Teens, Money and Debt Ceilings

On a 22nd floor conference room in midtown Manhattan yesterday, I taught a two-hour financial literacy workshop to a group of teenagers from the READ Alliance. It was my second year collaborating with the non-profit organization, and most of the agenda mirrored last year’s topics of discussion: money management, banking, credit cards, college and taxes.

When I began the section on taxes, a few rolled their eyes. A few more suddenly had scouring looks on their face. One raised his hand and shared his frustration that “taxes suck”.

In that room full of impressionable young people, the future leaders of tomorrow, I started at the beginning. “Why do we have taxes?” The answer: to provide services to the American people. We talked about the public education system, the military, police, firefighters, roads, parks, libraries, welfare, Social Security, Medicaid and Medicare. I emphasized that every American pitches in by paying taxes so we can all benefit from these services.

When I showed the slide about how federal taxes are used, the whole class was in disbelief about how much is spent on the military in proportion to other services. One girl couldn’t even wait to raise her hand before angrily blurting out, “why don’t we just stop spending so much on the military?!”

Given the nature of the workshop, I wasn’t about to indoctrinate these kids with my own political views (which would lean towards sharing that opinion), but took some time to tell them that while military spending is certainly a controversial political issue, it may also be part of the reason that we enjoy the freedoms that we do in America. Our national security and safety is extremely important, and unfortunately that comes at a price to American tax-payers.
In his January 1942 State of the Union Address., FDR told Americans, "War costs money, that means taxes and bonds and bonds and taxes. It means cutting luxuries and other nonessentials."
In a March 2011 CNN article, Nicolaus Mills writes, “Roosevelt was no egalitarian. He was committed to free markets and free enterprise. For FDR, the case for taxes rested on old-fashioned patriotism -- on the deeply held belief that interdependence and sacrifice were the cornerstones of American democracy.”

Sharing FDR’s sentiments, I finished up the section by explaining that in my opinion paying taxes is an American duty. Without taxes, among other things, there would be no public education, no national security and no social net if honest and hard-working people fall into misfortune. Yes, to me, paying taxes (assuming tax revenues are not abused) is patriotic, because like everyone else, I love this country and I want to every American prosper.
As I continue to read about our astonishing deficient and debt ceiling mess, I can’t help but wonder if all Americans are doing their fair share. Wharton economist and author of the blog, Freakonomics Justin Wolfers discusses his take on this question in his 2008 post, Taxes, Warren Buffett, and Paying My Fair Share, and reminds us that Warren Buffet, the world’s greatest investor and bajillionaire, pays about 17.7% in taxes, compared to his secretary who pays around 30% (mostly due to much lower capital gains and dividend tax rates). [Note: Buffet has continuously called on the government to increase taxes on the uber-wealthy and have individuals like him pay their fair share]. Apparently, even some wealthy GOP-supporters have urged Eric Cantor to increase their taxes.

As next week’s debt crisis deadline approaches, I hope that our elected officials can come to an agreement that a) doesn’t cut essential social services that contribute to the welfare of those in need. and b) considers asking those that can afford to pitch in a little more (the ultra-billionaires) to help us move forward and prosper as a nation. A US default would be a horrific mess leading to so much panic in the markets that a deeper financial crisis and recession will almost certainly occur.

I really don’t know what the economic environment will look like when those teenagers become taxpayers, or when it’s time for them to retire and need to turn to social security, but the decisions that are being made behind closed doors in Washington DC right now may affect us for a very long time. Our economic fate lies in a few very powerful hands; let’s hope they make some wise decisions…

Helpful article to understand the debt ceiling: http://www.bbc.co.uk/news/world-us-canada-14286606

I was so inspired by this story posted on the Operation HOPE blog of a 13 year old teaching a class on financial literacy:

On Tuesday, March 29th, we had the youngest person in Operation HOPE history (I think) to teach Banking on Our Future! 13 year old Zachary Oshin, who attends Viewpoint School in Calabasas, CA, commenced his instruction of Banking on Our Future to a group of 20 middle school students at Vista Middle School in Van Nuys, in collaboration with After-School All-Stars.

Over 4 sessions, Zachary taught the students about the basics of personal finance, from the unique perspective of a middle school student.

At age 13, Zachary already invests, gives to charity, and operates his own car-washing business, for which he gave out his business cards to a few select students. This is silver rights in action, for a new generation.

I love seeing people helping their peers - no matter what their age :) Keep up the great work Zachary!

Happy Financial Literacy Month!

April is National Financial Literacy Month. As the website notes, “National Financial Literacy month represents a national challenge to observe the month of April with programs and initiatives geared at helping individuals and families improve their understanding of financial principles and best practices.”

There are lots of great tools on the website including:

· Free Webinars - Sign up for free webinars designed to help you on your path to financial wellness. Topics include goal setting, credit reporting, managing credit, debt repayment, and budgeting.

· Income Worksheet - Use the income worksheet to help you determine the amount of income you can realistically count on.

· Net Worth Worksheet - Calculating your net worth is as simple as comparing what you owe (liabilities) and what you own (assets).

· Debt Load Worksheet - Create an accurate picture of your debt obligations.

· Financial Priorities Worksheet - Creating a list of needs and wants can help you establish your financial priorities.

· Financial Goal Worksheet - Smart financial goals are Specific, Measurable, Achievable, Rewarding, and Trackable. Use this worksheet to identify short-, mid-, and long-term SMART goals

· Goal Certificate - Create a "fridge friendly" personalized goal certificate to help you stay motivated.

· Record of Daily Expendatures - Knowing where your money is going is critical for a successful budget. Track your daily expenses and then ask yourself if you're spending your money wisely.

· Expense Worksheet - Create and follow a spending plan. A realistic monthly spending plan is a valuable tool to guide your spending and saving decisions.

· Tips for Change eBook - Download the eBook to read tips submitted by financially savvy consumers

There are also plenty of ways to show your support for National Financial Literacy Month using social media (“like” the Facebook page, follow @moneymanagement on Twitter and watch money management Youtube.com videos).

Good luck with your financial literacy goals!

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"Your Questions Answered"

I'm a big fan of getting people to write down what their personal finance questions are so that they can be addressed directly during a workshop. Through our middle school program we kept asking the girls to write down ANY questions they had about money. I'd write responses up for them and give the entire class copies of the handouts to take home - just to show that no question is dumb and that we really did care.

So, here are my responses to some of their questions. Enjoy!

1. “What is debt?”

Debt is basically a way of saying how much you owe. In our society when we don’t have the money to pay in full for goods and services we borrow the money and promise to pay it back over an agreed time frame. A few types of debt include:

- Credit card debt - when you buy stuff with a credit card the bank loans you the money to buy it right then and at the end of the month you are expected to pay the bank back for your purchases.

- Student loan debt - borrowing money to pay for college tuition and promising to pay it back once you start earning money.

- Car loan – a car can cost a lot of money (anywhere from $5,000 to $100,000!) so usually people put a small amount of money down and then promise to pay the rest back over time.

- Mortgage – buying a house or apartment is expensive (in New York City the average price of a one bedroom apartment is over $500,000!). Most people take a loan, or a “mortgage” to pay for their house over a long period of time.

Debt can be expensive. People won’t give you money for free! When someone lends you money they charge an extra fee called interest. That means that any purchase ends up costly slightly more than the price tag says. Some people find it hard to pay back the money they borrowed – that’s when they can get into serious trouble, which can be anything from extra fines to jail time. The key is to never borrow what you can’t afford!

2. “What job can you get that pays a lot of money and is easy to get with a college degree?”

That’s a difficult question to answer, but we’ll try! Firstly, unfortunately nothing is easy. College will be rigorous and finding any job might be challenging depending on the economic situation of the area you are looking for a job. The jobs that will be “easy to get” will depend on what society will need when you finish college (about 10 years from now). To get a job you will have to prove that you will be an unbelievably awesome and fantastic employee. Future employers will want to see that you had consistent good grades, that you have a track record quality results, can work in a team, have leadership skills and have a great personality as well. Phew! That’s a LOT!

It also depends on what you think a lot of money is and what your goals are. Do you want to earn a lot of money but be working non-stop 7 days a week? Or do you want to work 5 days a week, have your weekends off and have a flexible job that allows you to spend time with your family – but that pays a little bit less? Do you want to work on a computer all day or do you prefer working with people? Have you discovered what your skills are? In the future we’ll be using more technology, so if you are good at fixing or programming computers, perhaps you will find a career as a computer technician/engineer. Jobs on “Wall Street” in financial services and investment banking often pay well if you like numbers and economic markets – but those can be selective and often will be very demanding of your time (sometimes only 10 vacation days a year!). Alternatively, if you like teaching and working with kids, perhaps being a school teacher would be more appropriate for you. Teachers typically have a lot of vacation time (winter break, spring break, summer break etc.) which could be very appealing if you want to have a lot of time off. Health care is usually a strong profession because people will always need medical help. Some jobs that you might be interested in may include: nurse, doctor, occupational therapy, physical therapy or hospital administration (if you prefer the business side). For most of these careers you will probably need to go to graduate school as well and that can be 1-6 years extra on top of your undergraduate studies.

There are thousands of professions to choose from – these are just a handful of the options for you!

3. “How do taxes work?”

Firstly, the reason we have taxes is to provide services to the American people. This includes the public education system, military, police, roads, parks, libraries, welfare, Social Security, Medicaid, Medicare and much, MUCH more. Every American pitches in by paying taxes so we can benefit from these services. The amount that you owe depends on how much money you make. We have a progressive tax system which means that people who make more money pay more in taxes than those who earn less. Before you start a job, you have to fill out a W4 form which identifies what you think your tax level should be. When you start working, you will notice that a small amount of tax will be automatically taken of each paycheck (instead of a huge amount coming out once a year). This is also called “withholding”. At the end of the year the IRS (Internal Revenue Service) calculates exactly how much tax you actually owe. If the total amount withheld from your paycheck during the year is more than the amount you actually owe at the end of the year, you get a tax refund. If the amount withheld is less than the total owed, you will need to pay when you file your taxes to make up the difference.

4. “Why do we get money and sometime it confusing with it like it so hard taking care of money?”

Managing money is difficult for everyone – regardless of age, geographic location or socio-economic status – so don’t worry, you’re not alone! Have you heard that most lottery winners go bankrupt a few years after collecting their winnings? Strange, but true! This is because we have unlimited WANTS but only limited RESOURCES. To deal with that we have to constantly be making decisions like, “do I really need that?”, “can I find it cheaper?”, and “are there any alternatives?”.

A great technique is to create a budget or spending plan. You can do this by looking at the week or month ahead and trying to figure out how much income you will have (money coming in) and how much money you will spend. You can break it out into categories: Estimated Income, Fixed Expenses, Variable Expenses. Then follow through for that period and list every purchase you make and how much income you receive. At the end of the period take a look to see how far off you were to your estimation. What could you have cut back on? How can you save more next month? You shouldn’t stop enjoying your life and doing things for yourself, but if you don’t have much money left for yourself, think about how to do the things you enjoy, for cheaper. An example is instead of paying $13 for a movie ticket; go before noon on the weekends for half price! Budgeting isn’t always about abandoning the things you want to do, but sometimes finding the most cost effective way to accomplish them.

5. “Who made money? Is that person still alive?”

The history of money spans thousands of years. Before coins and bills, goods and services were exchanged using bartering. For example:

Caveman 1: “I’ll give you four chickens for one cow”
Caveman 2: “No way! A cow is worth at least eight chickens!”
Caveman 1: “Well…I don’t have eight chickens. I only have six!”
Caveman 2: “[Long pause] How about six and that cool rock you own?”
Caveman 1: “Oh man...I love that rock. But ok, it’s a deal”
Caveman 2: “Great. Good doing business with you”

The Ancient Greeks are thought of as the first group to use stamped metals coins in 700 B.C. The earliest known paper money dates back to China, when paper money became common around 960 A.D. On March 10, 1862, the first United States paper money was issued in denominations of $5, $10 and $20. The original one dollar bill featured a portrait of Salmon P. Chase, the Secretary of the Treasury under President Abraham Lincoln, but in 1869 the bill was redesigned with a portrait of George Washington. In summary, no one person made money. The people who were involved in the design and evolution of money range from our prehistoric ancestors to America’s founding fathers.