By Liz Pulliam Weston

That weekly infusion of cash often teaches kids very little about money management. Try giving them a monthly amount -- and put them in charge of their money decisions. Raise your hand if any of the following sounds familiar:

• You give your children a weekly allowance, but they’re constantly bugging you for more money or stuff.
• No matter how much you lecture about the importance of money and saving, cash just seems to slip through their hands.
• Deferred gratification, comparison shopping and the difference between wants and needs are all alien concepts to your kids. What matters is what their friends wear and have.

You despair of your offspring ever having the financial skills needed to navigate adulthood successfully. If this is the world you live in -- or one you fear -- it might be time to ditch the idea of an allowance altogether. Instead, consider replacing these weekly infusions with a monthly chunk of cash that your children use to cover most or all of their spending.

Instead of turning to you for clothing, school supplies and activity fees, your children manage those costs themselves -- along with all their incidental expenses that used to be covered by their allowances.

Sound radical? It’s obviously not an idea that could work for kids under 10. But neither is it a concept that should be delayed until college, which is when most young people get their first real crack at managing money, argues parent John Whitcomb.Point. Click.

Cash and responsibility can work wonders
By then, they’ll be far from your supervision -- and pelted with credit cards that can turn their bad spending habits into true financial disasters. Whitcomb, a Milwaukee, Wis., emergency room doctor and father of two, says it’s much better to begin giving children the reins starting in middle school, while you’re still able to supervise them.

Whitcomb outlined the concept in his book, “Capitate Your Kids” (Penguin 2002), also published as “The Sink or Swim Money Program” (Viking, 2001). “Capitation” is a health industry concept that basically means giving a fixed amount of money to doctors or a hospital to care for a population of patients. In essence, they’re given both the money and the responsibility for spending it wisely.

Think how different that idea is from the traditional allowance. In most cases, an allowance is:
Too frequent. If you give your child money every week and she spends it all, she just has to wait a few days to get more. There’s little incentive to plan and not much real pain if she makes a mistake.

Not all-inclusive. Since you’re still shelling out for most things, you remain the go-to person when your child wants something. That leads to nagging and whining -- plus there’s little opportunity for your child to learn true responsibility.

Too small. Allowances typically cover only discretionary expenses. In the adult world, however, most of our money goes to mandatory expenses -- shelter, food, transportation, etc. Children need to learn the concept that most money is “spoken for” and not available for anything they want.
At the same time, kids who are given significant sums can learn some important concepts: Resources are finite.

Longer-term planning is an important skill.

Careful shopping can stretch what they have. Once it’s their money -- to do with as they will -- the choices they make tend to change.

Parent Rick Brohmer of Waukesha, Wis., has already noticed this phenomenon with his three older children, now grown. While they were in school, brand names were essential. “As [they] left the nest and started buying on their own, brand names were less important,” said Brohmer, who still has a 14-year-old, designer-desiring daughter at home.

Start with the clothing budget
John Whitcomb learned his own money skills as the child of missionary parents in India. Sent away to boarding school for four months at a stretch, he and his siblings were given a term’s worth of cash at a time to pay their monthly tuition, buy clothes and cover their other expenses.

He adapted his experience into a six-step plan that starts when children are in middle school, with the creation and implementation of a clothing budget. Gradually, more expenses and responsibility are added. Kids learn to use an ATM card in ninth grade, a checkbook in 10th and a credit card in 11th to help manage their costs.

By the time they’re ready for college, they’re handling all their own expenses, including auto insurance and perhaps even paying their parents room and board.

Long-term saving, investing and charitable giving can be incorporated as priorities, as well.

You can start smaller, if you want. Some parents may find that a clothes budget may be too big for pre-teens to handle.

Screw-ups teach great lessons
Susan Beacham, a personal finance educator and co-founder of the Money Savvy Generation Web site, is starting her 12-year-old daughter Allison off with $25 a month to cover books, magazines and the once-a-month lunch out that her parents had been paying for.

Beacham and her daughter are still negotiating the details. Allison’s not at all sure, her mom says, that the added responsibility is worth losing her mom as a source of constant funds.

“She’s still very apprehensive about taking it over,” Beacham said. “But we have to get more girls understanding that they have to grab the reins. It will help them in later life become the independent, risk-taking people we want them to be.”

Parents who’ve tried capitation say screw-ups are inevitable -- and an important part of the learning process. Nan Mead’s sixth-grade son blew his first month’s capital, meant to cover lunches, hair cuts and all his miscellaneous expenses, in a week on CDs and pizza for his friends. Mead, communications director for a financial education foundation, refused to give him more cash, and he wound up taking sack lunches to school. That was a big setback for a kid who thought hot lunches were cool. Gradually, he learned his lesson.

Big enough doses to be meaningful
“His money management skills improved each month,” Mead said. “By Christmas, he was doing quite well, even saving for some short-term goals.” Mead’s son is now in college and handling money responsibly.

With their parents’ help, kids on this plan learn to anticipate what expenses they’ll face and how much they should set aside for them, Whitcomb said. They learn that, if they don’t buy the $180 sneakers but settle for a $40 pair, they’ll have more money for other things they want.

The parents have some work to do as well. They need to figure out how much is a reasonable amount for various expenses, and, almost invariably, they learn they’re spending a lot more on their kids than even they suspected, he said.

But Whitcomb doesn’t advise trying to save money by giving kids less than you’d spend otherwise. The idea isn’t to cheap out but to teach children about money “in big enough doses to be meaningful -- and for purposes that intensely interest them,” he writes.

“Your success comes not in saving money in the short term but in creating a state of mind that living contentedly within your means is the key to financial independence.”

Monitor -- but resist the urge to rescue
Parents also need to keep tabs on their offspring’s progress; Whitcomb recommends monthly meetings. He also believes parents should resist the urge to step in when their kids fail. If your kid does buy the more expensive sneakers but fails to save for the winter coat he needs, you shouldn’t dig into your wallet, he says. You might, however, drive him to the nearest Salvation Army store.

Beacham says she’s already learned that a firm but gentle hand pays dividends. On a recent shopping trip, her daughter began pleading for the latest issue of “Teen People.”

“I said, ‘You’ve got your money; it’s in your wallet. I reminded you to bring it,’ ” Beacham said. “We walked out of that store with nothing.”

As Allison gets used to handling money, she’ll be given responsibility for more expenses. By the time she’s a junior in high school, Beacham hopes to be giving her the money in one annual payout.

“People are surprised by that, but, in two years, they’ll be doing the same thing on a college campus,” Beacham said, “and they’ll have seven credit cards.”

By Liz Pulliam Weston

Tips On Avoiding Investment Losses
Posted 6/23/2004
 

By John Caspar

Everyone knows that investment losses are to be avoided, of course. But what startles some folks is the math. Take the NASDAQ for example. That once glorious market benchmark fell over seventy-eight percent from its high of 5048.62 in March of 2000 to its 1108.49 low in October of 2002. That‘s a nasty, brutal ride. And if you lose seventy-eight percent of your money, what kind of return do you need just to get back to where you started? That’s right. Three hundred and fifty-five percent.

As I write, the NASDAQ stock market  is about flat for the calendar year of 2004. It was the hot market of 2003, however, posting a gain of 50 percent. And it’s up a whopping 82 percent since its low of October 2002. That’s very impressive. But it takes a long time to recover from deep bear market scars, even with heroic investment returns. Despite the recent volatility and unpleasantness in the NASDAQ’s performance, the index is nearly 26 percent higher than it was this time last year. Now, get this: If the NASDAQ were able to continue to compound at this prodigious annualized rate, the benchmark would be back at about its pre-bear high by January of 2008. That’s nearly eight years after its peak – and that’s assuming that the market delivers much higher than average returns. (Legal Disclosure: Past performance is no guarantee of future returns. Your mileage may vary. Never run with scissors. Don’t look at the sun. Blah blah blah.)  

A seventy-eight percent drawdown is a staggering loss, and it takes spectacular returns to recover from it. And that’s because, of course, when you lose seventy-eight percent of your money, you’re left with only twenty-two percent of your capital to tackle the challenge of getting back to having what you had before.

Of course, the above doesn’t take into consideration the opportunity cost of the loss. The observation that a NASDAQ investor who adopted a “buy and hold” methodology might take years to recover from his losses neglects the added opportunity lost to not having been in another investment that produced its own return. Further to the example above, if the NASDAQ compounds at the stunning and unlikely rate of twenty-six percent per year, it will be back to its March 2000 high in 2008. But even at that rate of return, it will take until 2010 to catch an investor who has been compounding his money at five percent since March 2000. Ouch.

So the lesson is simple: Losses hurt, and since hurts can take a long time to get over, they should be avoided. Of course, if your equity strategy is to be one hundred percent invested in a buy and hold model, you’re going to have losses when the equity markets fall. Is there any way to mitigate this? Yup. By hedging.

Hedge funds come in a bewildering array of flavours, and it’s certainly beyond our scope here to discuss any of them except to make a note or two about hedge funds of the “long/short equity” variety. 

Long/short funds operate in the equity markets, buying (“long”) and selling short stocks with a mandate to generate better risk-adjusted returns than typical equity managers. As it turns out, there is a benchmark – the CSFB/Tremont Long/Short Equity Hedge Index - that captures the net performance of the majority of the assets invested in these types of funds. From the inception of the index in January of 1994 to the end of last month, it has produced an average annualized return of 11.87 percent. That’s significantly better than the S&P 500’s average return of 10.76 for the same period, and it positively smokes the MSCI World Index average return of 7.44 percent. Now, that’s very nice, but what we’re interested in here is the detail of why the average returns of money managers who can be either or both long and short in the equity market have historically outperformed the stock market by such a sound margin on a net-after-fees basis.  It may not be why you think.

If you drill down into the returns produced by the long/short equity index on both a year-over-year and a monthly basis, you’ll find that when the stock market has been hot, the stock index has generally outperformed the long/short equity index.  However, the long/short index has produced a higher average return over time because it has performed better when the stock market has been down.  By capturing most of the upside with less of the downside, long/short funds may compound money faster by avoiding long periods of drawdown and the longer recovery times necessary to get over them.  Long/short equity fund managers, in other words, recognize a basic truth of investing sometimes ignored by the buy and hold school: investment losses are to be avoided. That’s an obvious lesson, perhaps. But it’s a lesson that needs to be considered in the investment policy of more investors. 

© 2004 John Caspar

INDEPTH: PERSONAL FINANCE
Buy now, pay later: Canadians and debt
by Tom McFeat, CBC News Online | September 20, 2004

Buy now, pay later – Canadians and debt

On the surface, the problem seems big, dangerous, even out of control. We're talking about Canadians' ever-growing affair with debt. Getting into it. Trying to get out of it. And then piling on more of it.

Personal bankruptcies are near record highs. In 2003, for the first time ever, the average Canadian household owed more than its annual take-home pay. We carry 74 million credit cards – three for every Canadian over the age of 18. Credit counselling agencies say they're busier than ever. Students are often graduating with accumulated debt of $25,000 or more. Consumer debt levels are rising much faster than incomes and have been for years. Savings rates are at record lows.

So that's the bad news. Or is it? Are we truly facing a debt crisis, or can we handle it?

Obviously, that depends on the amount of debt we have, the repayment terms we've agreed to, the interest rates we're charged, and our income. But it also depends on the kind of debt we have. For one thing, financial planners like to distinguish between good debt and bad debt.

Good debt versus bad debt

You may think all debt is bad. But some debt is considered much better to have. Good debt is used to buy things that tend to increase in value (like houses or stocks). Those hard assets can be used to secure the debt so you'll pay less interest. And interest on money borrowed for investment purposes (like a rental home or mutual funds outside of an RRSP) can be tax-deductible, making the effective interest rate even lower.