When I was a teenager, my mother reluctantly told me her annual income, and how much she actually received in her bank account each month.
She talked to me about income taxes and other deductions. Then she explained what a mortgage was and how long it would take her to pay off our house.
That moment changed my life and led me to make a change in my practice.
I now ask clients to have their children over the age of 12 present at annual reviews or whenever I present a written financial plan. My rationale? Perhaps the children would think twice before burning through a student loan or abusing that first credit card in a few short years.
This process has paid off. And having the kids observe financial planning rituals often gives their parents more clarity. During one of my first self-imposed, family finance sessions, one client’s 17-year-old daughter, whom I’ll call Miriam, informed me she wanted to live on campus while attending a local university. She wanted to know about paying for school. Could she save enough for it? Could her parents afford to help? If she took a loan how long might it take post graduation to pay it off?
I showed Miriam that if she borrowed the $35,000 it would take to pay for four years of tuition and board at the institution of her choice, it would take her 10 years to pay it back if she paid $400 a month after she graduated. But if she lived at home and borrowed $15,000 over the same four years for tuition, the same payment would be gone in 3.5 years.
“Why would it take that much longer?” Miriam asked. “It’s only slightly more than double the amount of loan, but it takes nearly three times a long to pay it off? That can’t be right.”
I explained that interest rate is not the only factor with debt, and that time actually has the most profound effect on the total repayment cost of a loan.
Showing Miriam the math made a difference in her decision making. Armed with a little more information than she had before, she set a goal to earn enough every summer to cover fall tuition and books and she ended up graduating with no debt.
Sometimes, the client’s child is already in debt by the time I see him, but that doesn’t mean the debt cycle can’t be slowed. Another client’s son, whom I’ll call Rob, was in his last year of school and already had a substantial loan debt accrued. His father suggested he spend a few minutes chatting with me about his debt before using any of that year’s student loan.
“I can’t figure it out,” Rob told me. “I get $8,000 at the beginning of the year to last me all year and then it’s gone by the end of January. I work on top of it all, where is it going?”
Now, lots of Rob’s spending, like tuition and books, was legitimate but since that money was part of all his other cash, he couldn’t tell when he was dipping into the loan money until he needed more. So I suggested he put the student loan funds in a high-interest savings account, along with 30% of his paycheque each month. I also told him to apply for a few scholarships.
That year, Rob received a $1,000 scholarship, he put $2,400 into savings and he only needed to spend $5,000 of his $8,000 loan.
My mother once told me it wasn’t polite to ask people about money. I’m so glad she changed her mind. It changed my perspective for the better.