Where’$ My Money

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A dark ‘game’ used in select Financial Literacy circumstances to teach how compounding interest works as well as the value of paying down debt.

Example of a Loan and the Interest and payments made. Note that even after the hard work of this family, they had barely paid off $58 of the original $5,000 loan made to them as a result of a high rate and compounding interest.

Payday Loans and Family Funds

If someone is in dire financial straits, they may be forced to apply for a Payday loan. Typically loaned for two-weeks or less and capped at $1,500 [1], the loan carries a high actual and imputed [2] interest. Interest on such loans can be in the hundreds to thousands of percent per annum [1 – How much payday loans cost].

Alternatively, a person or a family might be able to borrow from a friend or family member. The challenge of doing so, without there being a contract in place, is that the loan may be seen as a gift. While bad things happen to good people, a gift may simply enable and perpetuate bad financial habits – thus the game: “Where’$ My Money, Brian”.

Where’$ My Money, Brian or We Manage Our Money

If you are more open minded, and can stomach a bit of Family Guy humour, click on the following link to see the origin of the name for the game. If you are easily offended, DO NOT click on the link but instead go with the alternative name: We Manage our Money.

https://www.youtube.com/watch?v=z-sPXHQK8H0.

WMM is more than a method of offending your blog readers, it teaches core financial literacy concepts including:

  1. How compound interest works and why it accumulates so fast.
  2. The value of paying down debt.
  3. The importance of shopping around and negotiating interest rates.
  4. Teaching spreadsheet basics.

How Compound Interest Works

While most spreadsheets have powerful formulas, WMM uses the old fashion method of calculating interest on a daily basis. Each row takes the prior day’s running balance and adds 1/365 of the interest cost to this balance.

Paying Down Debt

Payments are made against the debt and may include:

  • Actual cash payments.
  • Negotiated behaviour changes.
  • Gifts or other payments against the debt.

Like tracking expenses, by recording the above in a spreadsheet, the WMM tool can be used to reinforce behaviour through positive payments.

Positive Payments and Charging Interest First

WMM is a game and not a debt obligation. WMM is reviewed at the beginning of each financial literacy session. Payments and interest charges will be added or subtracted as they occur. For example, if all four members of a family completed a required course, then a payment would be applied for the day they attended. If a child helped by doing their chores for the week, then this would be recorded as applicable.

The rule is that interest is always calculated first followed by additions to the balance owing (increased debt) or payments. Payments are negotiated and agreed to by the parties involved. Unlike a ‘real’ debt, the intention of WMM is to forgive debt through encouraging positive behaviour. It is the carrot, not the stick.

A Positive Example

The following is an example from a recent financial literacy program in which a family was ‘paid’ to request their credit reports. Within a family of four, there were 3 adults and one minor. All individuals (including the minor) were paid a total of $40 to pull their credit reports but on an escalating scale. Additional credits were given for calculating the family’s debt service ratios and on the family having a healthy discussion on the merits of the adult-children getting and being responsible for a credit card.

  • Credit Actions (With Extra Credit)
    • Apply for the TransUnion or Equifax Credit Reports.
    • Discuss, in the context of fraud, why it might be important to check their credit report.
    • For the Family, obtain or calculate the Gross Debt to Service Ratio (GDSR) and the Total Debt to Service Ratio (TDSR).
    • Track the GDSR and TDSR over time.
    • Discussion: Should the 18-year young adult get a Credit Card, pros and Cons.
    • Discussion: Is the WMM interest rate being charged fair relative to the families 5-C’s, GDSR and TDSR?
  • WMM Payments
    • $1, first Credit Report, $10 second, $19 for the third and $10 bonus for the fourth.
    • $100 Calculate GDSR and TDSR.
    • $50 Results of the ‘Great Credit Card Debate’.

Negotiating Interest Rates

The interest rate charged in WMM is variable. As knowledge increases, the interest rate will be reduced as the family understands credit rating concepts. It starts out at a rate equal to that charged by payday loan firms (e.g. 49.6% per annum!). Part way through the financial literacy program, the question is asked – is this a fair and reasonable rate?

Interest on credit cards is in the low 20%, a line of credit may be under 10%. In other words, at what rate could the person or family involved reasonably borrow at and how well do they negotiate this rate with the individual providing the loan. Interest is applied on a go forward basis and differences in interest accrued between early days and subsequent days are highlighted.

Tools to Master Your Financial Destiny

WMM is based on a spreadsheet (Google Sheet to be precise) and as such is also an opportunity to teach basic spreadsheet skills. Ideally, the person maintaining the sheet is an older child (e.g. twelve and up). Given that many financial literacy programs recommend tracking expenditures, developing a budget or creating goals – understanding how a spreadsheet works can help a person or family with these activities.

WMM is also one of a number of tools I am developing or honing to create a better financial literacy training experience. Keep an eye on this collection of blogs and, as always, let me know your thoughts about the tools and methods.

Notes and References

  1. $1,500 is the definition in Canada for a payday loan. Specifics may vary by jurisdiction. See: Service Alberta – Payday loans or Government of Canada – Payday loans.
  2. Imputed is the interest charged even if a debt agreement does not specify it. In a BC Supreme Court decision, the fees charged on Payday loans were deemed to be part of the interest costs of the loan, as a result the defendant was guilty of charging usury interest rates [3].
  3. For a summary, see the “Wikipedia – Payday loans in Canada” submission but the actual judgement “Kilroy v. A OK Payday Loans Inc.,” makes for (mildly) interesting reading as well.

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