Wisdom of Rich Dad

Too many young adults who are already out of school have low levels of financial knowledge so we, as a society, need to come up with other alternatives. Employers could offer financial literacy programs or at least provide resources to help young people avoid some of these costly mistakes. Schools should offer basic financial planning classes.

If nothing else, the recession has made us brutally aware of what we don’t know. Here are some of the more common, and costly mistakes, and ways that people can avoid them.

1. Not having an emergency fund. Experts recommend that everyone have a three-month emergency fund—at least. You never know when you’re going to get a flat tire or a leaky pipe—emergencies that happen all of the time but that can become very costly if you’re not ready for them. Having to borrow money on a high interest credit card can cost you hundreds in wasted interest payments.

What happens if you lose your job and have to dip into your emergency fund? First, don’t stress. It’s ok to use the emergency fund for rent or food—for needs. It’s not such a good idea to use it for that pair of shoes you really want or a night on the town. During a recession it can be hard to have and maintain an emergency fund. That’s ok, as long as you save what you can.

2. Slow leakers. These are the people who spend money on bottled water and daily Starbucks runs. The people who use their debit card for everything, no matter how small, and then forget to include the little things when they balance their bank account or budget. Even that $2 coffee can lead to overdraft fees.

3. Bad budgeters. These are the people who forget about certain expenses and therefore don’t budget for then. Or, they don’t budget at all, then wonder why they don’t have any money.

4. Minimum wagers. Paying just the minimum on your credit card is another expensive mistake. The bigger the balance, the longer it will take you to pay off and the more you will pay in interest. If possible, only use your credit cards for emergencies and pay off the entire balance on time. If that’s not possible, pay off as much as you can each month.

5. Plastic life. Living off a credit card is one of the worst money mistakes that you can make. If you are living off your credit card this probably means that you are spending more than you’re earning, a big budgetary no-no. If you are out of work and out of money you may have to live off your credit card for a while, but, in this case, you should really tighten your belt and spend as little money as possible. In addition, try to find a credit card with a low interest rate. A credit card is like a loan, meaning that the money will have to be paid back, with interest.

6. No doggy bag. It is possible to have some money leftover from a college or personal loan. As tempting as it may be do not use this money for anything other than paying back what you borrowed. Loans have to be repaid. The longer it takes to repay them the more money you’re going to end up paying in interest. Instead of spending any leftover loan money, simply use it to pay back what you have borrowed. In fact, it’s a good idea to make a loan repayment plan and begin paying back your loan as soon as you possibly can. 

7. Too much, too young. Many young people make the mistake of thinking that they need to build credit while they are still in college. While it is always good to have good credit, it is not always necessary to have credit at all. Remember, it’s a lot easier to turn your credit bad than to keep it good. Don’t open a ton of accounts just to build up your credit. In reality, it only takes three months to build credit.

No one can be perfect all of the time but if you can avoid making some of these costly mistakes you can avoid wasted time and money.

Ramit Sethi, Author of I Will Teach You to Be Rich was interviewed by certified financial planner, Cathy Curtis at the Commonwealth Club of California event.

Ramit talked about his book and some of his philosophies on personal finance management.  I recorded the interview and wanted to share a few snippets from the discussion about his “Bulletproof Personal-Finance System”.

Watch the video and share in the comments your thoughts about his system. Have you tried it? Do you think it works? If not, why?

With the US facing its worst recession in 30 years, many are being reminded of the importance of financial literacy. In fact, many are debating whether it’s important enough to make it a requirement in our school systems.

Increasing the importance of financial literacy is new legislation that takes effect in February 2010 which prohibits anyone under the age of 21 from obtaining a credit card unless a parent, guardian or spouse is willing to co-sign. The one loophole to this is if you can prove you have sufficient income to cover your credit obligations, you may be approved.

There are several statistics that show the need for increasing the age limit on a credit card. According to a 2009 study by Sallie Mae:

• In this time of economic downturn, college students are relying on credit cards more than ever before with the average amount of debt increasing 46% since 2004.
• Half of college students have four or more cards and seem to use them to live beyond their means. Close to one-fifth of seniors carries balance greater than $7,000.
• Nine in ten graduates paying for direct education expenses with credit cards and the average college graduate owes about $19,000 in student loan debt.
• One-third of students rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on money management topics.

If those under the age of 21 can no longer apply for a credit card, it may reduce debt for some college students who are depending on credit cards, but what about those who want to become independent? How can they build a good credit history so they can ultimately rent an apartment or buy a car, when they can’t qualify for credit?

This is where the importance of financial literacy becomes even greater, as young adults will not only need to start building credit early but they’ll need to learn how to build their credit without actually having a credit card.

Here are 5 ways for parents to steer their teens toward financial responsibility and help them build credit:  Read the rest of this entry »