The money talk

The daughter of a family friend got zapped with several months of interest charges on her credit card recently and couldn’t understand why. She paid the “minimum payment due” every month, right on time. So why were they charging her interest?

That’s when I realized that parents shouldn’t stop with the birds and the bees. It’s important to give your kids a money talk too.

A generation ago, the basics were easy. The magic words were “compound interest.” Put a few dollars in the bank whenever you could, leave it there, and the compounding interest would eventually turn those dollars into a hefty nest egg. “Money makes money,” as Benjamin Franklin put it. “And the money that money makes, makes money.”

The only thing that can mess up the “miracle” of compound interest is near-zero interest rates. Which of course is precisely where interest rates have been for nearly a decade, since my sons were in middle school. Until the Federal Reserve gets serious about raising rates again, we may be skipping the lesson on compound interest.

I plan to start my family’s own belated money talk with the other big money lesson of my youth: the benefits of diversification. If you buy the stock of one company and the company fails, you lose everything. But if you invest in 10 or 20 companies, you’re likely to do fine even if one or two of the companies do badly.

Follow the diversification principle all the way down, and you get to indexed mutual funds—funds that buy every stock or bond in the market—which is where my wife and I tend to put our savings. There’s nothing wrong with doing a little stock picking or other investing, but you should limit that to money you can afford to lose.

When I was in my early 20s, credit cards wouldn’t have been part of the talk. None of us had one. Now nearly everyone does. The convenience they offer comes with real costs. People spend more when they have a credit card than when they use cash, perhaps because the card seems less real, and it’s dangerously easy to run up debt you can’t pay. It’s hard to avoid having a credit card in today’s world, but some Christians do.

My sons have heard that minimum payments don’t eliminate interest charges, but my wife and I will probably talk to them about that again, and about the fact that credit card companies make their biggest profits from late fees and the high interest rates if you carry a balance. We’ll tell the boys to call the credit card company if they ever accidentally miss a payment date, because it will often waive the late fee if late payments aren’t the norm.

Perhaps we’ll tell them about how we lost money when we sold our first house. Or how a relative bought an interest in a real estate limited partnership back when tax shelters were all the rage, and has been saddled with complicated tax return obligations ever since.

Then we’ll talk a little more about the virtues of diversification.

If any of you who read this have a helpful money story or an obvious lesson I’ve left out, I’d love to hear it. (Please write to mailbag@wng.org with my name in the subject line.) We may already have had our money talk by then. Even so, it won’t hurt to have another one.