We all get those credit card offers in the mail. Every day, there's at least one in myt mailbox offering to sell me debt. I also get mortgage refinance offers in the mail, suggesting that I could take cash out of my house and have fun with it.Wahoo! Years and years of payments in exchange for a few moments of fun.
I'm a big Dave Ramsey fan and I'm enough of a mathematician to understand compound interest. Credit cards and larger mortgages are just products that some financial company is trying to sell me. They want my money and they'll give me a little bit of theirs for a short time to get much more of mine.
One of the things I want my children to know when they leave the house is how to handle money. As a part of this I want them to know when and how much debt to incur. Last week I tried something new when I got a mortgage refinance letter in the mail. I shared it with the kids.
We sat down and discussed what we could do with the buckets of cash they were offering us. We discussed just how much we'd have to pay back. If I recall, on a 30 year mortgage, you pay back three times as much as you borrowed. As soon as the kids heard that, they wanted no part of the money the bank was offering. Next time I get a credit card offer in the mail, I'll share it with them as well.
The kids had no idea at all that lenders were constantly targeting us. It was an eye-opener for them that I thought I could share. For more tips on teaching your kids, visit this week's Carnival of Homeschooling.
For credit cards you're correct, but mortgages are a bit trickier. In the first place it is specious to talk about paying back three times what you borrow, because compound interest goes both ways. At the end of your mortgage you are paying back with dollars that will be worth much less than the ones you borrowed due to inflation. You make that case to your kids and they are thinking about paying it all in todays dollars.
ReplyDeleteBeyond that you get to deduct mortgage interest from taxes. That means if you have a 5.5% fixed mortgage and your net tax rate is 30% (state & fed) you are really paying a little less than 4%. If you have a choice of paying off early or making an investment of more than 4%, clearly making the investment is the right choice; blowing it on a car or vacation is another matter.
Anon,
ReplyDeleteThanks for the thoughtful comment! While I agree with you mathematically, I do not agree with you in principal. I would argue that humans are not rational animals we are rationalizing animals. I fear that once my kids started down the slippery slope of taking money out of their houses to pay for things, they'd not know when to stop.
Like Dave Ramsey, I believe that mortgages are an appropriate place to borrow money. I just wouldn't take principal out of my house as a rule. Having said that, I've done a remodel or two in my life, so I acknowledge there are exceptions.
I really haven't read any 'teach Finance to your Kids' books.
ReplyDeleteWe do not give allowance. I have found that most people don;t teach about money the way we do and what little I have read, I usually don't agree with enough. So I just do my own thing.
so far it works.
Kudos to you for teaching your kids about money!
Do what my mom did. When I got my driver's license, I became the household food buyer. I had a $300.00 budget to buy all the standard food for the house. (eating out and other treats were still on mom and dad)
ReplyDeleteOther than a few weeks where we at stuff because it was on sale and/or cheap, it was great!