Gail Vaz-Oxlade's Blog, page 87

Teaching Kids Dollars & Sense (Part 3)

Teaching Kids Dollars & Sense (Part 3)

Younger children find it easier to handle money if they are given a small amount each week. Pick the day you give the allowance carefully. If giving an allowance at the beginning of the weekend means it's all gone by Monday, then give it on Monday or Wednesday. While you want your child to accept responsibility, young children need some help in developing some patience.

Children who are older and have established many of the habits of budgeting should be asked when and how often they prefer to receive their allowance. While some kids like getting a little money each week, others may prefer a lump sum once a month, allowing them to plan spending for the month.

Whatever allowance schedule you establish, stick to it. It's demeaning for anyone to have to constantly ask for money. And providing the allowance on time will send a subtle message about the value of honoring commitments.

The first time most kids learn about credit is when they go off to university and credit card companies start throwing cards at them. With no experience and very little understanding of the long-term negative ramifications, kids start to charge. And they charge, charge, charge until they're in a hole. Have you ever taken the time when you were using your credit card to purchase gas or pay for a new pair of shoes to explain how credit cards work? Have you explained that you're only putting on the card what you can afford to pay for when the bill arrives?

Discussing the importance of a good credit history and how a bad one can get in the way of future borrowing, whether they need to buy a car, rent an apartment or get a mortgage for a house is an important part of helping kids understand money. (Most teenagers don't realize that some cell phone companies report to the credit bureau and how they handling their cell phone bills can totally bugger up their ability to borrow in the future.) Don't pass up those opportunities that naturally present themselves to talk about money, the various ways we can use it (cheques, debit cards, credit cards, and cash), and the pros and cons of each.

Credit cards can be useful tools, but they should never be used to eliminate the need to plan our spending. Most of us are all too aware of the "see it, want it, gotta have it now" attitude. Lots of parents are happy to demonstrate it for their kids, so it's no wonder kids learn this lesson so well. Even if you are a planner, if you haven't taken the time to explain this to your kids, all they see is "What Mommy wants Mommy gets!"

Next time your young'un expresses an interest in buying a new doll or yet one more Lego kit, make a chart to help her see how long she has to set aside some of her allowance to get the money for the item. Find a picture that represents the item your child wishes to buy and paste it at the top of the chart. Draw boxes for the number of weeks she will have to save. So if the item costs $10 and she setting aside $2 from her allowance each week, you'll draw five boxes. Staple an envelope to the chart. Each week when she gets her allowance, she'll put $2 into the envelope and mark off one of the boxes. This will teach that sometimes it takes time to accumulate the money we need for the things we want. It'll also help to reinforce the getting there.

People – kids and adults alike — exhaust themselves trying to maintain lifestyles they can't afford. Whether it is the social pressure to conform or our a sense of entitlement, so many people are willing to put their futures at risk so they can make the right impression. One way to help a child gain some perspective is to talk about what it is they really want in life. I often talk to my teenagers about how important it is to live a worthwhile life: A life that brings challenge and love, that allows you to share, to laugh, and to be happy.

What makes your life worthwhile? And what are the things that your child thinks will make his life worthwhile? Teaching about the details of how to manage money is an important part of your job as a parent. But helping kids put money into perspective is just as important. Whether we realize it or not, we are teaching our children our money skills and values (or lack thereof) every moment they are with us. We can let it happen randomly, or we can take some responsibility for the messages we deliver.

Or we can give up the responsibility to our education system, our financial services system, or our government.  But you'll be sorry! Don't say I didn't warn you.

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Teaching Kids Dollars & Sense (Part 2)

When my children turned six, they both started to receive an allowance, no strings attached. Why no strings? Simple. The point of the allowance was to give them some money so they could learn to manage it. It wasn't to force them to do chores, get good grades, or dress appropriately. I had other ways of managing those issues. The allowance was to learn how to save, spend and share and to distinguish between "mad money" and "planned spending.  And this allowance wasn't "extra" money. It was the money I was spending on them put into their little hands so they could develop some skills. Once I'd given it to them, I kept my hand out of my pocket.

Over time, as they needed and wanted more money, we broadened the parameters of how they got their paws on more moolah. First there were "work for pay" jobs they could do to make some extra money if they were working towards a particular goal. Then there were the increases in allowance to cover things I wanted them to take responsibility for, like their clothing and school supply shopping. By the time Alex hit 15, she knew all about prioritizing her purchases and the consequence of blowing her wad too fast.

Giving kids an allowance lets them practice spending, banking, and saving. They learn that it's fine to buy something frivolous but not at the expense of something necessary. They learn that money is a finite resource: it runs out. And that using someone else's money (borrowing against your allowance) comes with a cost.

But giving kids some money to manage is only one part of the equation. With that money must come expectations, guidelines and loads of talk. And this is the part parents are most afraid of. Having little confidence in our ability to do it right, much less communicate it, we resort to yelling at them when they get it wrong.

Children will make mistakes as they figure out how this new tool works. When they do, if you rant and rave, you'll win no points as a balanced and open-minded parent.  And your kids won't learn diddly. Ditto if you can rush in and bail your kid out. You'll achieve nothing in terms of teaching what may be a very important lesson in consequences. Instead, help your child to determine how he will fix the problem.

If your daughter dents the car, she should not only have to pay for the repair, she should also have to take time from her busy schedule to have the repairs done. If your son spends $200 on a pair of running shoes (when a $50 pair would have been fine), he should have to go without whatever else that money was destined for: a school trip, a special purchase or his next month's supply of razors. And if your little mite blows all her allowance on candy, and then throws a hissy fit because she wants to buy something else, after she's cooled off is the perfect time to talk about patience, prioritizing, and how there is only so much money so we have to really think about what we want.

In terms of setting expectations, a big priority should go to establishing a savings habit. Yes, savings is a habit. The people who save do so because they've formed the habit. The people who don't can't seem to get into the swing because there never seems to be any money left at the end of the month.

One of the golden rules of money management is "Save Ten Percent." Started at six and encouraged all the way through to adulthood, this habit – like brushing your teeth – can save a lot of pain. Each week when you give the allowance and your child allocates 10% to saving, he is forming a habit that will stand him in good stead for the rest of his life. And when savings become automatic, that's something of which you can be very proud.

It takes some planning on parents' parts to make learning to save easy for kids. Think about the denominations in which you'll give the allowance. If you give your ten year old all her money a single bill, she'll have trouble implementing her budgeting plan without hitting a store to make change. On the other hand, if she gets smaller denominations she may find it easier to set aside the money for the various parts of her budget. And very little kids need their allowance in coins so they can immediately put their 10% away in their piggy banks.

Tomorrow: The final installment

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Teaching Kids Dollars & Sense (Part 1)

Everyone thinks kids should learn about money: how it works and how to manage it. But everyone also seems to think it's someone else's job. Money lessons should be taught at school. Borrowing should be taught by lenders. Banking should be taught by, well, bankers. The federal government has even appointed a task force to work on a national strategy for financial literacy.

I have to tell you, the report came out recently and I'm so NOT impressed I could yawn. Once again, everyone wants to push the responsibility for teaching kids about money to someone else's plate. Don't even get me started on how ill-equipped schools are to do this. But, no doubt, the school boards will spend millions of dollars to design curriculum that will not work. Teachers will be forced to squeeze it into an already crowded curriculum. Kids will walk away having completed enough to get the mark they need (maybe) but without internalizing any of the lessons.

The best place for kids to learn about how money works – and the role it should play in their lives – is at home. Since money is a hot topic, and most parents are scared to death to even broach the subject with their kids, let's look at another "life lesson" that is taught at school but learned at home.

When kids are introduced to the food pyramid at school, they learn all about which foods are healthiest, and how much of each kind of food they should include in their diets. But telling kids to eat five to seven servings of fruits and veggies each day has little impact if when they get home mommy and daddy serve up a hot dog, a bag of chips and a tin of pop for dinner. Out the window goes the lesson just learned and kids come to know that the stuff they're taught at school is irrelevant to their lives.

And so it is with money. We can talk about how important it is to save until we're blue in the face, if our kids don't see us saving at home, they won't learn the lesson. And we can talk about becoming smart consumers, but if we whip out our credit cards every time something takes our fancy – or worse because our kids' demand it – we're teaching them to embrace their Impulse Monkey.

Growing up in a financially sound home doesn't automatically translate into success for kids either. Kids don't learn about money by osmosis. They need to be taught the rules of good money management. They need lots of practice to incorporate those lessons into their lives. They need to be able to fail safely and adjust their thinking as they learn about how money works. And there's a lot to learn. So we should start early.

Want to teach your children to be more financially successful? Want them to avoid living from paycheque to paycheque? Want them to steer clear of crippling student loans and credit card debt? Time to take the reins of your child's financial education.

If you want your kids to grow up to be financially responsible adults, you have to let them handle money. Here begins the first debate of Money 101 for Kids. Should you give your kids an allowance, and if you do, what should you tie to the allowance?

There are people who feel an allowance should have no strings attached. Others think it should be tied to chores in the home, school grades, or behaviour ("If you don't smarten up, I'll cut off your allowance!"). Some parents debate whether or not kids should work for their money through part-time jobs.

If there were strings attached to the money you received as a child, those memories will have a strong bearing on the strings you attach to your children's money. But even if you had to walk seven miles to school in blinding snow with a hole in your shoe, that doesn't mean you want the same thing for your own children. And it may be time to embrace some new ideas about how to teach our children.

Part 2 tomorrow.

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This & That: Planning Edition

D wrote:  Hi Gail I love your show here in Texas.  I have started the jar trick myself.  I searched your Q&A but couldn't find any questions similar to mine.  I have this problem that I always want to help people out.  Not a bad thing, but usually hire them whether being for house work, yard work, or what have you, when in reality things I could do myself (and save money which I need to) but for reasons unknown to me I want to help people, hire friends and family do these jobs.  How could I stop doing this, when in all truth am not rich, I have a decent job, but in all honesty have bills that need to be paid myself.  How I can I stop doing this?  Help in Texas.  Thanks.

Gail says:  When your good heart comes into conflict with your empty wallet, the best thing to do is to PLAN to help, as opposed to just doing it reactively.  So you start a "Sharing Jar" or put a category in your budget for helping people out.  You allocate a specific amount you want to be able to share and then you stick with that amount.  You know that if you go over that amount, you aren't sharing consciously, you're just reacting, which is no different that impulse shopping.  If, in a particular month, you don't spend all the money, you can accumulate it until you do need to spend it, like you would the money for your car maintenance or property taxes.  Now you have a PLAN.  You know how much you can share without putting your own financial situation at risk.  And you know you're no longer going to do things "on the fly" because you're more conscious about your plan.

H wrote:  I've been working with your online sheets trying to 'build a budget that works'.  It's been difficult though due to the fact that I am self-employed and have larger one time payments throughout the year for work, have income tax and HST remittance to also consider.  Oh, I also have student loans. Everything I seem to have in order, or think I do, I end up coming out in the red.  Needless to say, I'm getting a little stressed.  Can you give me some guidance as to what to do?  Do I continue to save or do I stop and put all my money towards my student loans?  Should I consolidate my loans?  What is the best way to accumulate money for my income and HST payments?  I'm feeling overwhelmed and worried that I will never have things right.

Gail wrote:  You actually collect the HST you have to remit so stop counting it as income.  When you bill for and collect that money, move the HST portion to a separate savings account.  Then when you're ready to write the cheque to the tax man, move it back into your account to cover the cheque. Ditto your income taxes.  Figure out how much you need to pay, divide it by the number of months left until you have to pay it, and set it aside in your tax account.

People are always counting their gross income in their business as their money to spend.  I get this issue a lot from self-employed people.  You actually have to turn your perspective around so that you accept that the money you collect belongs to your business.  You take an income from that business. You must remit taxes and cover the other expenses of the business FIRST.  If you can wrap your head around the fact that you are two separate entities, this will actually get easier for you.

J wrote:  I'm a single 37 year old female who owns her own home and nets $40 000/year.  My house is 2/3 paid off (I owe $120 000), and I have about $35 000 saved in RRSPs.  I work for the gov't, so I pay into a pension.  Other than that, I have a 5 year old car that is paid for.  I have one credit card, which is paid in full each month.  I owe $30 000 on my line of credit, as a result of unexpected but necessary repairs to my house.  If I continue to follow your program (and no further major repairs are necessary), this will be paid off in 2.5 years.

Until recently, I've always focussed on paying off the house first, instead of saving for retirement or emergency funds.  This worked fine until I bought my current home and was faced with so many unexpected problems.  Now I see the problem with not having an emergency fund. All that build up is to say that I've recently been given a promotion, and a $10 000 (gross) pay raise. After reading Debt Free Forever, I'm no longer convinced that the additional money should be paid towards the mortgage.  I need an emergency fund, but I'm torn between that and paying off my debt sooner.  It bothers me that I'm unlikely to make as much interest with the emergency fund as I'd save by paying off my debt sooner.  I talked to the representative at my bank, and a few financial advisors, but I always walk away feeling as though their focus is not on helping me to make the best decisions, but on selling their product du jour, so I really hope that you can answer my questions, and point me in the right direction. My questions are:  Is there a way to set aside the emergency fund and invest it so that it makes a reasonable interest but remains (fairly) readily available?  Would it be wrong to invest my emergency fund in a TFSA?  Or, should I just put it into a savings account and consider the lost interest the cost of having peace of mind? Any other advice that you may have would be very welcome.  Thank you very much.

Gail says:  First off, a TFSA, like an RRSP, is simply a plan registration that tells the government that the money in the account gets special tax treatment.  In the case of the TFSA, it's telling the tax man to keep his hands off your money.  But within the TFSA you can hold all the same types of investments that you can hold in an RRSP: savings accounts, GICs, mutual funds, bonds, stocks, and the index. What you choose to invest in depends on three things:  your knowledge, your investment time horizon (how long the money will be invested) and your risk profile (how much volatility and loss can you stand).

I like TFSAs for emergency funds because if you have to use the money, you can put it back into the TFSA in a subsequent year.  But if you're going to use your TFSA as an emergency fund, you're stuck with a savings account — and the accompanying lower return — because you might need that money at any time and that's a short-term investment time horizon.

That being said, your first priority should be to make a plan to get that line of credit paid off.  Yes, get your emergency fund started, but bust your butt to pay off that line.  Interest rates are only going to go up from here.

As for paying off your mortgage, relax.  You have done very well so far.  Your line of credit debt is far more of "issue" than your mortgage.  And I hope you're having a great life too.

S wrote:  My husband has retired at 55 years old due to a heart condition.  I am working three jobs to pay the mortgage.  I have nine more years to go before I can retire.   My husband pays for other bills like the car payments, insurance, utilities, and food but does not contribute to the mortgage.  We have about $79,000 left on the mortgage. Is it worthwhile to refinance?

Gail says:  On a 79K mortgage at a five year rate of 4.3%, amortized over 10 years (so it's paid off by the time [you? and] he turns 65), your monthly payment would be $809.  If you needed the payment to be lower, you could amortize for 15 years and the payment would drop to just under $600 a month.  That might give you the breathing room you need.  You should go to your current lender, explain the change in your circumstances, and ask them to work with you to make the mortgage payment manageable.  While I'm a big believer in being debt-free by the time you're retired, you need to find a way to live without killing yourself.

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Give Yourself More Time

Let's say you've decided to take control of your money and your life. You've done a spending analysis and made a budget you know will work. Now all you have to do is stick to it. That's all.

Easier said than done. And if you have unrealistic expectations about how long it may take to make your new focus on financial stability into something you do automatically – a habit – you may be setting yourself up to fail.

It's long been thought that it takes anywhere from 21 days to 28 days to form a new habit. I actually haven't believed that for quite some time – ever since I tried a new workout program for 60 days and then dropped it like a hot potato. (I hate exercising. I guess I haven't found MY exercise yet.) Anyhoo, when I'd done the exercise thing more than long enough for it to be a habit and it wasn't I knew the habit number must be wrong. Then when I formed the habit of making my bed in a nano-second, that confirmed it for me.

I think the whole 21-28 day myth came about in the 60s and has been quoted so many times that we just all assumed there must be something to it. But really, forming a habit is far more complex.

According to a paper published in the European Journal of Social Psychology there's a curved relationship between practice and making a behaviour automatic – forming a habit. Phillippa Lally and colleagues from University College London found that on average it takes about 66 days for a habit to stick. And while the average was 66 days, there was huge variation in how long habits took to form: 18 days up to 254 days. So some habits are easy to form; others not so much.

Lally and friends also found that some people may be habit-resistant since it took a sub-group in the study much longer than the others to form their habits. Or maybe it's the type of habit itself since some habits seem to be easier to form than others. Missing a day doesn't end the creation of a habit so if you miss a day tracking your expenses, you haven't actually fallen off the wagon. You can just keep on keeping on and you'll still instill the new behaviour. But it's worthwhile to note that early repetitions give us the biggest boost in our habit formations.

So what does all this mean if you're trying to create some new positive habits around how you handle your money?

Give yourself more time for the habit to take hold. It may take you just a few days or it may take you months before what you're trying to do feels like a natural part of your life.

Practice intensely in the early days since it is those early repetitions that will help to make your habit stick. So set aside 5 minutes each day to do something on your Money To-Do List.

If you miss a day, don't beat yourself up or think you're back to square one. Just pick up the reins and keep going the next day.

If it still feels really hard after you've been doing it for a long time, you may simply be habit-resistant. Don't stop. If this is important to you – if you want to be in charge of your money and making it work for you – you must persist.

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Your Personal Economy

Adrian comments here all the time. He sent me a list of ideas for blogs (thanks Adrian) and this one caught my fancy right off the top.  Here we go…

Have you ever noticed that the news is always full of some drama or 'nother. The stock market is skyrocketing. The stock market is diving. The credit world is in meltdown. Savings are in the tank. Inflation is zooming up. The economy is suffering from stagflation.

People are constantly swayed by the news. It creates stress and tension and may cause people with perfectly well-balanced personal economies to go off half cocked.  Nothing marks this more significantly than all the people who bought the news that the housing market was "hot" and if they didn't get in they'd be left behind.  They created bidding wars because they had to have That House, and took on more debt than was reasonable. It was our irrational response to the news – and too easy access to credit – that drove our housing market to the heights it's seen.

The investment world is always responding to the news. And yet researchers have found that those who don't take in the constant flow of good and bad news are less likely to be negatively affected in their investment decision-making.  In the book, Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich cite a Harvard study of investment habits:

"Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media."

Their point, of course, is that investment decisions should not be made based on the market's most recent gyrations, but on your financial goals and the investment strategy that will achieve them. Really, we needed a study for this piece of common sense? And yet it is common sense that is ignored on the daily.

There will always be something in the news. And the global economy will always be changing. That's life. But does that something new always have an impact on YOU and your life? Let's face it, if the whole world is on a high and you've just lost your job, can't make your bill payments on time, or have just had to leave work because of an illness, all that good news has little bearing on you.  And if the whole world is ready to jump off a bridge and you've got all your ducks in a row, you'll be fine.

If you don't have a strong financial foundation, the global/local economies woes are likely to have a bigger impact on you than you'd like. But if your personal economy is strong, you'll have a plan, and the resources and the flexibility to make it through the rough patches and take advantage of the highs in the bigger-picture economy.

Focusing on your personal economy means putting the pieces into place that will protect you and give you some financial room to maneuver. Having clear financial goals helps. Establishing a well-funded emergency fund is key. So is using credit wisely (not taking on debt for stupid stuff) and living below your means. And of course, you have to be saving and investing for the future.

The issues and the impact of the global economy are real and they can have an impact on your personal economy. Just ask all the folks who have lost jobs, taken pay cuts or had their hours at work cut back.  But if you allow the mind-numbing negative information that flows around you to drive your behavior, you will not be happy. (You do value "happy" as part of your personal economy, right?)

Want to make your personal economy strong? Follow the 4 Gail Rules and you'll be well on your way:

Don't spend more money than you make.
Save something.
Get your debt paid off.
Mitigate your risks with an emergency fund and enough of the right kind of insurance.

As for the rest, it's good to know what's going on. It's better not to have to care because you've built a personal economy that's sound and that can weather any storm.

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The Million-Dollar Myth

Why is it that every time people start talking about saving for retirement, the Magic Million shows up to the party? Is it any wonder people get turned off and shove their heads firmly into the sand? Let's face it, saving a million dollars can be a daunting task. And who says you're going to need a million dollars anyway?

Most experts now agree that you'll likely need between 50% and 70% of your current income to meet your retirement expenses. So if you're family is living comfortably on $65,000 right now, you'll need the equivalent (in inflated dollars) of about $40,000 to avoid feeling the pinch later.

As with everything else in life, figuring out what retirement will look like and cost is a very personal thing. Rules of thumbs are fine, but they only go so far. To get a clear sense of how it'll be for you, you have to be prepared …brace yourself… to do some math.

The first thing to look at is how much income you will have. When Drew O'Brien told me he has a pension plan at work, I suggested he get in touch with his plan administrator to find out how much he'll be entitled to receive. Since his wife, Pat, would be dependent on that pension too, he also checked up on survivor benefits to avoid any surprises.

You can do the same when it comes to the Canada Pension Plan. This year's maximum CPP payout is just over $800 a month. It's may not seem like a lot of money, but it was enough to cover Dorothy Michael's food and transportation. However much you receive, it'll lower how much you have to come up with from savings.

Speaking of which, how much DO you have in savings? And how much are those savings going to grow before you have to start dipping into them? Lots of websites have calculators to help you predict the growth of your savings and how you can use them to create a retirement income. Just make sure you're working on a Canadian site. (I'll tell ya, I'm not overly fond of these calculators since they often over-state what you'll need, which is why I wrote Never Too Late. But if you want to have an idea of how much your money will grow, they beat using a calculator.)

Jessica Jones was looking for ways to boost her savings so I suggested she use her RRSP tax refund to boost her next RRSP contribution. She made an RRSP contribution of $5,000 (paying taxes at a 35%) so she got back $1,750 in taxes. Jessica not only boosted her next RRSP contribution, she increased the amount of her next refund to $2,362 and kept growing her savings without pulling her proverbial belt any tighter.

When it comes to expenses, some, like medical, may go up a notch or two. Many others will go down or go away completely. Drew wouldn't need a fancy work wardrobe anymore. Since Pat commuted for almost an hour each way to work, her transportation costs would drop. And since most retirees' incomes are lower, taxes (yes, they're an expense) will be lower too. With any luck, your children will be self-sufficient, so there's another big cost gone.

Having looked at your current budget with an eye to what you think will go up or down, turn your sight to things you can eliminate completely: car and other types of loans, credit card balances and, ultimately, your mortgage. You objective should be to move into retirement with the lowest possible fixed costs and no debt.

Keep in mind that there may be things you can acquire while you're still working to make retirement less expensive. Pat and Drew decided to modify their master bathroom so that they already had the features and fixtures they'd need later in place. Dorothy stocked up her "gift cupboard" over her last two years of working. Jessica made sure she'd replaced virtually all her appliances just before retirement.

It doesn't matter if you're two, five or fifteen years from retirement, if you make a plan and stick with it, you'll be able to move into the newest stage of your life with confidence. Now that you know what to look for, quit procrastinating!

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The A, B, Cs of Money: I

ILLIQUID: If an investment is said to be "illiquid" it means that it'll be damn hard to find some other sucker to buy it from you. Shares of private companies, commercial real estate and limited partnerships are all considered to be illiquid.  Illiquid investments are particularly difficult to get rid of without losing a lot of money during times of market turmoil.

IN PLAY: This is slang used to describe a company who has become a takeover target or who has put itself up for sale. With the first bid, the company is "in play." Typically, share prices increase on the expectation that several companies will try to win the bidding war.

IN THE MONEY: When an option or a warrant has a positive intrinsic value, it is said to be "in the money." So if a call option has an exercise price below the price of the underlying investment – or a put's exercise price is above – the option is said to be in the money.

INCOME-SPLITTING: This is when you move money from the hands of someone who must pay high levels of tax to the hands of someone who will be taxed at a lower rate. This is a good way of paying less income tax, particularly for those who are retiring. If all the retirement savings are in The Big Guy's hands, then he'll pay a whopping amount of tax. But if half are in his hands, with the other half being taxed in The Little Woman's hands, hey, ding, ding, ding, you win! Tax savings!

INDEX-LINKED GIC: A GIC that pays no interest (or significantly reduced interest). Instead, the return is tied to the return in stock market investments. Every index-linked GIC has a different calculation – I haven't seen one yet that is a direct tie to an index — (oy, my head hurts) so you have to be very careful that you understand what you're buying.

INFLATION: The increase in prices in an economy over time. A small amount of inflation is thought to be good because it denotes steady growth in the economy. The Consumer Price Index – or CPI – is used to measure inflation.

INSOLVENCY: The inability of a body to repay the debts he or she has taken on.  Oh boy, you're in deep doo doo now! Get thee to a bankruptcy trustee.

INVESTMENT PYRAMID: A ranking of investments based on their relative levels of risk. At the bottom of the pyramid is the safest type of investments: savings accounts, GICs, Canada Savings Bonds. The further up the pyramid you go, the more risk you're prepared to take in the hope of earning higher levels of return. You must know your investment time horizon and your risk profile before deciding how high up the pyramid you'll go. And if you don't understand what something is on the pyramid, that's a sure sign you should be buying it, no matter who tells you it's a good idea.

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Credit Cards for Young'uns

I get letters all the time from parents asking me if it's wise to encourage or help their children to get credit cards to build their credit history. I've also been getting letters from recent grads who want to know much the same thing.

I'm a fan of credit cards, particularly for people who are trying to establish a credit history. But if you want to stay on the right side of balance sheet when it comes to using credit cards, make sure you follow these 5 rules:

Rule #1: Pay your bill in full every month. As long as you're using credit to establish a credit history and for convenience, you're fine. The minute you start carrying a balance it means you're spending money you have not yet earned. Never mind what some moron lender tells you about paying just the minimum to have a better credit score… that's just advice designed to make you pay interest. And paying interest is dumb. Don't do it.

If you don't have the self-discipline to pay your credit card balance off in full and on time every single month then don't use a credit card. It's that simple.  Denying your nature will get you in a lot of debt and a heap of misery. Tell yourself the truth and stay away from temptation.

Rule #2: Choose a card that gives back. You don't have to pay a big annual fee to get a card that earns you rewards. My PC Mastercard gives me points I can use to buy groceries. Hey, that's money I don't have to use from my budget. Know that rewards cards usually have higher interest rates, so if you're stupid enough to carry a balance, you'll more than negate the benefits.

Rule #3: Track your spending. It's so easy to just whip out a card and – cachunk cachunk – charge it. But if you aren't tracking your spending, you may find yourself facing a credit card bill that's higher than you can afford to repay come the due date. Only by keeping track of where your money is going each time you spend – whether you use cash or a credit card – will you be shopping consciously.

According to the authors of a study published in The Journal of Experimental Psychology, "…using a less transparent form of payment such as a credit card lowers the vividness with which one feels that one is parting with real money, thereby encouraging spending."  However, if each time you use your credit card, you write what you've spent into your spending journal, and deduct that money from your bank balance, you're much more likely to stay real.

Rule #4: Review your credit card statement every month. It's not enough to just pay the bill off. You need to compare the charges that have come through on your statement with those you noted in your spending journal. This is the only way you'll know if you've been overcharged, if your account has been fraudulently used, or if you've been charged interest in error.

If you think that because you're paying your balance off in full every month there won't be any surprises, think again. I've never carried a balance on my credit card but was surprised when my card was declined one day. The reason: the credit card company had decided to lower my limit. The new lower limit was on my last statement, but I'd missed it. Hmmmm.

Credit card companies lower limits for all sorts of reasons: they can use that tactic to push you closer to your limit, or even over-limit, so they can charge you higher interest and more fees. And don't think they won't just because that's low-down and dirty. Hey, it's a dog-eat-dog world, and you better pay attention if you don't want to become lunch-meat.

Rule #5: Check your credit history. You should do this, at the very least, once a year. Twice a year is better. And since you can get a free credit report from each of Equifax and TransUnion just by writing in to request it, it doesn't have to cost you a cent. Look for errors or signs of ID theft. Make sure that if you find an error, you get it corrected lickety-split. And you'll have to follow-up and follow-up. Don't assume the other guy is looking out for your best interests. It may take several calls to get an issue cleared up.

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Happy with What You Have

Do you know that Warren Buffet lives in the same house in Omaha that he bought in 1958 for $31,500. He hasn't upgraded to a bigger, better house. Course, it became a more expensive house over time because of the real estate market: it's estimated to be worth some $700,000 today. But the guy's worth billions and "good enough" is good enough for him.

So what is it with people who don't have Buffet's money – or his brains – and think that they should be living in a home that eats up all their cash flow?

Are marble floor and granite counter-tops so important to our definition of ourselves that we're prepared to spend money we haven't yet earned to have them? What the hell are we thinking?

The Financial Post did an article earlier this year called "The New Face of Debt" where they profiled a retired couple living in B.C. who thought it was fine to go into debt to the tune of almost $70,000 – twice their retirement income of $37,000 – to repaint, put in new kitchen counters and custom French doors, along with "other elegances".  Are we so shallow and uncertain of what's important that we would risk our long-term security for some nice doors? Whazzup with that?

And now, having paid too much in renovations, even downsizing would leave this silly couple holding the bag. And they're not alone. All over the place, people are consolidating consumer debt into their homes and hiding it from themselves. They're using credit to put in gardens, pave driveways and replace their sinks and bathtubs. They're piling on the debt even to the point of moving into retirement with a bag-full.

Recent studies show an alarming trend. More and more people retiring are doing so with debt. One study by Investors Group found that 62% of people plan to retire in debt.  The Royal Bank found that one in four people begin retirement with a mortgage on their homes. Is this new trend to indebtedness in retirement a measure of our inability to stop spending or our unwillingness to live within our means? And regardless of whether we're driven by some unseen force to take on debt or willingly walk into Debt Hell, do we actually imagine things will be easier once we're living on a fixed – often significantly reduced – income?

As if it isn't bad enough that we bought too much house to begin with – our eyes were bigger than your budgets – we've chosen to throw money at consumer goods, travel and stuff before prioritizing becoming debt-free by retirement.

It isn't your income that's getting in the way of a safe and secure future. And it isn't your expenses. It's your attitude. If you're tired of being in debt, if you don't want to be hauling a wheelbarrowful of the stuff into retirement with you, then you have to decide that Debt-Free is the target. And every time you see someone's shiny new car or someone else's sparkling new kitchen with the granite counter-tops, know that below much of that  dazzle is rot. That's what debt is: rot. And you know what rot does? It spreads. Little by little it takes over the healthy parts of your financial life until everything just collapses in on itself.

The trick is to do what Warren Buffet does and see what you do have instead of what you don't. Become sure of what you really want and then good enough will be good enough for you too.

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