Color of Money Live: Giving an allowance to teach a lesson

Jun 13, 2019

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I'm back!

Had a great vacation. But need a vacation from my vacation :)

Anyway, looking forward to your questions/comments. 

Very interested to hear your thoughts on giving an allowance, the topic of the newsletter today. So let's get started.

For their grandchildren's 10th birthday, friends of ours treat them to a week at Disney World. My first thought was (1) that sounds like fun; and (2) that sounds expensive. My granddaughter will be 10 this month and has already been to DW twice. Recalling your regret for not investing earlier, I opted to open a custodial account with Fidelity and funded it with $10,000 (which I estimate to be the cost of a week at DW). We have previously matched her parents' contribution to her VA 529 tuition guaranteed account which is now fully funded. I am very grateful that we are able to provide for our grandchildren's future, and I hope it will instill in them some of the financial advice that I have learned from you over the years.

What a wonderful gift you've given. And while Disney is pretty cool, what you've given will be magical later on. 

Bravo!

P.S. Always open for a grandparent adoption of my kids! 

I know you're not a fan of taking out a loan to pay for existing CC debt and I completely understand the paying peter to rob paul moto. My husband and I were facing 80k in debt due to a huge medical bill, not budgeting etc. We realized the budget we had didn't work and didn't want to consider filing bankruptcy. Both him and I applied for a separate unsecured loan, got approved and both had interest rates of 5%. Michelle, the credit card interest alone was 24% on each card. We both took the loans, used it to apply to the cc debt and our total payment on both of those loans is $500 LESS than the total minimum on the cards. We cut up all but 1 card which is used strictly for emergency and always had a 0 balance. This was 2 years ago we did this. The loans were for 5 years each. In doing this we managed to pay off $80k in crap debt in 2 years. We made the final payments to both loans last month (comes out automatically in checking) and have not added to it. We now live by the cash only rule. Each week we both get $20 to use as we please so lunches, snacks, etc but that's it. It's been tough adjusting to a strict budget to everyone who says they can't do it, it's possible. Our only expenses now are mortgage, 1 car loan, and normal utilities. My question though is I've noticed our credit took a hit taking the loan which we knew it would, but has been slowly going up since. How long would you expect before we can see credit scores back in the low 800's (right now they're both at 650) and would you suggest closing the cards? They're 10 yrs old, and have 0 balances now.

Actually, I don't have a problem with your decision. There are times that I do suggest people swap high interest debt for a lower cost credit card or personal loan.

The reason I discourage taking out one loan -- or applying for another credit card to transfer debt -- to pay off another is that often people have resolved the underlying issues of why they got into debt. So for example, someone might take out a home equity loan to pay off credit card debt arguing the interest rate is lower. But the credit card debt was accumulated by overspending. They take unsecured debt and make it secure debt. Then -- because they haven't changed their ways -- they run back up the credit cards. I've seen this time and time again.

However, in your situation it was you incurred the debt because of an illness -- something out of your control. 

I like your solution to manage and the fact that you paid off the debt early is proof that it was a smart move.

As for the credit score just keep giving it time. Continue to pay the bills you have on time and you'll see a rise in your scores. For now, I would not close those other accounts. Just let them be for now. 

OK, I get it. But frankly, experiences are of value, too. Go ahead and skip the lavish expense of Disney, but I hope more modest grandparent/grandchild travel could go along with the investment accounts.

Yes, you are right. I just came back from Orlando with my family. But I would have NEVER gone had my husband and I not fully funded their college accounts, been on track for retirement, had an emergency and life happens funds, etc. 

It's all about balance and in that respect  you are correct. Spend time with each other in less expensive ways if you can't afford a trip to Disney, which may I add is crazy expensive. As was Universal, et al 

I got the keys of my first house yesterday! I was able to save 43K for the down payment and had to take some money from my emergency fund to pay for the lawyer and taxes. It's pretty nerve wracking to see that much money you saved for so long leaving your bank account, but my boyfriend keeps reminding me that it's an investment for the future. Next step, once we moved and the small renos are completed, is to put back money into my emergency fund.

You saved for a purpose and that's good. And I love that you have a plan to replenish the savings account. 

Michelle, I left my previous job a little over a year ago. When I left, I rolled over the money I had in their 401k plan. About a week ago, I received an email notification from that old account (I didn't close it, but it was zeroed out) that a withdrawal had been processed and my check is on the way, they said if I didn't request the withdrawal it might be because minimum account balance or some other reason. When I logged in to the account to see what was going on, I saw that my money employer is still contributing to the account, that's the money that was withdrawn and sent to me. What do I do in this situation? Should I get in touch with my old employer and let them know? It's just a few hundred dollars, but I'm puzzled how this could have happened.

Definitely track this down because you could be hit with a tax bill since the check was made out to you and not a roll over into another retirement account. So, yes, contact your former employer to see what gives. 

Well we owe big time and sent our check certified mail on April 15. We finally were concerned because we didn't get our "green" signed receipt card back. Upon checking the USPS tracking system we found out that IRS never signed for the letter/check. So the check wasn't cashed. Of course, as soon as we inquired USPS, the IRS Agent (Bank of America) signed and the check was cashed. We saw the IRS Agent/Bank of America on our returned signed green receipt card. It gets better, Saturday IRS sent us the you owe us money plus penalty and interest letter. Oh yeah...we are calling IRS but it's hard to be on the phone an hour on hold. So hopefully DH gets thru to explain and ask questions on why Bank of America took so long to picked up the certified check and to sign for the mail/check, and to have IRS correct the errors. Of course, the first person my husband spoke to at the IRS said that the money had to be at the IRS no later than April 15. Now we have to talk to someone else. I guess the next time we will send the money electronically and charge it on our credit card.

Don't give up on your pursuit of what happened here. You absolutely are not responsible for the penalty fees. It's a pain but stay on the phone to the IRS. I had an issue with a similar letter. A company I did some work for sent the the IRS a 1099 that said I was paid $25,000. News to me. Turns out the company mixed me up with a famous singer. 

After a bit of time on the phone I got a real person. She was very helpful. Walked me through what I needed to do and I got it clearly up fairly quickly. You have the proof of your timely payment so you should be fine. 

And I wouldn't worry about a future payment. We pay our IRS debt electronically with direct withdrawal from our banking account. Don't use a credit card because there's a convenience fee of almost 2%. 

After buying my first house 2 years ago, I finally got my savings accounts back up to a comfortable level. So when I got a bonus at work last month, I made my first-ever extra principal payment on my mortgage! It's still daunting, tho. I wish I had looked into a 15-year instead of a 30-year...

Yeah for you!

And you still can make your mortgage a 15-year. Just keep making those extra principal payments. My husband and I pay principal payments every month. But just making one payment a year can knock of a few years from your mortgage term. 

Dear Ms. Singletary I have U. S. Savings Bonds which will mature in 2023. Taxes will be due on the interest earned at maturity. I have two grandchildren, who are 7 and 9 years old. Is there a method where I can give/contribute these bonds for education purposes of my grandchildren so as to avoid taxes? Thank you. Clarence Johnson 

Good news for your. This from treasurydirect.com

"The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989, when the bond owner pays qualified higher education expenses at an eligible institution."

In the past month four people I know have died, all 55 and under. I’ve absorbed all the unrelenting messages about how I’m doomed to live in poverty if I don’t save a few million by 65. But what if I don’t live that long? I read a great line recently about not wanting to be the person who waved away the dessert tray on the Titanic. How do you suggest people strike a balance between now and the possible future?

Wow. Such a thought provoking question. Deep!

Here's the thing. You are not doomed to live in poverty if you don't have a few million saved for retirement. There are plenty of people living well in retirement on far less. Now, can they take trips around the world? No. Can they still enjoy life? Yes.

People argue all the time that they should spend the way the want because they could die tomorrow. But what if you don't die? What if you overspent worried that you will die before you retire. Yet you live an don't have the funds you need to live 20, 30 or even 40 years in retirement. 

It is about balance. Enjoy some of your money now, while also saving some for later. They key is to live some in the present and be aware that despite the deaths around us many live -- and a long life these days. 

By the way, the people who passed up on the dessert tray didn't know they would drown. Therefore how could they have regrets? 

We gave our kids an allowance. As soon as they were old enough, they were expected to buy (or make) birthday presents for their friends with some of the money. That freed us up from running around on weekends looking for gifts for all of the many friends of our three kids.

 

Read Michelle's column: Should you give your kid an allowance? Not if you aren’t willing to do some work.

You used an allowance to teach a lesson. That's my point in today's newsletter. If you are just going to give your kid money without the financial lesson don't bother. You'll just teach them to be consumers. 

Get an Advocate - my tax guy got me one and it was very helpful.

Actually, they probably can resolve this themselves. It's fairly easy for them to prove they mailed the payment in time. 

I was talking to a coworker with kids the same age as mine (5, 7) and blown away by how much he gave them in allowance... But the policy he had with them I quite liked-- their allowance has to be divided into 3 equal parts into 3 separate piggy banks: One for long term savings, one for giving to less fortunate, and one they can spend more freely... I'm not sure mine are quite ready for that (seems like a lot of work on our end too!), but we've found other opportunities to teach them about budgeting in the meantime. At their summer camp, we can provide them a gift card for the concession stand. I pre-loaded it with enough for the whole summer, explaining that they only get $1 a day. So they can get a small treat each day, or pack snacks from home all week and save up to get the big slushie on Friday. Little steps before we go crazy with the triple-piggy bank....

Both methods are just fine. The point isn't how much they get. It's what lessons come with the money. Your friend is teaching about "pots." I'm a big pot person. Did the same with my kids. You have to save. You have to give back. You can spend a little on things you want. Your strategy is good too. But really, truly children learn by watching what you do. They learn by the many talks you have about how to spend, when not to spend or taking some of what they earn and giving it to others less fortunate. Talk is not cheap in this case if you want to raise money smart kids. 

Hi Michelle, love your chats. This weekend I received an alert that my credit score had dropped drastically. I immediately ordered my credit report and discovered that although our lender sold our loan right after we bought our house earlier this year, we were listed as 60 days overdue on our payment. My score dropped from 826 to 678! You better believe I was unhappy. We contacted the mortgage loan officer we'd worked with, and she apologized profusely and said they're submitting the correct information. I was just wanted to remind everyone to sign up for credit alerts--I'd never have known anything was going on if I hadn't gotten that email.

I have so many alerts I hear them in my sleep.

You are so right! And good for you for jumping right on this. They better fix it, too!

I don't understand why anyone would get a 15 year mortgage. When I bought my house some years ago I was employed by a company that downsized regularly. While I could afford the higher payments that come with a 15 year, I wanted to not be on the hook for them if I were to lose my job. I went with the 30 year mortgage, paid extra on the principal every month, and saved thousands on interest. But knew I could stop the extra payments whenever I had to.

I agree that for some people they need the breathing room of a 30 year. But when my husband and I refinanced we went with a 15. We wanted to eliminate the breathing room to "make" us get this monkey off our back before we retire. Plus the 15 year cost less in terms of the interest rate. 

Whether a 15 or 30 just make sure you can afford either with or without extra principals payments. 

It's always good to teach your children good money management skills when you offer an allowance. But speaking from experience, not all kids will absorb the lesson no matter what you do or say. I have three kids. One finds it hard to spend at all -- she's a real saver, another is getting better as she enters young adulthood at resisting impulse buys, and the third has never been able to hang on to a dollar. Same family, same lessons.

You are correct. Still, teach, stay consistent and on top of them. All you can do is do the best job you can as a parent to instill in your children good financial values. Ultimately, you are right, it's up to them to implement them. And some kids just have to learn the hard way. 

This is why I suggested getting an advocate. Also - always ask them to repeat their badge number and log every interaction.

I missed the nuance in that line. No, you just have to show a postmarked by/on the 15th. It does not have to arrive by the 15th. 

Good point about the badge since clearly that person needs some retraining. 

I hope you got that person's ID number because he/she needs to go back to training. It is appropriate to make a complaint if a federal employee lies to you like that. The "mailbox" rule is universal across federal tax enforcement and all you need to prove it is the slip that shows when it was mailed, not when it arrived. I once did some work in private practice where the IRS employee questioned how they could know what was in the envelope that was mailed (the IRS had no record of receiving the return, it had been mailed from another country and the income was subject to a tax treaty, so not a simple issue) but they never questioned that the date of mailing was the correct date. Sigh. And I assume things have been modernized, but do you have any idea how complicated it is to prove mailing dates when the proof is a photocopy of a hand written register in Switzerland and is in German? Notarized translations and affidavits from the accountant and what a mess.

Yup, some retraining in order, as I said. 

I have a problem with this as it a. I think children should be required to do this without 'payment' as we all contribute to this family in different ways and pull our weight and b. it seems to underscore that contributions are only 'valuable' if they have a 'wage' - thus re-enforcing the problem that keeping the home fires burning is undervalued.

I don't believe in paying for chores either. As a member of our household there are basic things you are supposed to do. But I have on occasion paid my kids for extra things that I want done such as cleaning the car. 

Michelle, I follow you religiously and wanted your take on what I should do. I’m getting a nice bonus check from my job tomorrow. I will be splitting it between debt and savings and wasn’t sure of what type of split would be best. I’m slowly working my way out of credit card and other personal day. My life happens fund currently has $1000 in it, my emergency fund has about a half a month of bills in it. Automatic transfers to both accounts every single paycheck that while or small they are automatic. Also have small savings accounts for any specific expenses related to my son and for expenses related to my divorce from my abusive ex husband. Bonus will be about $6500. The current plan is to pay off one credit card and it will be around $600, pay about $300 bonus (1.5 week of care) to my sons amazing home daycare provider as he will be moving to pre-kindergarten very soon and she has gone above and beyond in helping to make sure my son is safe and I am able to work to provide for him. Then plan to make a mortgage payment of $1300 that would be due July 1 so I have that as a cushion and then through the extra at other debt. I could take that $1300 and push that other debt and still make the mortgage payment on July 1 Hills well as be on time with all other bills but I like the idea of that cushion. Whatever Wood has me torn is that if I pay that $1300 plus the remaining amount of the bonus to one personal loan I have that was a credit card consolidation I will then be on track to pay off that loan by August 15 instead of The current 18 months. What are your thoughts?

Lots of numbers. Head spinning but think I got it. 

Before you dole out the money in various ways do this.

-- Figure out how much you need for a full month's of household expenses. Then I would build that emergency fund up to a full month.

-- Create a life happens fund. This money in case you have a major car repair, etc. Start with $1,000

-- With debt I might argue you can't afford $300 to the daycare worker but I applaud your generosity. 

-- List all your debts from the smallest to the largest. Take what you have left from the $6,500 and get rid of as many debts in full as possible. Then take the money you were paying on those debts and apply it to the debt that moves to the top of the list while making the minimum payments on the other debts. 

-- Do not make an extra mortgage payment. Use the bonus to get out of debt since you say you have enough income to stay current on your other bills. The mortgage cushion isn't needed right now. Plus, I'm pretty sure the interest rates on the other debts is higher than the mortgage. Focus on giving yourself breathing room from the debts. 

I never liked the chore for money idea for another, more personal reason. As a kid, I know I valued my free time far more than spending money. If skipping chores one week in exchange for simply having to miss out on that week's allowance had been an option, I'm sure I would have availed myself of it frequently! Fortunately, my parents knew their kid, and didn't tie the two.

Good point. I don't like the idea that kids are being taught so early that everything they do comes with a price tag. Money for grades, cash for chores. 

How about doing what you are supposed to do because you are supposed to do it?

Yes, let them learn the hard way. Don’t bail them out. If they have squandered their allowance before the month is up, then they don’t get snacks at lunch. They will eventually learn the lesson If you never bail them out.

Amen!

Earlier this year, we were notified that my husband owed back taxes from 2012! This was the MD department of revenue, and they didn't accept his documentation that he had appropriately paid state taxes to another locality (moving + contracting = a lot of confusion on the state's part). We had our accountant write a letter and Maryland dropped the issue. We are much happier paying the accountant for an hour's time than paying $4,000 just in penalties and interest!

You are so right and I wasn't discouraging getting professional help on tax matters. Just that some things you can do yourself. In your case having that letter probably did make all the difference. But like I said when I had my mix up, I called the IRS. I called the company and the immediately sent a corrective 1099 and then I sent all the documentation of what happened to the IRS. All was cleared up in a matter of a few months. 

Growing up in the 90s my allowance was always $2 a week and never increased! That was fine for an elementary school kid buying snacks, not so much for a teenager who wanted a social life. I remember learning about inflation when I noticed the price of candy bars going up. My dad was not swayed by our arguments for cost of living adjustments. I got a part time job in high school and even when I was making almost $100 a week, dad still insisting on giving me my $2 allowance :)

Just love your dad!

As a child, I didn't often get an allowance. More often, I would be given a small amount of money to spend on treats while at the pool or at the zoo, etc. I had to pick and choose what I wanted to spend that money on. And when I turned 16, I got a job. Although my parents provided a car and insurance, I had to put gas in the car and pay for my entertainment expenses. Taught me the value of money quite handily - a friend and I carpooled to school to split the gas cost and make our money go farther.

Funny thing. When my kids had to use the money they earned from part-time jobs for various things they wanted they all of sudden didn't want so much. 

Lesson learned. 

Dear Michelle, I know you will probably speak sternly to me for part of this situation (buying a car on credit), and rightly so, but I am confused as to what to do next. I bought a car and have 18K left to pay. We've been paying extra on our 30-year mortgage for the 10 years we've had it, so that it will be paid off next year (19 years early!!). I bought the car because my 18 year-old Honda was just getting too expensive to fix. My question is: should I pay any extra money to pay off the mortgage first, since it is at a higher interest rate (although higher balance at 47K), or pay off the car since it is lower balance and lower interest rate? Many thanks for any thoughts!

I like the small to large method to pay off debt. So list all your debts from the smallest to the largest. Concentrate on paying off the debt with the smallest balance. 

Dish, girlfriend!

Lol! Then I would be telling people how much she made for something. Her business. But nice trying.

There are a few reasons why an employer might contribute to a departed employee's 401(k) account after they terminate. Sometimes the employer has to "true up" the employer match so that you get the amount the plan document requires you receive. Sometimes employers have to make corrective contributions to some employee accounts - required when a plan doesn't pass compliance testing, or to correct an administrative error. There could be an annual company contribution (profit sharing or otherwise) to which you were entitled because you were employed on the last day of the plan year. So - definitely ask about it, but these are possible reasons why they're still funding it.

Things I hadn't thought about. Thanks.

Hi Michelle. My kids (7 and 11) get an allowance. They tithe, save, and spend. However, any guidance on what they should be saving for? Is this something BIG they want or for college or a car or what? Thanks!

Talk it out with them. It wasn't allowance money but we did require all three of our children to contribute to their college expenses. We paid the big ticket stuff -- tuition, room and board. They paid for their books, most of their clothes and entertainment. We did this on purpose because we didn't want them to see a lot of "extra" money and become consumers. With so much of their money earmarked for expenses they really buckled down and became great savers. 

Great chat today. Thank you so much for joining me. I'm sorry if I didn't get to your question but keep an eye out for my columns because it could end up there. 

See you next week.

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Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Wednesday and Sunday and is carried in more than 120 newspapers.

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