Money Lessons At Home

Now that everyone is home due to Coronavirus COVID-19, it’s a great chance to spend that quality time together brushing up on subjects that school may not focus on, like learning about money! Here are some suggested activities that can make learning about money FUN!! Some ideas come from personal experience, but I found neat ideas from others too, so click through the links to learn more. And of course, there is one more fun activity you can do on family game night — Monopoly! Happy studying, ACE!

Activities (Sorted By Grade Level)

  • Preschool – Kindergarten
    • Share, Save, Spend – Review the purpose of each bucket before beginning. Give play money (or real coins), one bill/coin at a time, for your child to place in 1 of 3 buckets. At the end, count the money in each bucket. Was the total amount distributed evenly?
    • Compound Interest In MarshmallowsThe Marshmallow Game is all about delayed gratification and the rewards that come with it. If your child likes something better than marshmallows, use that treat.
  • Grades 1 – 6
    • Mini Society – Find goods around the house to buy and sell to each other. This exercise teaches negotiation, pricing, supply and demand, entrepreneurship. You set the rules in this market!
    • Heads Up! Money Style – Ellen Degeneres’ popular cell phone game, Heads Up!, may not have a category for finance/money, but that shouldn’t stop you from making one. Write money phrases or words on index cards, and then place all the cards on a table, with the words facing down. The words can be simple, like “credit card,” or a little tougher, like “401(k).” Now let the guessing begin! Do your kids understand each financial concept?
  • Grades 7 – 9
    • Get A Job! – Parents should post chores around the house as jobs for hire. Children can practice writing a resume and then interviewing for the part. Parents can either pay real wages or reward with TV/tablet time. This mom actually held a job fair for her kids!
    • Stock Market Investor – Starting with a hypothetical investment of $10,000, pick 10 stocks for your portfolio. Track the investments over a year, and see how they perform. Just because it is fake money, don’t make decisions that you wouldn’t normally make! Get to really know your risk tolerance and investment style.
  • Grades 10 – 12
    • Beans for BudgetsThis activity is brilliant and works for college kids too! It’s better with small groups, but it can still work on an individual. You start with 20 beans that you decide where to “spend” them on. Occasionally something happens that causes you to re-think where you put your money!
    • Decoding Documents – It’s time to get acquainted with what bills and paychecks look like. Take a handful of real statements — paystub, investment, credit card — and learn what each line means. Are you ready to graduate from the school of personal finance?

Homework: What other activities help to learn about money? Contribute your ideas in the comments!

Spring Break: Ace Academy will skip the next two weeks’ lessons and be back in session during the first full week of April. Stay safe and healthy!

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Target Date Funds

Set it, and forget it!

– Ron Popeil
(Infomercial King,
Founder of Ronco)

If you are watching your savings go up and down in the stock market with a queasy stomach, you’re not alone. The natural human reaction when this is happening is to take all your investments and cash out. But that’s exactly what fuels a downturn in the stock market, a mass sell-off when too many people cash out at the same time. Panicked investors are actually selling low, instead of selling high when the market is doing great. How do you avoid this gut reaction to follow the herd?

If you’re the type of investor who gets nervous during stock market drops, you would benefit from something called target date funds. To understand target date funds, we first need to understand mutual funds. A mutual fund, which can be shortened to a single word – fund – is a bundle of investments purchased altogether. This bundle may contain only one type of investment, like a stock fund or a blend of types, like stocks, bonds, commodities, etc. The bundle might even be comprised of multiple funds, in short, a fund of funds.

To visualize this, say you are at a farmer’s market, and you buy some carrots, celery, and lettuce. Those veggies bundled altogether are like a mutual fund. Now let’s bundle another set: corn, cucumber, and zucchini. That’s another mutual fund. Bundle the two veggie sets together, and you have a fund of funds. A huge benefit to using mutual funds is the diversification it offers in one investment. With the veggies we bought, you can make veggie soup on a rainy day or salad on a sunny day. Mutual funds offer the same variety, so that you have some investments that perform better than others at different times. They also cost less bundled together than purchasing each investment by itself.

When you select a mutual fund, you automatically accept all the investments bundled within. There is no hand-picking like you do with individual stocks or bonds. A mutual fund has one or more mutual fund managers who pick for you. It’s almost like enlisting someone to do your farmer’s market shopping for you. At times, the fund manager(s) may decide to change some investments inside a mutual fund, like switching one stock to another. This is much like picking strawberries over watermelon, based on what’s in season.

As you can guess, this carries a cost, known as the expense ratio. It is not a dollar amount, but rather a percentage (%). So if the fund averages a 10% return that year, and the fund’s expense ratio is 1%, you see a 9% return on your money. If the fund loses money, that same expense ratio still applies. Try to find an actively managed fund with a low expense ratio (around 1% or less), and you’ll still be better off than trying to match the time and expertise of a fund manager when picking investments on your own.

Now let’s get into target date funds. A target date fund is also a mutual fund, in which the investments within change from aggressive (more stocks) to conservative (more bonds/cash) as you near a specified target year. As an example, Fidelity Freedom 2055 Fund currently contains 93% stocks and 7% bonds, whereas Fidelity Freedom 2020 Fund contains 54% stocks and 46% bonds. Why switch from more stocks to less stocks? The idea is to get more return by taking on more risk when you have many years before you plan to take money out of the fund. As you get closer to your target year, being more conservative allows you to withdraw money without worrying about swings in the market and without suffering big losses when it’s time to cash out.

Although you have many choices where to invest your money, a target date fund is a simple choice that gives you the sophistication of investing in many areas while not needing to check your portfolio every minute of every day. Think of it like auto-pilot. You buy just one target date fund, which is already diversified with many investments inside, and stick with the same investment until you need to use the money. This is the ultimate investment choice for someone who wants to, as Ron Popeil put it, “Set it, and forget it!”

Homework: Are you a target date fund or an a la carte kind of investor? Where could a target date fund work well for you?

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ABC’s of Health Insurance: From HMO to PPO

With the spotlight on coronavirus, medical care and the means to pay for medical care become ever important. Just one visit to the doctor averages $200-$600, and hospitalizations cost anywhere in the tens to hundreds of thousands of dollars! Most people do not have that kind of money laying around, and even if you do, would you want to spend it all on medical bills? Health insurance allows you to pay only a fraction of the cost of medical care, while the insurance company pays the rest. Like any other insurance, you pay on a regular basis for the insurance, no matter if you are sick or healthy. But in the event that you require medical attention, the cost of care won’t become a huge burden to your finances.

The case for having health insurance can be a topic of debate, with some countries mandating universal health care through public funding and taxes and others leaving the decision up to the individual. Given the cost of medical care nowadays, the case for having health insurance seems like an easy choice. What’s not so easy is deciphering the language of health insurance, especially when deciding which insurance plan to choose. Use the glossary below to help you “talk the talk” of health insurance!

Glossary

  • Coinsurance: The percentage (%) you owe for medical services. If your coinsurance is 20%, you pay $50 of that $250 medical bill (or 20% x $250).
  • Copay: The fee per doctor visit. A $25 copay for an office visit means you only pay $25 for the visit, instead of the full rate. Some insurance plans use a copay for urgent care visits and ER visits too.
  • Deductible: The amount you pay before insurance benefits kick in. For example, if you have a $1,000 deductible along with 20% coinsurance on a medical procedure that costs $5,000, you pay a total of $1,800 = $1,000 deductible + $800 coinsurance ($4,000 remaining x 20% coinsurance). Ever hear of high-deductible health plans (HDHP)? That means the deductible is higher than normal, usually starting in the thousands of dollars.
  • EPO: Exclusive Provider Organization, or EPO, is a type of health insurance plan that restricts all medical benefits to network providers and hospitals. Any care sought outside of the network will not be covered.
  • HMO: Health Maintenance Organization is another type of health insurance plan that adds more restrictions, but offers lower medical costs like little or no deductible and lower coinsurance. The main difference between an HMO plan and EPO/PPO plan is that the HMO typically requires a referral from your primary doctor to see anyone else for a medical problem. In an effort to keep costs low, it is rare that you will ever be referred out-of-network, so when choosing an HMO, make sure you are comfortable with the network of providers and hospitals.
  • HSA: Health Spending Account, or HSA, allows you to save money from your paycheck to be used solely for medical expenses (cannot be used for premiums). The benefit to using an HSA vs. paying from your own pocket is that money saved in an HSA never gets taxed. For instance, if your income tax is 13%, only $1 of every $1.15 earned goes in your pocket. Fifteen cents ($0.15) goes to taxes. Putting that money in an HSA means you get to keep the entire $1.15, but only spend it on health care.
  • In-Network: These are the preferred providers for your insurance plan. In-network providers and hospitals charge a lower copay or coinsurance than out-of-network options. With HMO and EPO plans, your benefits may not even extend beyond in-network providers, so seeking care outside of the preferred provider directory would mean paying for medical expenses on your own.
  • Out-Of-Network: Health insurance companies require you to pay more to see out-of-network doctors and hospitals. In the case of HMO or EPO, you will likely pay the full rate to seek out-of-network care, since no insurance benefits apply.
  • Out-Of-Pocket Max: Once you spend the out-of-pocket maximum for the year, the insurance will take over all expenses beyond that limit. Let’s say your out-of-pocket max is $3,000 in a given year, once you have paid $3,000 in medical expenses that year, the insurance will pay any remaining or future medical expenses for the year.
  • PCP: Primary Care Physicians, or PCP, are the doctors who provide general care like conducting annual physicals or treating common colds. They refer you to other doctors, or specialists, when the medical issue is beyond their scope. HMO plans usually require selecting a PCP, so all care must either be performed by or referred by the PCP.
  • PPO: Preferred Provider Organization, or PPO, is a type of health insurance plan that allows you to see any provider you choose, no referral necessary. It costs less to see in-network doctors compared to out-of-network doctors, but you have freedom of choice. This choice comes at a higher cost to you, which becomes noticeable in the deductible or coinsurance. If the PPO plan carries a low deductible or low copay and coinsurance amounts, you will likely pay a higher premium for that plan.
  • Premiums: The premium is what you pay on a regular basis for health insurance. If your employer offers health insurance, they usually pay a significant portion of the premium, and you are left with a smaller chunk of the premium. That is why when people leave or lose their jobs and elect to keep the health insurance plan (otherwise known as COBRA), they notice a spike in insurance premiums. The insurance company is not charging more. It’s just the combined cost of paying both employee and employer premiums.

Homework: What type of health insurance do you have? HMO, EPO, or PPO? Become familiar with the deductible, copay and coinsurance. How does the plan suit your needs?

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