Dr. Justin Henegar
Director of Research and Scholarship
Ron Blue Institute for Financial Planning
The topic of personal finance can be such an overwhelming topic of discussion for parents. For many, establishing the “spend, save, give” containers has been the foundation of setting guidelines for their kids in managing money. Unfortunately, research has suggested that this is the extent of what parents do as it relates to teaching them about money. This is due to a variety of factors which includes: feeling inadequate to give “good” advice on money management to their kids, feeling that they have never been “good with numbers,” or believing that budgeting and investing is too complicated.
What if I could equip you to potentially change the outcome of your college student’s financial future without you feeling inadequate or me getting into all the complicated numbers and figures? I hope you are nodding your head!
Although we could cover a substantial amount of information, I want to narrow this article and address what I consider to be the most important principle: There are no independent financial decisions. That’s it. Understanding this principle will help you begin to make wise decisions. So, let’s unpack this simple but important principle.
There are no independent financial decisions
We teach that there are only five things that you can spend your money on:
Every dollar that is available to spend is put into one of these five categories. For example, in the diagram, 35% of one’s income is being spent on lifestyle. Suppose that this person wanted to take a vacation and spend 1% more of their income (we are using percentages to keep the illustration consistent). If they decided to use this money for a vacation rather than putting it into their “grow category”, then that category will go down by 1%.
So I know what you are thinking: you could put this vacation on your credit card. True, you could. However, then your Owe-Debt category increases by 1% plus interest. This increase will go from 32% to 33% and will need to be made up in other categories.
Because this pie chart works as one unit, each additional expense from one category impacts other categories. The pie is always 100%
Money Management is a Collection of Decisions
The second part of this principle is that money management is nothing more than a collection of decisions. Financial decision making is allocating limited resources to an unlimited option of alternatives. For students, this is concept may be hard to actually implement because it takes time to go through a decision making process.
To provide some guidance, two concepts might help students think about the decisions they make. First, of the five uses of money mentioned above, three are consumptive and two are productive.
- Consumptive encompasses money we use or consume, and comes from our “Lifestyle,” “Debt repayments,” and “Taxes” category.
- Productive uses of money will yield more or result in something more. The productive uses of money come from the “Grow” and “Give” categories. Both savings and giving will yield more to use in the future.
Another concept that ties in with consumptive and productive uses of money is that there is always a trade-off between the short-term and the long-term. What does that mean? Because we allocate limited resources we must choose between spending money on something today or delaying our desires for the future. Once money is spent, it is gone forever!
Suppose a student decides he wants to graduate with no student loans as he enters college (this decision, by the way, should be applauded!); however, during his freshman year he decides to buy a car to get around town. This gives him the decision to choose between using money now for a car or saving in order to pay for school and not take out student loans. Although each person’s situation is unique and will require a decision-making process, we like to propose that, in general, a better financial decision will be made with the longer term perspective.
Okay, so all this sounds good, but what can I do now? Glad you asked! I like to call this game “What if?” This game is probably best played around the dinner table or any time where the family gathers to have conversation. Think of a situation that requires your student to make a financial decision and then talk through how they came to that conclusion. Perhaps you can add your own experiences and outcomes that apply to this situation. As a family, you can discuss the advantages and disadvantages to each situation. If you are having trouble coming up with some situations, here are some starter situations for you:
- You have been saving for a car and have $1,500 so far. Although you still have not reached your $6,000 goal, you are pleased with where you are. While at college, your close friends all decide to take a ski-trip over Christmas break before classes start back up again. The cost will be $850 per person which includes everything but meals. What would you do?
- You have been given an opportunity to take a study abroad trip for the entire semester for which you will receive only 6 hours of college credit in lieu of a regular 15 hour semester (at the same cost). Taking this trip will put you back an entire semester from graduating, but only a few students each year are selected, what would you do?
- After the first week of classes, you begin to realize you need to put more time into your studies than you originally thought. Although you have never cared for coffee, you are contemplating buying a prepaid coffee card for $500 at a cost of $400 – which is the best deal available. If used, this offer brings each cup of coffee down to $.50 cents per cup. The other option is to pay as you go and pay $2.25 per cup. What would you do?
This is a great way to bring up important discussions and have fun with coming up with “What if?” scenarios. Let them give you some scenarios and ask what you would do. It is not their response that is important at this point, but rather their thought process in coming to their decision.
Ron Blue Institute for Financial Planning
Here at IWU, we value the principle that there are no independent financial decisions, so we have two distinct programs that help our students wrestle with decision-making. First, in our personal finance course (FIN 250 – Personal and Family Finance) students go through a 12 week financial decision making process and get to see the outcomes of their decisions on a budget assigned to them. We review these decisions in class and allow students to talk through why they made these decisions. This has been one of the most valuable real world applications in class that has brought theory and application together.
Secondly, and more broadly, the Ron Blue Institute has created the NEXUS Financial Discipleship Center, a peer-to-peer program that offers students the opportunity to talk through financial decisions with peer coaches. Peer coaches have access to tools and resources that can aid in decision-making and are there to help hold students accountable for the decisions they make. This service, funded and supported by the Ron Blue Institute, is available to all residential students and will be soon available to all online students, as well as to residents of the Marion community.
Learn more about the Ron Blue Institute!