teach children the value of money. Ensure that the kids save the money that they earn or receive as gift in their piggy bank. Let them learn how little cents saved over time pile up to a few dollars. Insist that they should not break it until there is a need to do so.

3.    Give them little incentives for extra work done You can gift them a few cents whenever they help you with an extra errand, whether it is helping you paint the fence or fix the leaking tap. Let them know how much you have saved by doing it yourself. You have to be really careful here. Let the child not believe that he can expect incentives for doing his routine tasks like setting the dinner table or cleaning his room.

4.    Send them for summer jobs Summer jobs are an excellent way to make your child learn the value of money. It may be things as simple as babysitting or running errands at a neighborhood store. It helps the child know that nothing in this world comes for free. Everything has a price. You will certainly see a difference in your child’s attitude.

5.    Take your child to the bankThis will familiarize your child with the basics of banking and financial planning. Let them know how interest rates work when you deposit or borrow money. Show them how money deposited is both safe and grows over time.

It is important to let our children know our financial position. We need not exactly prepare a balance sheet of our income and expenses to show our children. But sitting with the child and explaining that Dad cannot afford that new play station this month or that swanky car that his friend’s father drives, will make them better and more mature adults.

 

 After the subprime crisis, it is the credit card debt crisis that many financial analysts and economists are predicting to hit the country. Many average Americans seems to be using their credit cards for all the wrong reasons, falling prey to fancy deals and getting into debts.    

In case you are one among those trying to get out of a messy credit card debt trap, here are some tips that might help:

1.    Try balance transfer to consolidating debts to 1 or 2 cards If your debts are spread across different cards try consolidating those into one or two cards. Most credit card companies allow balance transfer and offer incentives for the same. Assuming your credit card issuers A and B charge 16% interest and a Card B offers you the balance transfer option at a rate of 8% and an introductory period of 4 months. It means you can transfer the debt of say $2,000 in Card A to Card B. The sum of $2,000 will attract an interest rate of 8% between say October-January. You can use this period to manage your debts better. If you still haven’t settled the debt, then February onwards the balance amount to be paid will attract an interest of 16%. Card companies allow balance transfer of up to 80% of the credit limit. So if you have a credit limit of $10,000 in your credit card A, then you can transfer up to $8,000 to your card B.

2.    Restrict the number of credit cards If you have credit cards with varying interest rates, then after settling all the debts, cancel those cards which have a higher interest rate. A maximum of two credit cards are sufficient to meet more than your basic needs. It is also advisable to avoid using your credit card until you have settled your debts spread across your cards.

3.    Try breaking your savings account to repay If you have some money in your savings accounts, you can try breaking that to settle the debts. Of course it hurts to break the savings, which you have planned to use for your wedding or your child’s education. But instead of having to live with mounting debts, harassing creditors, bad credit ratings and stress, it is better to forego the interest on your savings account and repay your credit card debt.

4.    Get a home equity loanIf the roof above the head is the entire asset you have, you can try considering a home equity loan to pay off your card dues. The debt on your house may attract an interest rate of 6-7%, which would be way lower than an 18% charged by your credit card issuer.  Two things to note here: ·         If you haven’t paid your mortgage fully then you cannot take a loan on your house. ·         Once you have paid off the credit card dues, finish off the loan on your home equity loan as soon as possible. Else you will end up with both home loan and credit card dues to be paid.

5.    Confront your creditor with your problem Okay, you neither have savings to speak about or a house to bail you out. The next best option would be to talk to your creditor and explain the situation. Tell him that you lack resources to repay the huge debt and the mounting interest. Ask for renegotiation of interest rates or extension of repayment period. Apprise them of your situation honestly and let the creditors believe that you are serious about repaying your debts. Chances are that your creditors will lend an ear to your pleas and help you settle your debts.

6.    File for bankruptcy This is the last resort, if you have exhausted all options to settle your debts. When a customer files for bankruptcy, the credit card companies are required to write off all or most of the debt. But before you jump to the option think of the consequences. First you should qualify for bankruptcy. The rules for declaring bankruptcy have become tougher over the years. The filing of bankruptcy will remain in your credit record for 10 years impeding almost all chances of acquiring credit, loans and mortgages of all kinds in that period. In addition you have to cough up a hundreds of lot of dollars to filing for bankruptcy, your attorney fees and so on.

The impact of the economic crisis facing the country has started trickling down to lay persons like us. I was speaking to my sister Samantha over the phone just a while ago which actually prompted me to post this blog. Samantha works in an IT company which has just announced its plans to lay off employees. Thankfully she does not feature in the firing line. But she was worried that any time soon, it could be her turn to be shown the door.

There are many reasons why companies lay off employees. When the economy was bullish orders were flowing in big and fast and companies needed people to execute the work. Now that there is a slowdown, orders start dwindling in size and number and in effect the requirement for the human resource also goes down. To add to the misery of the companies banks have started restricting loan disbursal to businesses or charge higher interest rates due to the liquidity crunch, throwing a spanner in the development plans of companies. These are just two of the many reasons why jobs are laid off.
It is important to be prepared for the worst in such times and let me suggest how:

1. Start creating an emergency fund
Traditional wisdom suggests that one has to save around 3 months of one’s salary as an emergency fund. If you have not done it so far, it is not too late to start doing it. Check all the possible ways in which you can save money. It is ok if you do not spend your weekends at the mall or hangout for a beer with friends for a few weeks, at least until you have saved up a decent sum for your emergency needs.
 

2. Get mentally prepared
As much as the financial preparation, it is important that you mentally prepare yourself for the worst. The emotions of people getting laid off range from anger, guilt, low self-esteem to a feeling of helplessness. Understand that when you are in a boat and the stream is rough you just have to sail along. No point finding faults with your boat or cursing your fate. Remember there are things beyond your control. Just keep telling yourself that it is just an opportunity for your to realise how tough you are as a person.

3. Start networking
Even as you are still in your job, rummage through your phone book, revive old contacts, make calls to people who matter, just to say hello. Let people remember that you are still around. You can subtly hint them that you are looking for a change in job. You can also start circulating your resume among friends and job sites.

4. Prioritize your debts and investments
Make a list of the debts and loans to be paid off and prioritize them. By paying your secured loans like mortgage and car loans regularly you can ensure that they are not seized for non-payment. Try not to default on your insurance premium payment either; else the whole purpose of having a policy will be lost. And avoid breaking your 401(k) or retirement plan as much as possible. Withdrawals from your retirement plans are subject to taxes and a 10% penalty as well.

 

 I am sure all you chums out there know by now that the country is going through a very serious financial crisis, unless you have been on a long sleep like Rip Van Winkle of the fairy tales. The economists and financial analysts worth their air time have been comparing this to the Great Depression of the 1920’s. So what exactly happened during the Great Depression of the 1920’s when almost none of us were born and how does the present situation compare with that? Let me explain.  

Wikipedia says that the Great Depression of the US started in 1929 with the stock market crash followed by a decade of unemployment, poverty and low economic growth. Though the reasons for the Great Depression (let me refer to it at GD, henceforth) are not certain, it is believed that it was caused by a combination of bad loans, badly regulated markets that also resulted in financial misappropriation by banks and financial institutions. The impact of the failure in financial markets was felt in other sectors like farming, construction and manufacturing. The financial crises snowballed into a global phenomenon as other countries also felt the impact of the GD.

Check that with the current situation- bad mortgages, subprime woes, layoffs, rising levels of unemployment and skyrocketing prices. History seems to be repeating itself. The ripples of the current economic slowdown have already reached Europe and parts of Asia. So going by how things worked during the GD, does that mean the worst is yet to come for us?

Not exactly, say the financial experts. First the government and the regulators have been swift in reacting to the financial distress as compared to the GD when they were largely mute spectators. The US Federal Reserve’s $700 billion bailout package is certainly a debatable decision but what cannot be denied is that it has insulated the banking and financial system from a large depression. As for the financial security of individuals, it is taken care of with programs like Social security and unemployment benefits, which are actually the results of lessons learnt during the GD.

Another difference between then and now is that the GD was sandwiched between World War I and II leaving little time and resources for the economy to limp and hop back to normalcy. The situation is different now, though few economists point fingers at the presence of American troops in Iraq and the precious resources required to station the troops there.  

The slowdown is certainly affecting us, no doubt. The stocks that we have invested have tumbled, our bank deposits interest rates have dwindled, prices of essential goods are rising and getting a loan may be a bit more difficult in the days to come with the threat of layoff and job cuts also around. But the past lessons learnt have helped the common people and the establishments to be better prepared to handle the situation. Economies always have the boom and bust cycle. The bust has just begun and we just have to keep our fingers crossed for it to pass off soon.