Did You Know?
Approximately 430 youth have participated in at least one training or event on money management with the help of Project LIFE.
Young people — especially those just entering high school — live in the moment. They often do not consider how their choices today will affect their future options. As they get closer to aging out of the foster care system, it becomes increasingly important that we emphasize planning. This is particularly true for money. Without a good cash flow plan, youth risk being homeless, hungry, and unable to pursue jobs or education. Money may be the foundation on which a stable life is built.
The Annie E. Casey Foundation workbooks, I Know Where I’m Going But Will My Cash Keep Up, are very useful guides for engaging youth in foster care with the concepts of budgeting and saving.
Why youth should care about money management now
It takes time to save the money needed to start living independently. First and last month’s rent, deposits for utilities and books for school all cost money. As youth age out of foster care, they need to be able to cover these costs if they are to meet their goals and avoid undesirable outcomes such as homelessness. In other words, they need to start building their own safety net, sooner rather than later.
Money can buy things now or it can be saved for bigger things. We need to help youth in foster care think of money in terms of their immediate, short-term and long-term goals. Give them a reality check by asking what they think they can buy for $100 and what they could buy if they saved that $100 until they had $200. Then discuss whether the immediate gratification is worth the loss of the future benefit.
Ask young people what their most important goals are: college, an apartment of their own, a car? Saving small amounts can eventually add up to a new cellphone, a great pair of shoes or the security deposit on that apartment.
Use the Creating a Simple Budget tool to build a budget with the youth. The budget usually has three sections: income, expenses, and savings. Create a list of items they need to have money for now, will need money for in a few months and what they will need in the long term. Have the youth write an estimate of his or her income for the next few months. Follow up at end of the month by asking and writing in the actual income. Comparing estimates to the actual amounts is a useful exercise to help youth realize where money goes. They will also start seeing how much money they can save for short-term or long-term goals by making small changes, such as eating out less often.
If the youth has income, it may be useful to go over Understanding Your Paycheck to make sure he or she understands the different parts of it and how much he or she will actually receive each pay period. It may also be useful to discuss ways to increase income, such as by increasing hours worked, if possible, or by working to get a promotion to a higher pay level. The goal is to come up with a realistic amount of income the youth can expect from a job, benefits, student aid if they continue school and any continued support from relatives. The rest of their budget and how they can live will depend on what their income is.
Youth need to know the real costs of living. How much will food cost each week, how much will rent be? Do they need medication? What is the co-pay for the medication and how often do they need to refill it? Will the co-pay be the same when they age out of foster care? Will they have insurance premiums?
We may need to help youth come up with realistic estimates for the cost of living because they may not realize all the items their income must cover. Help youth balance their budgets so that expenses do not exceed income. This may require a discussion of priorities. They may need to spend less on some things they want in order to pay for the things they need.
Saving is closely related to goal setting and the ability to prioritize one goal over another. Putting small amounts of money aside each week for short-term goals is a good way for youth to learn both. As the idea of saving for a goal is better understood, we can encourage the youth to set longer-term goals, such as housing, that will take longer to achieve but be of significant value when they age out of foster care.
Investment vs Saving
Once youth in foster care grasp the idea of saving for long-term goals, of foregoing instant gratification, they may be interested in making their savings grow faster. If they learn to wisely invest the money they are saving, they may be able to reach their goals sooner. You may want to talk with them about putting their money into a Certificate of Deposit rather than a non-interest savings account.
As they save larger sums, they may consider investing their money. Make sure they understand that financial advisors often base their recommendations on the advisor’s commission rather than the youth’s best interest. Remind them also to be wary of investing in get-rich-quick schemes. If the opportunity seems too good to be true, it probably is. To explain investment options in a way that youth can understand, we can use the Investing tool.
Explaining credit card debt
In order to understand credit card debt, youth in foster care need to understand that what they charge on a credit card has to be paid for eventually, usually with interest. When a purchase is charged, the consumer is borrowing money from the credit card company. The interest rate is the price paid for that loan.
Credit card companies can charge between 9.9% to 29.99% interest. How much interest is charged depends on the credit card and whether the youth is considered a good risk. Young adults often are not considered good risks so their rates tend to be high.
Youth also need to understand how easy it is to outspend their income when paying with a credit card, racking up debt they cannot repay. To keep the convenience of a credit card without the temptation to overspend, they may be better advised to use a debit card without overdraft protection.
The importance of establishing good credit
We need to help youth understand the connection between goals, such as buying a car, renting an apartment or applying for a job, and their credit rating. Bad credit can be a barrier to getting a job or an apartment, and other goals.
Teach youth that once they start paying rent, contracting for a cellphone or renting an apartment, they are creating their credit report. The report reflects how good the youth is at keeping his or her promise to pay on time. Credit bureaus assign everyone a credit score, known as a FICO. Late payments lower that score as does opening too many credit accounts. Employers, landlords and banks look at that credit score when deciding if they want to do business with the youth.
Get a free credit report
The Fair Credit Reporting Act (FCRA) requires that the three credit-reporting agencies — Equifax, Experian, and TransUnion — provide consumers with a free copy of their credit report, if requested, once every 12 months. Consumers are also entitled to a copy of the report if the credit report is used as the basis for denying them employment, etc. To get their free report, encourage youth to visit annualcreditreport.com or call 1-877-322-8228.
Annualcreditreport.com is the ONLY website authorized to provide free credit reports. Some “imposter” sites use terms like “free report” in their names; others have web addresses that purposely misspell annualcreditreport.com in the hope that you will mistype the name of the official site
If a youth’s credit report is incorrect, he or she can correct the errors at the Federal Trade Commission’s website.
Money is an emotionally charged issue for foster youth, as it is for most people. Youth in Foster care may not have learned how to use money wisely or been responsible for their own cash flow so it is important to talk with them about spending and saving. Listening to youth in foster care and encouraging them can help make them more receptive to learning a new, healthier approach to managing money — one that connect goals and aspirations with practical steps to achieve them.
More information on money management:
- Creating a Simple Budget
- Understanding Your Paycheck
- Free Annual Credit Report
- Credit Score
- Federal Trade Commission website
- Compound Interest
- I Know Where I’m Going But Will My Cash Keep Up, a free two-part workbook for youth ages 12 and older contains information on being a savvy shopper, investing money, using a credit card, and planning a career.