Are Parents Terrible Financial Role Models?

This Friday, Dan Kadlec of Time discussed the findings of a study that discovered that parents are terrible financial role models. In Week 1 of Financial Peace University, Dave Ramsey discusses in the Super Savings lesson that parents make their children believe that they don’t have sex or money, to which he remarks, “It turns out, they had both!”

There are a number of topics that strain the parent-child relationship, and money is one of those topics. Although my family did not discuss money openly, my grandparents, particularly my grandfather, were decent role models. Unfortunately, I succumbed to peer pressure and tried to live like everyone else during my 20’s and learned to appreciate their lessons later in life.

If it ain’t broke…

My grandparents married in the early years of the Great Depression. They started out with little to no assets. In fact, their first home was a one-room shack. According to my grandmother, the home required regular pat-downs of sprinkled water with a broom to keep the dirt floor from becoming dusty. When both passed, their net worth was in the black. Although they had a few debts, paying them off was a non-issue since they secured the savings and investments to cover the remaining balances.

While they were alive, they shared weird lessons:

• Pay for purchases using cash. When my grandfather purchased a vehicle, and when my grandmother purchased a new living room set, they paid for those purchases using cash.
• Don’t fix it (or replace it) unless it breaks. Whether it was the washing machine, the garbage disposal, the vehicle, the fence line, or the plumbing, my grandfather would attempt to fix the item himself, hire someone if he couldn’t, and then get first and second opinions before he ever replaced an item.
• Pay your bills on time and in full each month. As my grandfather aged and his fine motor skills weakened, I was given the role of writing the monthly checks. He would lie out the envelopes each week, which had been opened initially when they arrived. He would verify the amount the amount to be paid and had me list the date and amount paid on the invoice and in his business-type checkbook register.
• Save for a rainy day with safe, reliable investments. My grandfather saved a decent amount of money in the bank to cover unexpected expenses such as hospital visits and home emergencies. He also invested in real estate by paying for properties in cash.

My grandfather didn’t have an MBA. He wasn’t a college graduate. To the best of my knowledge, he never graduated from high school. Life was his teacher.

Last Will and Testament

The one lesson I wish he would have taught me before he passed was proper estate planning. Like most families, he was very private about the specifics of his nest egg. Unfortunately, he only verbally declared where he wanted his money to go after he passed. Although each family member was well aware of his intentions, the lack of a will forced his estate into Probate Court. No matter the amount or the value of property, money and entitlement changes people. In my conversations with various individuals and families, I have learned that no family is immune to the heartache caused when money matters affect family matters.

Let’s Talk About It

It may be a difficult talk to have with your children. It may be a difficult talk to have with your parents. It is a critical, honest talk that each side needs to have with the other on a continual basis.

All Hail The Great FICO: Are You in Credit Bondage?

Like many people, I used to worry a lot of about my credit score. In life, it seemed that the credit score determined a number of things such as:

• The amount of interest I would pay on borrowed credit
• The amount I would pay on my vehicle/mortgage insurance
• The types of apartments I could rent
• The amount of funding I could obtain on a mortgage

It seemed that FICO was the master, and I was its servant. I dutifully kept my credit accounts open, financed purchases, and attempted to pay on all of them. When my husband and I hit a snag in our finances, we began getting those calls, “If you don’t make a payment, if could affect your credit score.” I would make a small payment, but compromise the household budget by using money from the food, gas, utility, or food fund. How could I have been so dumb? Enter The Great FICO. All Hail The Great FICO!

It took experience, my grandfather, and Dave Ramsey to help me understand credit and the FICO Score. Dave Ramsey calls this the “I Love Debt” Score.

Understanding the “I Love Debt” Score

According to FICO (What’s In your FICO score), your credit score is based on the following five factors:

This means that in order to maintain a great FICO score, you have to use credit for a certain period of time, balance that with a certain number of credit accounts for a certain length of time, and continuously obtain new accounts and types of credit.

The FICO score doesn’t account for the fact that you have saved $50,000 in an emergency fund. It doesn’t account for the fact that you make $7.25 per hour or $100,000 per year. It only cares that you use credit (credit cards, car loans, student loans, medical bills, payday loans, rent-to-own accounts, and installment loans). Thanks, but no thanks.

What’s Affecting My FICO Score

You can always get a free copy of your credit report at https://www.annualcreditreport.com/. You are entitled up to three free credit reports per year. If you want to check your credit report year-round, I suggest ordering one from Experian on January 1, one from Equifax on May 1, and one from TransUnion on September 1. Then, repeat the order process the following year.

A word of caution, be sure to select the option that does not include the FICO Score. You will be required to pay extra for your FICO Score. Also, do not use that credit reporting company with the cute jingles. Their credit reports are not free.

Life without the FICO Score

You can still have a life without The Great FICO while becoming debt free:

• Credit Accounts: As you are eliminating debt, be smart about how you pay down your credit accounts and when you choose to close your credit accounts by working your Debt Snowball. Remember, The Great FICO doesn’t care about tangible things like people and cash; it only cares about credit. In my book, he’s a superficial tyrant.
• Vehicle/Mortgage Insurance: There is a high likelihood that the FICO Score will still determine your insurance rates. Educate yourself by calling your insurance company and find out how they use the FICO Score to determine your rates. Before you call, read this document on FICO Credit-Based Insurance Scores produced by the Fair Isaac Corporation, administers of the FICO Score.
• Apartment Leasing: When I rented my first apartment in college, I had just started using credit and probably did not have a great FICO Score. What I did have was a decent savings account (by college student standards) and stable employment with one employer for three years. Based on the latter, they leased the apartment to me. Here is an example of how one residential property management company views you and your FICO Score.
• Mortgages: If you want to buy a home, you still can without a FICO Score, or a great FICO Score for that matter. You’ll need to save 20% of the amount of the house you want to purchase and have a stable job for at least two years. Before you start the process of buying a home, you can ask your lender about manual underwriting.

Dave Ramsey offered some tips on CBS Early Show for people who are still “worshipping at the altar of The Great FICO.”

Going Old School: What To Expect When You Take Financial Peace University

At the beginning of each spring and fall, you can expect a number of churches across the country to begin promoting Dave Ramsey’s Financial Peace University (FPU). Personally, I am a huge advocate of FPU for the simple fact that I have seen the program help change lives.

My spouse and I will begin facilitating our third set of FPU classes within the next few weeks. When we originally purchased the FPU Kit at a Dave Ramsey Live Event in the spring of 2010, we sat the kit down, looked through the contents, and passively looked for a class in the fall of 2010. Unfortunately, we could not find classes that fit our schedule close to home. We waited a few more months, and finally found one that was definitely worth the wait in the spring of 2011. We had a great coordinator and facilitator who cared about our progress.

We could not have imagined what the classes would do for us financially, emotionally, and spiritually. We attempted to pay down debt on our own, but FPU really helped us to get Gazelle Intense. Additionally, it was great to know that there were others, like us, who were simply sick and tired of making payments each month with so much of it going to interest. Saturday Night Live has even poked fun at the topic of credit and consumerism with the following skit:

Saturday Night Live – Don’t Buy Stuff

So, what can you expect when you take Financial Peace University? You can expect to go old school by paying for purchases using only cash or your debit card. You’ll also learn to:

• Build a budget,
• Start saving money for your emergency fund,
• Eliminate debt with the Debt Snowball,
• Retire with dignity,
• Pay off your home early,
• Save for a college education,
• Accumulate wealth, and
• Give like no one else!

Personally, I have given away a few of Dave Ramsey’s books and an FPU kit, and I am grateful I can help others get a jump start towards changing their family trees. The cost to attend FPU is roughly $100 for all of the study materials, but it is well worth the investment. Since the kit comes with a Lifetime Membership, you could attend refresher classes later at no cost to you at any site that offers FPU.

This weekend, I spoke to a number of people who were very happy to have gone through the program. These people are just like you and me. They are:

• single, married, divorced, or widowed;
• mothers, fathers, sisters, brothers, daughters, sons, grandparents, and pet parents;
• uneducated and educated with G.E.D.’s to Ph.D.’s; and
• unemployed or working, earning low incomes and high incomes.

On a final note, Financial Peace University is not the only program out there. Gail Vaz-Oxlade, Suze Orman, Clark Howard, and a number of other financial gurus have similar programs to help you pay down debt and save money. I encourage you to take a look at various programs and find one that works for you and your situation.

Will FPU work for everyone? By all means, no. If you follow the Baby Steps diligently, you will start pay down debt and grow wealth. It won’t be easy, but it was worth the sacrifice to my family and the students in our FPU classes. On the other hand, if you continue to use money as you do, then I can pretty much guarantee that things will not change, and may even get worse regardless of whose plan you choose to follow. Unfortunately, not everyone is ready to stop using credits cards, stop taking out student loans, stop financing new vehicles, and stop buying into the current trends. It’s harder to hear this when people admit that they are broke, but refuse to change their lifestyle.

As for my family, and me, we’re done keeping up with the Jones.