Archive

Overview of Our Financial Education Program

No Comments

Hello Folks,

Please review this trifold which summarizes our financial education program.

Personal Financial Education Overview

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Cultivating Work Ethic

No Comments

I had the pleasure of listening to a recent lecture by a researcher in child psychology. One of the most interesting findings involved an experiment of 7th grade students.  All students were asked to perform a set of some moderate difficulty math problems.  After completion of the problems, one-half of the students were complimented on how smart they were for being able to solve the problems.  The other half were complimented on how hard they worked to get to the solutions.  Though the problems that each group worked on were unchanged, those kids who were complimented by the effort they exerted as opposed to some innate intelligence were substantially more likely to choose to do a more complex set of math problems when given a choice of a new assignment.

This finding is fascinating to me.  It demonstrates that work ethic and the willingness to work hard and take on new challenges can be cultivated in children.

Wealth creation is the result of a collection of habits founded on fundamental premises.  Habits such as spending less than you earn, performing due diligence and managing risk can be brought about by education and practice.  But if the fundamental premises behind wealth creation are not observed or not believed, no amount of education and training can help your child down the road to success.  This means that one of the most important tasks for any caring parent must be to instill a strong work ethic and cultivate a belief that usually hard work dedicated to a good purpose over time is a great recipe for success. 

We have the benefit of living in a time in history where our society can afford a great deal.  Not long ago, young boys and girls of age 10 were busy planting and harvesting crops or performing the household laundry.  Families needing to eat had to hunt or fish or grow their own food.  Our lives of convenience are truly blessed, but with our increased time for ourselves, what do we do with this time.   Our children in many cases live lives of comfortable privilege free from the cares of daily life.  As a parent, I wish that my children never know pain or hardship, but we forget that pain is an important part of the learning process.  When my son hits his head on the edge of a table and he cries, he will know next time to be more careful and mind where the table’s edge is.  Similarly, nearly all families and individual at one time or another will suffer some financial hardship.  But hardship is not permanent condition.  I, myself, learned the hardest financial lessons in a time of hardship.  These lessons have only tempered my resolve to pursue success and the hardship itself has forced me to make decisions that have propelled me further down the road. 

Parents, to cultivate a strong work ethic in your children it is important to keep in mind several items

  • Money must be tied to effort – Reject the concept of an allowance.  Demand that your children perform some of the household tasks in exchange for any money you provide them.
  • Encouragement – Periodically, be sure to encourage your children to continue to work hard by recognizing the effort they put in.  Reinforce that success is a pattern of reward that follows achievement.
  • Share how the family works through hardship – Whether you realize it or not, your kids are watching and they know when things are tough for mom and dad.  So let them know, to the extent that they can understand, what is happening and how you are working to resolve the problem.  You may be working longer hours or doing extra jobs or giving up on luxuries that you used to enjoy.  Explain these things with a smile.  Let your children know that work is one of the best companions you have on the road to success, because work can help you solve nearly all financial problems.
  • Work is life – Most importantly, it is important that your children learn early on that it is only through our contributions that we make the world a better place.  Anything of value ever created throughout human history has been brought about by the efforts of individuals working in solitude or in concert with others. 

Children want to change the world; but the world has never changed by itself.  It changed because of the desire and effort of the former 7th grader who once chose the harder set of math problems.

 Cultivating Work Ethic
VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Incoming search terms:

  • work life

Supply, Demand and the Higher Education Bubble

No Comments

In the mid 2000’s, our society saw the largest asset bubble in modern history.  Low interest rates spurred loosening of credit which propelled home sale prices upward.  Operating by simple laws of supply and demand, the abundance of cheap and loose credit meant that there was an abundance of money.  Without a strong constraint on the availability of funds with which to buy homes, there price of homes increases to match the supply.  The crash that began in 2008 was driven in large part of the well of credit drying up.  This caused the supply of money to shrink rapidly.  Again, operating under the simple laws of supply and demand, home prices plummeted. 

For decades, we have been seeing the same process at work in education.  Driven by easy access to low interest credit in the form of Federally backed student loans, the prices of post-secondary education has risen unchecked.  According to inflationdata.com, in 1986, average costs of a 4-year degree was $10,000.  By 2015, costs of a 4-year degree is anticipated to be $120,000.   Between 1985 and 2010, the total cost of education increased more than 485 percent, while the average of all consumer prices increased about 107 percent.

Based on this information, it is apparent to me that higher education costs are a major bubble.  The only reason that bubble hadn’t burst years ago is because the Federal Government has been willing  to continue to lend with reckless abandon.  In 2010, in the wake of ever increasing student loan defaults, combined with a widespread cry for fiscal accountability in government, there finally started some discussions about limited the pool of government funds to be used for new loans.  If and when that pool dries up, finally, there will be a reversal in the cost of a college education.

Unfortunately, this will come too late for those students who will be laboring for decades under the load of loans that in many cases will not result in a large enough income stream to pay them off in a reasonable period of time.

 Supply, Demand and the Higher Education Bubble
VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Incoming search terms:

  • demand for higher education
  • education bubble

Don’t Speed – The Financial Speedometer

No Comments

In 1995, Congress repealed the Emergency Highway Energy Conservation Act.  Prior to repeal, the law established a national speed limit of 55 mph and later 65 mph.    Repeal of the law allowed the individual states to establish their own speed limits as they had done prior to passing the Federal law.  In my home state of Illinois, the speed limit of most interstate highways is 65 miles per hour.  Historically, state speed limits had widely varying limits.  For example, prior to passing the law Rhode Island and New York for example limited speed to 50 mph.  Nevada and Montana had no posted speed limit on rural roads.  After the 1995 repeal of the Law, Montana again reverted to having no posted speed limit in daylight hours. 

The speed limit has been established for two major reasons energy usage and the likelihood of having an accident.  One of the greatest critiques of speed limit laws is that there is a low net reduction on fatalities and energy usage because of the huge amount of non-compliance.  I know many folks who have no trouble driving 85 mph on interstates.  The lure of time savings is much more attractive to them then the risk of accidents or increased fuel economy.  Some folks will reduce their speed during periods where they believe police are more likely to be monitoring roads.  Their fear of tickets pressures them to take things more slowly.  Each individual constantly makes decisions about what is the right amount of risk they are prepared to accept relative to the perceived gain the expect to receive.  We know, for example, that the likelihood of our receiving a ticket is much greater if we choose to drive 90 mph rather than 68 mph, when the speed limit is 65 mph.  From my perspective, it is much more a question of self-governance than any outside influence that encourages people to drive more slowly. 

There has always been a debate about how speed limits may have reduced roadway fatalities and conserved energy, but I believe there are lessons that can be drawn from applying an analogy to our financial lives.  

When it comes to money, many of us speed all the time.  I’d like to introduce to you the concept of the financial speedometer (or more accurately spend-o-meter).  Each month each of us earns and spends a certain amount of money.  When we divide one by the other, we realize what proportion of our earnings we spend every month.   If we make $4,000 (net income) and we spend $2,400, we are spending 60% of our income and we’re driving 60.  $3,000 during a month, we are spending 75% of our earnings and we are driving 75.  While if the speed limit is 65 mph you can reasonably expect not to receive a ticket when you are driving 60 mph, sooner or later you can expect to receive a ticket if you are always driving 75 mph, if for no other reason than the officer who pulls you over has had a bad day.   

The key learning here is every time you are financially speeding, you are running the risk of being ticketed.  Moreover, since tickets cost money, it is much more likely that you will need to speed more just to keep up.  If you are spending 80 percent of what you earn and, for example, your car breaks down, it is likely you will feel you have no other choice than to place the repair bill on your credit card.  Now you have to pay $50 more a month than you had been previously.  You now must drive 84 just to keep up.  If you never have an occasion to either increase your income or lower your expenses, it will only be a matter of time until you are exceeding 100 mph.  At this point, you are driving out of control and you are destined for a catastrophe. 

However, if you are driving at 60 mph and your car breaks down, after repairs you might have to drive 64 mph for a few months, but you have the capacity to pay down the bill faster and can quickly return to driving at a leisurely 60 mph.  Better yet, you may have the money in the bank needed to pay cash and never be forced to change your speed at all.

Another consideration is that of energy usage, if you are driving above 80 mph in your car, you must concentrate a great deal more, you have less margin for error, you must be more attentive to hazards ahead, the movement of other cars relative to your own, your adrenaline is pumping at a much greater rate.  When you finally reach your destination, you are exhausted because the physical toll of driving at this speed is so much greater. 

Drawing the analogy out, if you are financially driving your life greater than 80 mph, you are taking a huge physical toll on yourself.  You experience high stress, greater sleeplessness, more moodiness and your personal relationships suffer.  This is made all the worse because it is an experience from which you cannot escape.  There is no short term destination to reach.  You deal with this stress as long as you are moving that fast, which for many people is a period of years.  It leads to physical ailments, emotional trauma and depression and various forms of self destructive behavior.  The human body and mind is not designed to accept such physical exertion over the long term.  We see similar struggles from soldiers returning from a war zone. 

Finally, storms are going to happen.  When the storms come, it is suicidal to continue to drive at the same speeds you were driving in clear weather.  When heavy fog, hail and blizzards hit you while driving, you need to be able to reduce speed.  You will experience at least 1 major financial obstacle in 10 year period in addition to several small to moderate obstacles.  You will be laid off, have a major accident or illness.  The car will need to be replaced.  An investment will go bad.  When you have a setback, life cares little if you cannot afford to reduce your speed.  You will crash.

As a general rule, it has been my experience that for most families, who have regular income and expenses, a self-imposed family financial speed limit of 65, that is to spend no more than 65 percent of what you earn is a great value to achieve in the long term.  We call this the “Green Zone”, and is shown on the financial speedometer.  This will allow you keep you financial stress low, provide you great resources to plan for your future success and still allow you to have some enjoyment in your life. 

The zone on the financial speedometer between 65 and 80 is referred to as the “Yellow Zone”.  For short periods of time, if your speed moves between 65 and 80, though you have some increased risk, you can utilize this zone to both adjust to surprises and to take reasonable risks to get ahead.  When you have a financial setback, if you remain in the yellow zone, though you may have to tighten the belt a little, it is likely that you can work yourself out of the problem relatively quickly.  In addition, if you start in the green zone and you wish to take a risk, such as start a part time business and are in need of start-up capital, you have some capacity to move some of your earnings to subsidize the business until it gets off the ground.  The Yellow Zone is a tool which allows you manage risk over short periods.  Again, if you are driving 75 mph, eventually you will be pulled over.  In general, you should never be in the Yellow Zone more than a year, 6 months is even better. 

The Red Zone is located on the financial speedometer between 80 mph and 100 mph.  If you find yourself consistently spending more than 80 percent of your earnings in a month, you are probably steadily increasing your speed and you one step away from financial tragedy.  Above 80, you no longer have the capacity to work yourself out of the hole you’ve dug for yourself, or even if you do, the amount you have extra to clean up your mess is so small that you cannot gain traction.  Every small setback adds additional burdens to your financial engine.  Doctors appointments, replacing clothing, even basic cable television become luxuries.  Every dollar you spend for these items usually is placed on credit which steadily pushes you closer to 100 mph.  Financial stress skyrockets.  You begin to jeopardize basic needs.  You personally undergo psychological and physiological changes that reap havoc on your personal and interpersonal health.  It is an existence that tears you apart and one from which is not easily escaped.  If you find yourself in the Red Zone, must urgently get yourself out of it.  If you do not dramatically cut your expenses or increase your income, you are on the headed for financial death.

Once you reach 100 mph, every dollar you earn is being spent on supporting yourself and your family.  At this point, you financial life resembles much more of that of a serf in Feudal Europe than a member of a free society.  I call the zone above 100 mph the Black Zone as is symbolizes financial death.  If you have any savings, every day you live costs you some of it.  Every day you work, you do so not for yourself, but for others.  It is made all the worse by the fact that you have absolutely no capacity with which to change your situation.  If you ever find yourself in this situation, you are financially flat-lined.  It is possible that if you work quickly, deliberately and are willing to make huge sacrifices you can be brought back from the brink, but the odds are against you.  Those who are brought back suffer scars that are with you for years.  Those who die, suffer scars that stay with you forever—scars that stay on your soul and your heart and on any mortgage application you will ever file.  Bankruptcy is financial death; and in case you aren’t aware, death is something to be avoided.

To summarize here are the recommended ranges for financial speeds on your financial spend-o-meter.  As a caveat, if you are in a household with variable income, such as self employed individuals, I highly recommend a lower range of speeds for the Green and Yellow Zones.

            Zone                                                   Expense to Income Ratio

                                                Regular Income                                 Irregular Income

            Green Zone                0 to 65                                                0 to 55

            Yellow Zone                65 to 80                                              55 to 70

            Red Zone                   80 to 100                                            70 to 100

            Black Zone                 100+                                                   100+

 

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Incoming search terms:

  • financial speedometer
  • us spending speedometer

Managing Cash Flow

No Comments

I have always been interested in entrepreneurship.  In college, I took several courses that dealt with starting and running a business.  Though none of the material was exceptionally difficult, I was intimidated by assembling financial statements.  One would normally think that being an engineer and otherwise being very proficient in mathematics, this wouldn’t be difficult.  However, there is a world of difference between using math to solve an interesting problem and using math to keep a business solvent, feeding your family and keeping people employed. 

Like many people I was intimidated by assembling income statements and balance sheets and left the creation of these documents by other folks who were in traditional finance fields.  Looking back this is amazing since both income statements and balance sheets consist of nothing more than simple addition and subtraction.  The most difficult parts of preparing financial statements usually comes in the initial setup when you do not have a history that will guide you in making predictions moving forward.  Even in these instances, there are numerous ways one can estimate costs and incomes if one thinks things through.    I would have given myself a tremendous advantage earlier on had I chosen to apply myself more in facing my lack of confidence and learn it. 

Speaking plainly, you will never move forward financially until you learn to track your financials and make reasonable financial projections.  You need to learn to track your income and outflow so you can effectively manage the challenges of spending today and projections are needed to manage the challenges of spending in the future.

 Managing Cash Flow
VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Sir Issac Newton’s Other Discovery

No Comments

Most children are taught the story of Sir Issac Newton sitting under the apple tree and being struck in the head by a falling apple and how the falling apple prompted him to discover gravity.  However, what kids are not told is that same event prompted another Newton invention.  Gravity is the force that describes how things are pulled down toward the center of the earth.  In order to explain the concept of gravity and to make the new concept more useful, Newton invented a whole new branch of mathematics called calculus.  I have an engineer’s training and have taken more mathematics classes than the vast majority of the population.  Although teaching calculus to kids at an early age may be difficult, the basic concepts behind calculus are very simple, easy to illustrate and are vitally important in the teaching of financial education concepts.

Prior to the invention of calculus, it was very hard to make sense of many things in nature, because math was limited to snapshots.  Algebra, geometry and trigonometry only make sense for the given data at a certain time.  If you wanted to see how things behaved with time you needed to figure out the equation at a bunch of different points and draw the graph to see it.  Calculus allowed us to see how things are changing at a given instant.  It allowed us to see that if we are in our car and slam on the brakes, we can predict how far and how long it will take us to stop.  It allowed us to see if we are spending money at a given rate and earning money at a smaller rate, how long will it be until we run out of money.  These types of measurements weren’t easily performed prior to the invention of calculus.

When it comes to personal finance, each of us does calculus all the time, though we may not realize it. Calculus is used to measure the rate at which something is changing at that instant.  Week-to-week, month-to-month, we adults always work the Net Income equation to make choices.  Net income is simply total income minus expenses.    The bulk of financial education is geared toward increasing the rate of change of the net income equation.  When we work to be more frugal, we are making expenses smaller.  When we invest, take on additional jobs or get wage raises, we are making the gross income side bigger.  Both of these increase the rate at which the net income equation is changing.

300px GodfreyKneller IsaacNewton 1689 Sir Issac Newtons Other Discovery
Image via Wikipedia

By using the net income equation, we can make predictions about where we are going to be financially in the future.  When will I be able to afford that new item?  Will I have enough money to go buy groceries or go to the movies?  Will I be able to pay my tuition bill?  Will there be enough left over to continue to pay for other things?  These are the questions that one can reasonably answer through the help of calculus.

I find it unfortunate that teachers in schools often tell about the first discovery the Newton made that day, but so often neglect to mention the latter.  Kids need to know the concept behind calculus and rate of change at an early age.  It will help them throughout life.  If you think about it, you will find many ways to illustrate these concepts for your children in the car, on the playground and in the home.

This type of learning is important, because gravity tells us that, on earth, unless we do something about it, things fall. This applies to equally to checking account balances as it does to apples.

 Sir Issac Newtons Other Discovery
VN:F [1.9.22_1171]
Rating: 1.0/10 (1 vote cast)
VN:F [1.9.22_1171]
Rating: +1 (from 1 vote)

Incoming search terms:

  • newton calculus for kids
  • Newtons calculus for kids
  • isaac newton the calculas for kids
  • isaac newton calculus FOR KIDS
  • isaac newton calculus discovery
  • newton\s calculus for kids
  • why teach kids calculus
  • newton invented a whole new branch of mathematics called
  • isaac newton calculus discovery kids
  • isaac newton calculus discovery for kids
Blue Taste Theme created by Jabox

Bookshelf 2.0 developed by revood.com