Giving Cash to Children

When should kids be taught about money?

Personally, I think as soon as possible. Even expectant mothers should discuss finances with their kids while they're in the womb. Hey, why not? We're told to play classical music during pregnancy. So why not turn on CNBC or the Fox business network for the kid to hear?

Okay, perhaps I'm being a little extreme -- jut a little -- but Kiplinger's Janet Bodnar suggests starting the money talk at age six or seven. Her advice: start giving them an allowance.

As long as it's your money, they'll keep spending it like it grows on trees, Bodnar says. But by using the allowance, they'll begin to learn better money management skills.

Now if you can't be bothered with showing them to save some of the money or plan for long-term wants, then don't give an allowance. Otherwise, the money just becomes cash they can spend recklessly.

Read Bodner's advice in Part Time to Start With an Allowance, But Don't Let It Be a Handout (Aug. 31). She'll continue writing about this topic in the coming weeks.

Speaking of giving money to kids, what are your thoughts about a new program started in Washington, D.C., to pay students for high test scores and behaving well?

The program, called Capital Gains, is a joint venture by Harvard University and D.C. Public Schools. Middle school students at 14 schools -- 2,700 of them -- will be eligible for a cash reward of up to $100 a month.

Students are also supposed to receive financial literacy training to help make the right choices with their money. Thankfully they won't be getting ATM cards. As the program is set up now, parents will not be allowed to withdraw any of the money, only the kids.

I certainly hope the literacy program includes parents. Time and time again surveys show the important role parents play in teaching their children about money. A survey this year by Charles Schwab (pdf) found that 60 percent of parents identify their teens as "quick spenders," and most acknowledge they could do a better job at preparing their kids for the financial challenges of adulthood, including budgeting, saving and investing. And yet parents are much more likely to teach their kids how to do laundry (70 percent) than how to pay bills (43 percent), the Schwab survey found.

As you might expect, not everyone agrees with doling out dough to students.

"Critics said the idea crassly monetizes the pursuit of knowledge and academic achievement," writes Post reporter Bill Turque. "Proponents say it gives students from low-income neighborhoods incentives that have long been available to children in families with more resources."

For more details about the program, read 14 Schools Named to D.C. Program to Motivate Students With Cash (Aug. 29).

How do feel about paying students to learn? Is this program any different than paying children to do chores? Send your comments to colorofmoney@washpost.com. Put "Incentive or Cash Crutch" in the subject line.

Also, in this Sunday's Color of Money column, I'll be annoucning the September Color of Money Book Club selection, which discusses teens and money.

College Contributions vs. Saving for Retirement

Kids and money is always a hot topic. That's why I was not surprised at the array of responses I received from last week's e-letter question. I asked readers if contributing to their children's college fund was more important that saving for their own retirement accounts. Here are a few of the comments:

C. Palmer, from Greenville, S.C., says, "My wife and I have cut back on contributing to the 529 plans we have for each of our three children ages 16, 10, and 9. We did this in order to pay down our home equity credit line faster. We contributed over a number of years when they were younger to get a good account going. There are plenty of options for financing college, but only a few ways to finance a long retirement for my wife and me."

Earl Roethke wrote: "We didn't save anything for our kids to go to college. When the time came, they got grants, loans, part-time jobs and we paid the rest, basically by having my wife go back to work. There's something to be said for this approach, since the more you have, the more the colleges expect you to pay. While if you have fewer assets, they give larger grants."

The Roethkes raised their children in Minneapolis, Minn., and now live in Curitiba, Brazil.

Web Chat Reminder

My regular online discussion is set for next Thursday, Sept. 11 at Noon ET. Let's talk about your financial woes and the economy. We can even dabble in some political debate since the new president will have an effect on your finances.

Answers to More Chat Questions

Last week's chat was one of the best! There were far too many questions to answer, so here are a few leftovers:

Q: First of all, I wanted to thank you. You set a fire in me two years ago to get all of our debt paid. Well, that happened two months ago. House paid and all debts paid. We've been setting aside 20 percent for retirement for over 25 years, have a "life happens fund" and working on that emergency fund -- we have two months of expenses. It is just my husband and me -- we have no children. I've been helping my younger sister for the past thirteen years. She is married to a pastor and has seven children. Many of the children have physical problems -- asthma, Type 1 diabetes for the oldest, allergies, etc. My sister is trying hard to have an eighth child -- none of my business how many children they have, but they do always need help. I'm beginning to feel, frankly, used. I love the children, my sister and her husband are great parents, but their religious belief is that they should have as many children as they can. I don't know what to do and my husband is losing patience with the amount of money we spend on them every year. I've been putting aside money as well for a small college fund for my nieces and nephews since I know they will not have the means to do so as well as give them money monthly to help with the additional expenses for my niece with diabetes. In such a situation, what do you think would be the best way to assist my sister's family? I think my husband and I need to budget a set amount we can give to them every year and leave it at that, but all he sees is that they keep having children and require more and more assistance. Any suggestions?

A: If it's important to you, then help out your sister, her husband and all their children. But keep budgeting for the financial assistance. Now before you send another penny, talk it over with your husband. He has to agree this is the right thing for your marriage and budget. You don't want to continue giving to your sister's family and risk hurting your marriage. So regardless of how many more children she has, figure out what you can afford, allocate that money and then stop giving when the money runs out. And don't you dare feel guilty. Your sister, regardless of their religious beliefs, is grown. She and her husband have to take financial responsibility for the children they bring into this world. Finally, I hope your sister realizes how special you and your husband are.

Q: I'm beginning to think about buying a condominium -- an inexpensive one. In the part of the country where I live, condos -- while there are quite a few of them -- aren't really the norm. I have many questions, and no idea where to start. More than anything, I want to have some confidence that the home I buy will keep its value. Any suggestions or resources that would give me an idea of where to start?

A: I so understand your situation. My first home was a condo. And like your situation, condos weren't popular in the neighborhood where I bought. When I was ready to sell, it took an incredible long time for me to find a buyer and I didn't make any money on the deal. So tread lightly. If there is a glut of condos but few buyers in your market, this might not be the right home for you. Before buying a condo, you should do a lot of research. Here is a link with some information on buying a condo from by columnist Ilyce R. Glink

Q: I have around $15,000 in a rainy day fund. How much rainy day fund do you recommend? I have a $1,700 a month mortgage, no credit card debt and a $600 auto loan. We both work. In case of losing a job the COBRA will be around $1,000. We need to have a continuous medical insurance as my child has a medical condition that uses costly medicine.

A: Typically I recommend three to six months of living expenses. That would include mortgage, auto loan, food, utilities, insurance payments, basically all the funds it takes to run your household. For extra safety add in the $1,000 COBRA payments. So, just based on the mortgage, auto loan and possible COBRA payment you need at least $9,900 for three months. Remember that doesn't include other necessities. I know that's a lot of money so just start saving as much as you can, even if you have to start, for example, with $25 a month.

Carolyn Warren, whose book "Mortgage Rip-Offs and Money Savers" (John Wiley & Sons, $17.95) was the Color of Money Book Club selection for August, also answered a few more questions:

Q: I am newly married and my husband and I are looking to buy our first "place". We are torn between buying a townhome/condo in-town or a house further out of town (but still close enough). I am leaning toward the townhome due to location and low up-keep. But I am afraid we may be wasting money on monthly maintenance fees and that the price may not go up as much as it would with a house when we are ready to sell (within 5 years). Any advice?

Carolyn Warren: When choosing a condo, location becomes even more important. You want to select a property that is in a desirable area, is well-maintained, and is not owned primarily by investors renting out units. Also take care in looking over the financial information from the association. No one can predict what will happen with values five years from now. Choose a home YOU will enjoy living in for the long run, whether it's a condo or a single family residence.

Q: I avoided the ARMs while buying in 2006 and did a 1st time homeowner loan through FHA, who promptly sold my loan. My interest rate is a fixed 7% over a 30 year mortgage. I see the rates are very low, down at 2%. My credit is excellent, 700's, and I'm wondering if it's possible to refinance a FHA loan after 2 years? Even if I got it down to 4 or 5%, I'd save a bundle in interest.

Carolyn Warren: Mortgage interest rates are not at 2%. Those were the risky, teaser-rate, negative amortization ARMS that are falling into foreclosure faster than anyone can say boo-hoo.

You can get a 30-year fixed rate at about 6 - 6.25 percent, depending on what state you are in and how many points you pay up front. You should contact your current lender about doing what's called a Streamline FHA refinance to see whether or not you can lower your payments enough to make it worth it. But don't expect an unrealistic rate like 2 percent or even 5 percent.

Q: Are people with credit in the mid 500's ever going to be able to get a house again? I didn't buy during the mortgage rush where it seemed anyone could get a mortgage, and now money is so tight that hardly anyone can get a new loan.

Carolyn Warren: I have good news for you! Raise your credit score to 580, and you can get an excellent FHA loan. 30-year fixed rate with 0 prepayment penalty. That is a realistic and very do-able goal, so go for it! Billions of dollars are being lent out and lots of folks are taking advantage of lower house prices to buy their first home right now. For more information on raising your credit score, go to www.mortgage-helper.com and click on Credit Scoring.

Suggestion Box

What great ideas do you have for the e-letter? Anything come to mind? Tell me about it. If you have a suggestion, please e-mail it to colorofmoney@washpost.com. Please put "Suggestion" in the subject line.

You are welcome to e-mail comments and questions to singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.

Charity Brown contributed to this e-letter.