This can’t be right!” said 21-year-old Steve (not his real name), jabbing at his calculator as he stared at the figures on the board. Seldom did the topic of finance elicit such a strong reaction; his classmates were riveted in their seats.
In math class years ago, I discovered that several students with credit cards only paid back the minimum amount every month. After finishing exercises on compound interest, Steve, who had been using his card for three years, volunteered a “ballpark figure” of how much he still had to pay.
He plugged in the numbers, and yelled, “This is so much more than what I owe! This is so unfair!”
“You purchase a lot of stuff in US dollars, and the exchange rate is not in your favor,” I said. “But banks mostly make money through high interest rates on loans, which credit card debt really is. Nothing illegal, except they often entice people with the lure of easy and instant money. But they are upfront about interest rates. You know the consequences if you default.”
“The agent said the rate on the remaining balance was less than 5 percent,” said Steve. “It sounded low, so I forgot about it. As long as I paid the minimum amount, the card kept on working.”
“Compound interest increases a lot faster than you think,” I said.
“So we should never use credit cards?” asked another student.
“I use credit cards, since they are often more convenient than cash,” I replied. “But I pay back in full every month to avoid penalties. Credit cards are mere tools. They can be used for good or ill.”
“Talk to your parents about this as soon as possible,” I told a shell-shocked Steve. “Ask them to guide you in paying the entire amount—principal, interest, penalties—as soon as you can. And stop using your card in the meantime.”
This incident came to mind as I read banker-turned-full time mother Rose Fres Fausto’s book, “FQ: Financial Intelligence Quotient.” To distinguish good from bad debt, Fausto asks two questions: Will the proceeds of the debt improve our condition? Are the terms and conditions of the debt fair?
“If all credit card holders would scrutinize the terms and conditions of the loan that kicks in once they fail to pay the entire balance in their billing statement,” says Fausto, “they will realize that [these] are not good for them and will just lead them to a condition worse than before the loan.”
Fausto also quotes Ezra Pound (“Wars in old times were made to get slaves; the modern implement of imposing slavery is debt”) and Henry Wheeler Shaw (“Debt is like any other trap, easy enough to get into, but hard to get out of”).
The ability to make wise decisions on managing finances is essential, Fausto says, as she debunks misconceptions about money. Do you have to be a math genius to be good in finance? No, all you need are the four basic arithmetic operations.
Is it difficult for rich families to raise kids to be financially smart? No, as long as you model good values rather than spoiling your heirs. “Delaying luxury to your children is not being stingy but parenting responsibly,” says Fausto.
Is money the root of all evil? No, money just enables or magnifies who you truly are. “If you are kind and happy … chances are you will use your money in positive endeavors … If you are mean … and vindictive, chances are you will use your money to make life miserable for your enemies … The richer we become, the more our true character shows … [Thus] parents should be their children’s teachers about money.”
Channeling financial guru Suze Orman, Fausto explains how our childhood experiences influence our current attitudes about money, guide us on how to align money with our core values, and includes a self-check FQ test.
Visit Rose Fres Fausto’s site at fqmom.com.
Queena N. Lee-Chua is with the board of directors of Ateneo’s Family Business Center. Get her book “All in the Family Business” via Lazada or the ebook version on Amazon, Google Play, Apple iBooks. Contact the author at [email protected]
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