If you were rich, how frugal would you be?

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This post is from staff writer Suba Iyer.

“What is now proved was once only imagined.” – William Blake

Most of us embrace frugality to save money. Typically though, there are a few areas where we wish we could spend more. If you come into a windfall, depending on the amount, you might not be as frugal as you are now. However, will you completely give up being frugal? Or is frugality, for you, an outcrop of trying to reduce waste rather than saving money? What would I do if I won the lottery? Would I be drive the same car? Live in a similar house? What would I do with my time if I didn’t have to work anymore?

How much would the money change you? Can you imagine living the same lifestyle you have now, with millions under your belt?

Defining frugality

By definition frugality means “prudence in avoiding waste.” In my life, I practice frugality by spending as little as possible in areas that don’t give me any pleasure and channeling that money toward something that has value in my life and makes me happy. I am not rich now, at least not by U.S. standards. Even so, I do not practice extreme frugality.

The simple concept of avoiding waste cultivates many great personal finance traits that doesn’t stop with saving money: spend less than I earn, spend based on priorities, be focused and disciplined, ignore the Joneses, delay gratification and continuously add new skills to save more.

Essentially I view frugality as a lifestyle that focuses on goals and a determination to achieve those goals.

What would money change for me?

Since I do not practice frugality just for the sake of saving money, not much would change. But I believe money can buy happiness if spent appropriately, so my spending and saving habits would change a little.

Realize my dream of starting a charity to work with mentally challenged kids much quicker than I can do now. As much as I would like to set aside most of our income to this cause, I am not there yet. I have started to take the first steps in this journey but I have a long way to go. Coming into a windfall would certainly make this go a lot faster.

I will travel the world. Traveling is one of my two luxuries (food is the other). Right now I cannot afford to take any international vacations. I would like to travel to different countries, meet different people, sample local cuisines and learn from all the cultures in the world. Having more money will certainly help me do that and without too much guilt of spending that money on me when it could have helped a few more kids.

Finally, I will be a lot more frugal with my time. I do spend a lot of time in getting the best value for my money. While that is not entirely bad, I feel I spend a little too much time for the return to be worth it. Right now, my time is not worth much so even if I save $5 by spending one hour it is not a big deal. But if I do have a lot of money, I will be a lot more prudent with my time.

What would stay the same?

Pretty much everything else would stay the same.

My lifestyle would stay the same. I never fancied cars; they don’t give me any pleasure. A car to me is just a means to get from point A to point B. So I will drive the exact same car (will probably add cruise control and a rear-view camera).

I do not own a home yet. If I come into money, I will buy a house but that would be the same house I would have bought without the windfall anyway. I do not have TV/cable mainly because I do not have the time to spend in front of a TV, not because I do not have the money to buy a TV.

Last year I quit my job to concentrate on my business and volunteering. That would stay the same but now I will have an added benefit of financial security. So I will be able to concentrate more on my charity goal instead of sweating about everyday expenses.

In a nutshell, if I became rich today, I would still be the same frugal person.

Yes, it is nothing more than day dreaming, but I find this a very productive exercise in two ways:

(1) Motivating myself to work harder, to earn more money, to help me achieve everything I want to achieve, if only I had more money!

(2) To evaluate the attainability of my goals (that I think I need to be rich to accomplish) in my current financial situations. I do not want to delude myself in thinking a magical golden egg will realize my goals when in reality I could do a lot more with my current finances. My goal is a journey not a destination.

Would you still be frugal if you were rich? What does your dream life look like? Are you confident that part of your dream life is not attainable right now?

Why hiring a career coach was the best thing I ever did

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This post is by Anne Greenwood, as told to Colleen Oakley and comes from our partner site LearnVest, a site that helps people take control of their finances.

As the head of client development — and one of the very few women in a managing role — at Morgan Stanley Smith Barney, I had a lucrative career in finance, and 25 years of experience under my belt.

But, in my mid-50s, I was ready for something different.

I’d spent years advising people through their retirements, and I noticed that there were a lot of people in their 80s who’d worked in the same career their entire lives, and then looked back and thought, “Why didn’t I do something different? Why did I just keep going down this path?”

The answer: Because it was the easiest thing to do. It was the path of least resistance.

But the path of least resistance wasn’t the right one for me.

A midlife career crossroads

My favorite Mark Twain quote comes to mind: “Twenty years from now, you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

I was ready to catch those trade winds. But I wasn’t ready to retire.

I was in my 50s, with more energy than I had 20 years before, so I had no interest in hitting a ball on a golf course for the rest of my days. I wanted to make a difference in the world — to be fully engaged and use the skills and talents I’d acquired over the years to do something that I was passionate about.

As soon as I made up my mind, I was ready to quit my job and start this new life immediately. That’s how I do things — I get fired up and then go full steam ahead. But as I was talking to a friend over coffee about my plan (which wasn’t really a plan at all), she told me about New Directions, a company that helps people at my stage of life figure out what to do next. “It’s career and retirement coaching,” she said. I was skeptical, but I had to admit that I didn’t really know where to start.

So I made an appointment. What did I have to lose?

What career coaching is really like

At my first meeting, as I was telling the counselor that I was ready to quit my job cold turkey, he responded, “You can always quit, but you can’t un-quit.”

It was good advice, and I knew at that moment that coaching was something that I could use. I was paired with a counselor, Mark Shepard, M. Div., Th.D., whom I met with two to three times a month to begin formulating a proper plan.

For the record, coaching costs anywhere from $15,000 to $75,000, depending on your needs. The New Yorker reported last year that there are close to 50,000 career-cum-retirement coaches out there today. The uptick is likely due to a trend among Baby Boomers known as “retiring retirement” — instead of simply putting their feet up, these folks are pursuing second careers in their later years. In other words, retirement has become a process rather than a destination.

Over the next six months, Mark helped me to understand that walking away from a career — whether you’re retiring or just moving on to something else — takes careful thought and consideration. You need time to not only uncover your options, but also do some deep reflecting on who you are and what you’re good at. Career coaching is as much about the psychological aspect of changing paths as the financial part.

Along with my coach, I was paired with a psychologist, and we delved back to my childhood years to examine the things I enjoyed and excelled at as a kid. They’ll look for the tiniest kernels of joy from your life to see if there’s something that might be worth re-engaging with in your coming years.

One thing that we touched upon was my inclination toward nonprofit work. I got my undergraduate degree in urban studies, and my first job out of school was working with an agency that helped the chronically unemployed. I ended up running that agency, but it was so emotionally draining to work with people who were dealing with substance abuse that I shifted into the for-profit sector, with the intent to give back on weekends. That, unfortunately, didn’t happen.

Mark also put me through a battery of tests — including four or five written personality tests, like the Myers-Briggs — to really find out what makes me tick. One of the most significant things that I learned about myself was that I’m not someone who can be alone in a cubicle: I get my energy from working with a group of people. I guess I always knew that was true on some level, but the tests confirmed it.

Little did I know that I was about to stumble across an opportunity as far away from a cubicle as you can get.

How I found the right path for me

During this time, I was reading “The Big Shift,” which mentioned a Harvard fellowship program called the Advanced Leadership Initiative. It’s a one-year offering that connects people like me — who’ve had successful careers in business, and now want to use their skill sets to make a difference in the world — with each other and with Harvard’s faculty and staff.

For example, one man in the program is working to bring accessible electricity to Liberia, an African country where only 2,000 households out of 4 million have lights. Another woman in the program has cleaned up San Francisco’s unsafe water, and she’s even co-authored a book about water and technology.

I finally saw the opportunity I’d always sought to improve the world, so I talked it over with Mark, who agreed that the program would be a good fit for me. When I was accepted, I really was ready to quit my job. I had a plan — I was no longer winging it.

That was more than a year ago, and I just finished the fellowship. I’m now working in an advisory capacity with three different social entrepreneurship start-ups focused on helping women feel more empowered about managing the financial side of their lives. Thanks to my work with Mark, I have a feeling that, unlike some of my former clients, I’ll someday look back on my life and know that I threw off that bowline.

Working remotely: It’s good, right?

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This post is from staff writer Sarah Gilbert.

I’ve done it all; worked remotely, worked in an office with a serious in-traffic commute, worked in an office with a short commute, worked for myself, and worked for Fortune 100 corporations. I’ve worked 80 hours weeks and I’ve worked 10 hours a week part-time. I’ve been overpaid and underpaid. I’ve worked at $2.13 an hour with tips. I’ve worked hourly with overtime. I’ve been given a bonus bigger than my annual salary. I’ve managed people, hired people, fired people, and managed a team of dozens of freelance contractors. I’ve even managed groups of volunteers.

Never, however, have I been more certain that someone had the whole concept of human nature as it relates to work more wrong than when reading recent news that Yahoo! CEO Marissa Mayer was telling her remote employees to come into an office or lose their jobs. “Speed and quality are often sacrificed when we work from home,” says the memo.

Lots of people agree: some people are lazy

I have done many wrongs in my career, but I can guarantee you that quality and speed were never positively correlated to my presence in an office. I can equally say that the most effective work I’ve ever seen done — the highest-speed work, the best quality work, the most kick-butt, forward-thinking work — was done by a group of freelance contractors, many of whose faces I never ever once saw.

Studies show that remote workers are more engaged in their tasks. And I have lots of anecdotal evidence to back that up, including a few friends who work remotely at Yahoo! — I’ve rarely seen such all-the-time dedication to their jobs. To think those employees would be more engaged and have better “speed” and “quality” of work if they moved to Los Angeles, bought cars, and commuted a few hours a day in one of the worst traffic cities in the world, leaving their children with nannies a few more hours each day? I can tell you if it were me, I’d be resentful and bitter (like so many people I’ve known who spend hours each day in their car), often spending hours at the office following up on auto insurance claims, dealing with paperwork for day cares and summer camp applications, or shopping for clothes to wear to the office.

Working in the office is a time sink in itself

Driving to and from work each day is a social construct that requires an enormous amount of upkeep, and includes an equally enormous amount of social inefficiency. A recent interview with a knitting writer I admire prompted hundreds of comments, including one woman who was shocked, after taking an in-office job for the first time, at the many hours of time wasted with pointless meetings and social interactions (like a co-worker who demanded help figuring out a basic software package).

This is not to say that every job ever should be done by remote workers; this is not to say that all people are more efficient in the home than in the office. Judging by the number of people I see every day working in coffee shops, I imagine that there are lots of home environments not at all conducive to work.

But I think most reasonable people would agree that the commuting, the lunch-getting, the requirements of hygiene and wardrobe, the social niceties, the gossiping and the scheduling, the fact that human brains do not work well sitting quietly in front of a screen for eight-to-10 hours a day, all add up to lots of lost “productivity.”

I get more productive investment banking done working from home, 15 hours a week, than I did as a 20-something banker in 40 hours in the office. And I make more money, too, because I don’t have to spend any of it on commuting, lunches out, clothes or the inevitable social functions (and none on the near-compulsory United Way!).

The higher the quality of life, the better the quality of work

What it comes down to in my opinion is a truth often acknowledged by researchers but rarely honored by the way corporate environments (and, in fact, a good deal of our modern work economy) are created: if you are happy with the quality of your life, you will be a better employee. European countries acknowledge this to some extent, with shorter work weeks and much greater “entitlement” to vacation and family time (not to mention far more generous family leave policies). But many American companies stubbornly refuse to create policies that support this balance.

I’ve done what many of my contemporaries have done; find work situations that agree with my own personal findings. I’m much better if I get to care for my creative, community and family obligations as the priorities; and now that I’ve found an ideal assortment of freelance and creative work, I’ve even discovered that my financial life is better for it. I’m paying off debt, growing savings, and only spending money where I want to spend it. I think that the attitudes of my own children and the “millennials” who will one day run our corporate future agree with this belief.

Do you do better work in a traditional commuting office environment, or with more flexible arrangements? How have you created a work life that does (or does not) work for your skills and personality type?

Bluebird card adds enhancements

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Last fall, an odd couple – American Express and Walmart – introduced the Bluebird card, a debit card with almost no fees and with the member benefits of an American Express card.

Cardholders can add money to the card via direct deposit, transfers, cash at Walmart or check. The card can be used anywhere that accepts American Express, for online purchases, ATM withdrawals ($2 fee if using an out-of-network ATM or don’t have direct deposit), bill payments. This week the partners announced enhancements to the card, including FDIC insurance for funds in an account, direct deposit of government payments (Social Security, military pay and tax refunds), and checking. The FDIC insurance is important, since they’ve also raised the balance limit to $100,000 per year.

American Express, which markets itself as a luxury brand, and Walmart, which markets itself as inexpensive, would seem an unlikely partnership. Yet AmEx has long been the issuer for the Costco TrueEarnings card. And who doesn’t like to spend, er, save money shopping at Costco?

For those who are frustrated by bank fees, which continue to rise at brick-and-mortar banks, the Bluebird card is a decent alternative. Unlike most debit cards, there is no annual fee, no monthly fee, no card-replacement fee and no inactivity fee. Plus, you get those AmEx benefits like purchase protection, roadside assistance, and access to entertainment events.

Granted, it’s not going to help you build a credit score, since activity is not reported to the credit reporting agencies. But it can be an alternative to a checking account.

Have any of you tried the Bluebird card? Are you happy with it?

Tips from a recovering procrastinator

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This post is from staff writer Richard Barrington.

Co-workers tend to look at me as someone who dives head-first into projects and generally meets deadlines ahead of schedule, so they don’t realize my hidden secret.

I’m a recovering procrastinator.

When I was a student, I did everything at the last minute. I suppose the blessing was that it taught me to work fast, but the stress made me miserable, and often the results were not my best work. Once I started my career, with so much more at stake, I made a conscious change. I’m not sure that the natural tendency to procrastinate every really left me, which is why I refer to myself as a recovering procrastinator. I force myself to jump on every project as soon as it comes up, because I know that the longer I delay, the harder it will be to get started.

The result is much better productivity, but that’s not why I do it. The truth is that it just makes me happier. There’s an awful lot of stress and misery in being a procrastinator, and once I realized that, I chose to avoid it.

Anyway, I bring all this up because procrastination has a terrible effect on personal finance. The more you neglect your responsibilities or put off saving, the worse your finances will be. So, here are four tips from a procrastinator’s point of view for overcoming the tendency to delay financial decisions:

1. Use automatic deductions to take the effort out of savings. Saving money effectively relies on starting early and being consistent — two things that procrastinators are not good at. If you find you often don’t get around to putting money into savings, set it up to happen automatically. If your employer sponsors a retirement plan, you can generally have contributions automatically deducted from your payroll. Even without a retirement plan, you can save money out of your paycheck by having a little more than you need for taxes withheld every week. Financial advisers don’t generally recommend that, but with interest rates so low these days, you aren’t losing much by getting your money a little later, and having a lump sum accumulate automatically is simply a more effective saving method for many people than having to make a regular effort throughout the year. Finally, check with your bank to see if you can have money regularly transferred from your checking account into a savings vehicle, so you can put more savings on autopilot.
2. You can start saving for retirement before you do any actual retirement planning. Most people realize more savings accumulate if you start early, but when you are young, retirement planning seems like a big chore that is best put off until you are a little older. Here’s the thing though — you don’t really need to go through a detailed planning process before you start setting aside some retirement money. You know you’ll need that money later, even if you haven’t yet set specific goals. Don’t get me wrong — the planning process is important and you should get to it eventually. It’s just that for most people, setting up payroll deductions or some other savings mechanism is a much smaller barrier than going through detailed retirement planning, so get the money flowing first if you find that easier.
3. Learn to love IRA contributions. IRA contributions not only have tax advantages, but they should be a procrastinator’s dream. Not only do they extend the official end of the prior year until the April 15th tax deadline (that is, you’ll be able to make a 2013 contribution until April 15, 2014), but special “catch-up” contributions are available to older taxpayers who may be a little behind in their retirement savings.
4. Honor the pleasure principle. In psychology, the pleasure principle is simply the idea that a lot of human behavior is motivated by seeking pleasure. Overcoming procrastination does not have to be based completely on puritanical concepts like self-denial and discipline. You can honor the pleasure principle by looking for enjoyable aspects of the task at hand. Seemingly thankless tasks like retirement planning and saving can be leavened by fantasies about the vacations you’ll take or the things you’ll have time for when you meet your retirement goals. And, of course, work itself goes by much more effortlessly — and often with better results — when you decide to enjoy it. You won’t like everything about your job, but focus on the parts you do like, and get as much satisfaction as you can out of that.

I hope some of this is helpful to my fellow procrastinators. Acknowledging and confronting my tendency to put things off has worked in my career and in my personal finances. I’m semi-retired now, so you could say I’ve taken the approach of being a little lazy on the back end of life, rather than on the front end. Still, I got this blog written ahead of schedule — and that feels great.

The End of an Era

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Nearly eight years ago – on May 1, 2005 – this site went live. In the time since then, we’ve published nearly 3,300 articles. I say “we” because, though I ran this site solo for nearly four years, it eventually became a group effort.

In the spring of 2009, I took on my first two staff writers (Matt Jabs and Laura Martinez). And later that year, I reached an agreement to sell FCN to a company called QuinStreet with me staying on in an editorial capacity.

Following the transition, we continued the practice of having staff writers contribute a couple of posts per week. And, of course, I continued to write – to the tune of roughly 2,800 total articles over the life of the site.

During all of this, our 1st grader grew into a high school freshman. Our preschooler became a middle-schooler. Our toddler is nearly out of elementary school. And our youngest, who was barely 4 months old when I launched the site, is now 8 years old and nearing the end of 2nd grade.

In other words, much has changed in my life. And now it’s time for another change. I’ve decided that it’s time for me to step away from FCN. It’s been a great run and I’ve enjoyed it immensely. But, as they say, all good things must come to an end.

The good news is that the site will live on. It’s in the hands of an excellent editorial staff and capable contributors. They have every intention of keeping it humming along in my absence and I fully expect them to deliver.

Before I go, I want to thank the many bloggers whom I’ve interacted with over the years — in particular, the original members of the old MoneyBlogNetwork (Flexo, FMF, Jim [also here], JLP, and MBH) as well as those who joined along the way (NCN, JD [now here], and the good folks at WiseBread). I also want to thank all of you, the readers and commenters, who have made this so much fun.

And finally, to my wife…

Thank you for your patience, understanding, and support. You frequently picked up my slack during the many long evenings that I spent building this site. I noticed. And I appreciate it more than you know. I couldn’t have done it without you.

An Affinity for Fraud

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There are some who wear their religiosity on their sleeves. They never tire of telling people how devoted they are to their church or synagogue, how faithfully they attend services, and how God-fearing, spiritual and pious they are. Some go so far as to suggest others who don’t share their faith are headed hell-ward.

My father claimed he maintained a standard response to such people whenever and whenever he encountered them. He tightened his grip upon his wallet.

The more I read about affinity fraud, the more inclined I am to feel that he may have had a point. There’s nothing wrong with being religious, and much right about religious faith. But when coming face to face with those especially loud about their spiritual beliefs, it might be best to observe a fair degree of skepticism.

That’s doubly true if there is the prospect of a money-making venture to be had. The number of folks who have been fleeced in investments brought to them by members of their own church, synagogue or mosque is growing, according to organizations tracking the particularly nefarious scam known as affinity fraud.

It’s no coincidence that affinity fraud is particularly prevalent in a place like Utah, where people tend to know their neighbors, 65 percent of the population is Mormon and trust seems part and parcel of being a Utahn. Affinity fraud has grown so rampant there that they’ve even established a “Fraud College” to school folks on “fraud awareness, protection and education.”

People who perpetrate affinity fraud are, or purport to be, members of a group, whether religious denomination or church, an ethnic group, an immigrant community, racial minority or even a member of a country club.

Affinity fraudsters exploit the trust and camaraderie between members of such groups. They often first work to gain the trust of leaders of that congregation or group, recognizing those leaders command the ears and allegiance of those they lead. In many cases, the leaders themselves become victims of the fraud.

Members are persuaded to place their money into investment opportunities that may appear legitimate on the surface, but are in reality Ponzi schemes or some other type of sham transaction. Once the fraud has been perpetrated, those victimized are often reluctant to report the scam, preferring to keep the problem and any potential resolutions hammered out within the tight-knit church, group, or organization of which they’re members.

No lack of case studies

Examples of affinity fraud abound. Many claim Bernard Madoff’s fraud was an affinity fraud, because word of Bernie’s seemingly spectacular returns spread via word of mouth among a tight group of friends and relatives. Other examples are far more clearly affinity frauds.

The U.S. Security and Exchange Commission reports one recent example of affinity fraud was a $7.5 million Ponzi scheme that victimized members of the Los Angeles Persian-Jewish community. Rather than giving his investors the rich returns he touted, the fraudster tossed their money away on shopping sprees that netted him scads of jewelry, luxury cars and tickets to pricey big-time sporting events.

Then there was the $11 million investment scam targeting the gay community around Fort Lauderdale. The fraudster at its center wove tales of returns as high as 26 percent while wining and dining potential victims — who came to him through friends and relatives — at some of South Florida’s most upscale bistros.

Additional affinity frauds targeting African-American churchgoers, evangelical Christians, members of South Florida’s Cuban exile community, Hispanic groups seeking help establishing financing services firms and many other ethnic, religious or racial groups have been reported in recent years.

Together those frauds took their victims to the cleaners for millions if not tens of millions of dollars.

Fighting affinity fraud

The healthy dose of skepticism I alluded to at the outset of this column is one of the best defenses against affinity fraud.

Authorities advise being leery, doubtful, perhaps even cynical, about investment opportunities presented to you, not just by those in your church or synagogue, but by members of your fraternal or civic organization, workforce group and any other tight-knit coterie of which you might be member.

Before coughing up even one red cent of your own money, thoroughly check out both the investment opportunity and the background of the individual bringing you that investment. Be cognizant of the fact that the seemingly trustworthy person alerting you to the opportunity may have been duped into the conviction that it is above board, even if it is in reality a Ponzi scheme of Madoffian proportions.

If the individual bringing you the investment opportunity pledges returns that appear too good to be true, walk away. Take a similar stroll if the opportunity comes with the promise of little or no risk. In the lexicon of fraud, there’s no bigger red flag than investments guaranteeing sizable returns with no risk.

Another danger sign of fraud is the investment opportunity you’re told you simply have to act on immediately. No one delivering a legitimate investment offer will prevent you from taking time to closely examine the particulars of an offer, and no above-board opportunity will force you to rush into forking over cash.

Follow all of the above cautions regarding affinity fraud, and you’ll be tipped-off long before you’re ripped off.

Lending Club Update – March 2013

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Time for another Lending Club update… Our balance is now down below $500 and we should be completely cashed out within the next few months.

Last month our portfolio looked like this:

• 110 loans were current
• 295 loans had been paid off
• 1 loans were currently 16-30 days late
• 6 loans were currently 30-120 days late
• 40 loans had defaulted and/or been charged off

with a net annualized return (NAR) of 6.7%.

As of now, our portfolio looks like this

• 88 loans were current
• 315 loans had been paid off
• 2 loans were currently 16-30 days late
• 7 loans were currently 30-120 days late
• 40 loans had defaulted and/or been charged off

and a current NAR holding steady at 6.7%.

So the good news is that 20 more loans have been paid off with no more defaults. The bad new is that the sorta late note slipped into the really late category and two more notes moved into the sorta late category.

What about you? If you’ve been investing with Lending Club, how are things going? When reporting your results please be sure to give us an idea of how many notes you’re holding and how long you’ve been at it.

How to Request an IRS Income Tax Extension

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It’s that time of year again… Taxes are due in less than three weeks. If you haven’t finished your returns (like we have!) it’s time to get cracking.

But what if you’re not going to make it? Well, I have good news and bad news for you. The good news is that you can request a six month extension — which is automatically granted — but you still have to pay whatever is due by April 15th.

Said another way, if you don’t want to run the risk of a late payment penalty, you still have to essentially complete your return by the 15th so you’ll know what (if anything) to pay.

A few facts about income tax extensions:

1. To request an extension, you should use IRS Form 4868. Any tax prep software worth its salt will also be able to handle this, as will any professional tax preparer.
2. Even if you request an extension, you still have to pay the amount due no later than April 15, 2013 to avoid penalties.
3. After filing an extension request, your new deadline for filing your income tax return will be October 15, 2013.

And, assuming that you don’t live in an income tax-free state, you’ll also need to consider requesting a state filing extension. The process is similar, though you’ll need to get the details for your particular state.

If you choose to file an extension, you should claim credit for your payment on the appropriate line of your return:

• Form 1040, line 68
• Form 1040A, line 41
• Form 1040EZ, line 9
• Form 1040NR, line 64
• Form 1040NR-EZ, line 21
• Form 1040-PR, line 10
• Form 1040-SS, line 10

That’s it. Happy filing!

Should You Pay Your Children for Good Grades?

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This is a guest post from Suba Iyer.

I grew up in India. We didn’t have a concept of weekly/monthly allowances. If we needed anything we would ask our parents. If they felt it was reasonable and affordable for them, they would buy us the stuff. We never handled cash on our own other than the occasional birthday or other holiday money. No one got allowances, so we didn’t miss it either.

When I first came to the US and heard from my friends about the allowances they got from their parents, I was amused. Why would someone pay a kid just because he/she lives with them? I didn’t understand but I didn’t have an opinion on that one way or the other, so I just filed it away as one of the cultural thing in the US. Then recently I revisited this concept when I stumbled upon a “cash for grades” experiment that paid school kids based on the grades they got.

That got me thinking. Money is one of the great motivators for making people work hard or for getting something done. So why not extend that concept and pay underperforming kids at school and incentivize them? But do I really want my kid to put a dollar value on everything, including expected behavior like chores they should be doing anyway to keep their living space clean? What are the pros and cons of this approach?

What does science say?

As I mentioned earlier there are a couple of studies that measured the impact of paying kids to do well in standardized tests. The premise is quite simple – kids were rewarded either with money or trophies. The reward was either given: (1) before the test with the condition that it will be taken away if the performance doesn’t live up to the expectation, (2) immediately following the test, or (3) promised at a later time.

The result was generally positive, with test scores improving if the kids were rewarded. What is more interesting is the way each one of these scenarios worked out.

1. The size of the reward matters. Kids worked harder if the reward was $80/hr vs. $40/hr.
2. Rewards that were framed as losses (e.g., you get a fresh $20 bill handed to you before the test, if you don’t get an ‘A’ on the test, you lose the $20) worked well. Loss aversion turned out to an excellent motivator.
3. Non-monetary rewards like trophies worked best for younger kids.
4. Delayed gratification never seems to work. If the rewards were promised with a delay, it was not very effective in motivating a better performance.

From these individual scenario outcomes, I feel like we are sending kids a wrong message – work for instant gratification.

Yes, paying kids for good grades helps

I can see some advantages in paying for performance.

Performance pays. After all, throughout our adult life we are paid for performance, why not start at childhood?

Money is an excellent motivator for most people. Most of us work for money, we budget to save money, we look out for more money making opportunities. Whether we accept it or not, money does act as a strong incentive in our lives. What is wrong with teaching kids about working hard, getting paid and managing that money wisely? Don’t most of the financial mistakes we commit during our youth occur due to a lack of financial knowledge?

Some kids need all the motivation they can get. In India I know a few people who send their kids to school only because the school provided free lunch. Otherwise, the kids would have gone to work with their parents. In the US, there are lots of underprivileged kids who are the first in their families to go to college. They could use every ounce of motivation they can get. If the money helps the family and keeps the child in the school, why not?

No, it shouldn’t be encouraged

I can find as many disadvantages to this concept to balance out the advantages. The main ones being:

It sends the wrong message. All of us have extrinsic motivation (influenced by outside rewards) and intrinsic motivation (a genuine interest in doing the best). If they always come to expect some reward for their performance, doesn’t it entirely kill any intrinsic motivation the child should develop?

It doesn’t serve the purpose. Tests are developed to measure knowledge. If the only goal is to get better grades, it is possible to just memorize things instead of actually learning about anything. A child can get a perfect score and still be void of any knowledge.

And finally, Shouldn’t we encourage kids to put their best efforts in everything they do regardless of rewards?

Should you pay your kids for better grades?

Every child is different. Some people get motivated by rewards, some are motivated by recognition, and some do the work because they enjoy it, no matter what the outcome is. I feel if someone is going to reward better performance, it is important to understand what motivates each child.

I do not have kids, so I cannot comment on which is a better parenting approach. I can see both sides of the coin but would love to hear from parents. What do you think? Does paying children for good grades help in the long run? Or does it send the wrong message?