Commitment: Please Send Money: A Financial Survival Guide for Young Adults on Their Own is a well written and very useful guide for people in their 20's who are trying to achieve financial independence. How did your own personal experiences motivate you to write Please Send Money?
Dara Duguay: I was married in my 20s and shortly thereafter we found out that my husband had a terminal disease. When he was no longer able to work, he started receiving disability payments. This amount however was much less than his salary. We both had been living life to the hilt and had a mortgage payment, two pricy car payments and countless credit cards which were charged to the max. In order to make all these payments I ended up working numerous jobs, which cut down on the time I was able to spend with my husband. If our finances had not been so precarious, this stressful time would have been less so- at least on the financial front. This experience showed me that life events can happen to anyone... at any time... and that we needed to be prepared to handle any financial emergency that came our way.
Commitment: How can parents teach young adults about fiscal responsibility and help them acquire skills to handle their own personal finances?
Dara: The best way to learn how to manage money is to actually “manage” it. This means not being afraid to have the responsibility of a credit card. Some young adults start off as authorized users on their parents’ cards. This way the parents will get the bill and are aware of their children’s purchases and can have a discussion with them about their spending decisions. Additionally, young adults need to start developing and following a budget.
Commitment: What are some of the most important things young adults should know about money?
Dara: That credit is not their money. This seems obvious but for many young adults the concept of paying for the privilege of using “others” money is not apparent. Whenever credit is extended it usually comes with a price attached. The “cost of credit” is what gets many young people in trouble. Remember that interest can be expensive if your debt accumulates to a substantial level.
Commitment: In Please Send Money, you include a net worth chart to summarize one's assets and liabilities, and encourage young adults to complete such a chart. How important is it to be aware of both what one owns and what one owes?
Dara: Many times when we get into financial trouble, we focus entirely on what we owe and not what we have. However, having an awareness of what assets you own can be extremely advantageous to finding a solution to your financial woes. For example, your assets may be sold or borrowed against in order to pay down debts. Additionally a net worth chart will let you know if you have negative net worth. This happens when you owe more than you own. This situation needs to be reversed. Knowing your net worth will clearly illustrate your financial situation, making it easier to make financial choices necessary to improve your situation.
Commitment: What are the first steps a person should take once she realizes she cannot meet all of her financial obligations?
Dara: The first thing to do is to decide to deal with it. Many times people act like an ostrich and put their head in the sand. But by ignoring the problem, it surely is not going to go away. The second step is to create a budget. They then need to review their expenses and see what can be reduced or eliminated. Many times this exercise will free up money and solve the shortfall. However if it does not, they need to take steps to work with their creditors. They may elect to call their creditors on their own to negotiate an alternate payment plan or choose to go to a non-profit credit counselor who can act as an intermediary between them and their creditors. Either way, the creditors must be contacted and a mutually agreeable solution worked out.
Commitment: What is a “financial infant” and why is it dangerous for a woman to be financially dependent?
Dara: This term means someone who is not in charge of their finances. Their parents or their partner/ spouse may be the one in charge. When one becomes dependent on another for management of their finances or control of the purse strings, numerous problems can occur. They may find themselves in the dark when the person in control is no longer there- through death or divorce for example. Or they may find themselves never learning about investments or efficient budgeting because they have never needed to learn these skills. In many cases, the financial infant feels so dependent on the other person that they are incapable of becoming self-sustaining and may feel trapped in an unhappy relationship because they lack the skills to be financially independent.
Commitment: What does it mean to have “perfect credit?”
Dara: When people say they would like to have “perfect credit” they are usually referencing their “credit score.” There are different credit scoring systems but the most well known is the FICO system. Many lenders use a 650 score as the cut-off point for being considered “sub-prime” or “prime.” Under 650 you may not qualify as easily for credit or if you do, you may be charged a much higher interest rate than if you are over 650. The highest score possible is 850. If you achieved that, you might say that you had “perfect credit.”
Commitment: When should a person start saving?
Dara: There is no better time than the present to start saving. However at all ages, people have excuses as to why “now” is not the best time. They procrastinate and say they will start saving as soon as... they finish college... they get married... their kids leave the home...they get a better job, etc. There are always reasons why now is not the best time to start saving. But in reality the longer you wait, the fewer savings you will be able to accumulate over a lifetime. The earlier you start; you have time on your side for the interest you receive to accumulate.
Commitment: Who should formulate a monthly budget?
Dara: Anyone who has a source of income and is responsible for paying certain expenses should formulate a budget. By putting your total income and total expenses down on paper, you will see the direct correlation between them. It will be evident if you spend more than you make or visa versa. The budget is the starting point for making your spending and savings plan. Without knowing your true financial picture, it is hard to make wise decisions.
Commitment: What should a young adult know about credit cards before she starts using one?
Dara: It is important to realize that how you handle your credit card will be reflected on your credit report. If you make a late payment, skip a payment, or go over your limit, all these actions will be indicated negatively on your report. Therefore, it is incredibly important to pay your bills on time, try not to charge more each month than you can possibly pay when the bill arrives and maintain a debt level that you can handle.
Commitment: Although ideally, a person should not spend more than she has, many young adults do accumulate a great amount of credit card debt. What advice would you offer for young adults in that situation?
Dara: People get over their heads in debt when they live without a budget. If they don’t have enough money to pay for their expenses, they end up using their credit cards as a way to supplement this shortage. The worst thing to do is to ignore the situation. First, do a budget. Next, stop using your credit cards. Then pay more than the minimum payment each month. If these steps are followed, the debt level should slowly go down. But remember, you can run into debt but you usually have to crawl out.
Commitment: What are the biggest reasons young adults go into debt and what strategies can you offer to avoid such debt?
Dara: The biggest reason is that young adults don’t have a spending plan. If they have neglected to do a budget, they don’t know how much discretionary spending they have available each month. With cash, if you run out you have to stop spending. But with credit cards, if you are living above your means you can fund this lifestyle (at least for awhile) with additional income secured from your lines of credit.
Commitment: Please Send Money includes a chart which shows earning potential based on academic degrees; the higher the degree, the greater the earning potential. Yet, college is expensive, and an advanced degree adds to this debt. What should a young adult who is fearful of accumulating such debt do?
Dara: I usually tell people that there is good and bad debt. Included in good debt are mortgages and student loans. These are debts that will contribute to your positive net-worth because they are building assets and also, in the case of student loans, increasing your earnings potential. A college education is a down payment on your future income. And, usually student loans have lower interest rates associated with them than other types of debt. Finally, if you find yourself in a situation where you are having difficulty paying back your student loans, there are numerous options to assist, such as consolidating your loans and temporarily stopping payments.
Commitment: The current economic situation is bad, and seems to be getting worse. What advice would you offer to young adults who are just entering the work force?
Dara: They need to realize that they may need to accept a job or internship for a low wage or maybe no wage. It is important to get their foot in the door, whatever way works. They also need to be persistent and creative in their approach to job hunting. They will need to work to distinguish themselves for the others who are vying for the same position.
Commitment: How can parents help their young adult children weather tough economic times?
Dara: If parents can approach this time with a sense of calm and not panic, this will ease their children’s anxieties. They also need to explain that our economy is cyclical. There will be good times and bad. But over time, our stock market has always gone up. The United States is a large diversified market which has the ability to withstand economic downturns. The up-side of this crisis is that more people are learning to live within their means and the end result may be that more Americans learn to save more and spend less.
Dara Duguay, the Director of Citi's Office of Financial Education, has been involved with the issue of financial literacy for over 20 years. She is the former Executive Director for the non-profit Jump$tart Coalition for Personal Financial Literacy in Washington, D.C. For more information or to contact Dara, visit her website at http://www.daradollarsmart.com/
To purchase Please Send Money, click here.