Confused About Crypto?

If you find cryptocurrency confusing, you are not alone. Cryptocurrency, “crypto” for short, is a form of money, or currency that only exists digitally. Crypto got its name because transactions are encrypted with complex digital codes sent over powerful computer networks. It is used very differently than other common currencies, such as the dollar, euro, and peso. However, comparing crypto to a common currency, such as the dollar, makes it easier to understand. 

Consider what gives a US dollar value. A dollar has value because it is an accepted means of buying and selling, particularly in the United States. A dollar buys a dollar’s worth of goods because the government says so. This is called fiat. The government supports the dollar’s value, and our Central Bank, the Federal Reserve, helps regulate the value. A dollar bill is simply a piece of paper that represents the ability to buy, but has almost no value in itself.

Cryptocurrency, on the other hand, is a peer-to-peer version of cash. Presently, it is not issued by a government and is primarily unregulated. Like paper dollar bills, the units of cryptocurrency have no value by themselves. It is a way for money to be sent between individuals without it going through a bank. The people that own it, use it, and trade it, determine its value, and the major cryptocurrencies have their value reported daily in financial news sources.

There are many available cryptocurrencies. Some of the more familiar names are Bitcoin, Ethereum, Dogecoin, and Tether. Bitcoin has the highest value in circulation.  Ethereum is second in total value.  At the time of this article, each Etherium unit has a much lower value than Bitcoin but there are many more in circulation. Dogecoin started as a joke between a couple of friends, and quickly became popular sue to social media. Tether is considered a stablecoin and named after its mission to tether its value to a standard currency.

Currency is what makes trading easy. In the US, we trade dollars for the items we buy. Using money to buy things means we don’t need to barter, and it is easy to determine value. We understand what it means when a box of mac-n-cheese costs $1.00, a book is $15.00, and a car sells for $15,000. 

The best way to explain how cryptocurrency works is with a simple and fun illustration. 

Suppose there are three individuals, Lamar, Olivia, and William. Lamar sells llamas, and wants to buy oats to feed them. Olivia sells oats, and wants to buy a wagon to carry them.  William sells Wagons, and wants to buy llamas to pull them. Instead of trying to barter or using their government’s established currency, they decide to create a new cryptocurrency among themselves that they can use to pay each other over the internet. They name their new currency “logancoin,” after their product types, and decide at that time that each logancoin is worth one llama, or 20 wagons, or 100 bushels of oats. As the value of llamas, oats, and wagons change, or new products are added, the value of logancoins would change. Then each can decide how many logancoins, or fraction of a logancoin, each product is worth to them. That is the general idea behind cryptocurrency.

Why is cryptocurrency so frequently in the news? Crypto is a relatively new form of currency. New currencies, and the technology that supports them, are constantly being created and rules are changing.  Crypto’s appeal has risen and fallen many times since it was introduced in 2009. The more people and business accept these digital coins as payment, the more popular these currencies become. Demand increases what people are willing to pay for each digital coin. The opposite is also true. Events such as scams, hacking, and illegal activities diminish demand as investors sell their coins and leave the networks. Cryptocurrency has quickly evolved into more of a speculative investment than a means of exchange. It will be interesting to see what the future holds.

Making Sense of Cents

With the start of summer, I thought I would share some resources available for youth about money. Teaching youth about money is like building a strong foundation for a house. The strong foundation will last a lifetime and support everything that is built on top of it. For example, early discussions about the difference between wants and needs is a simple concept that youth can understand. An individual needs to eat, but they don’t need the candy bar at the check-out line. This blog will focus on resources, especially books, that teach youth about money.

So let us begin with the Money as You Grow materials available by the Consumer Financial Protection Bureau (CFPB). The site contains materials for all ages of youth, but for this blog I will focus on resources for younger youth. There is a list of books suggested that focus on money skills which can be found at Build your child’s money skills while you read. There is also information on ideas to keep reading fun and a guide for parents.

Another great resource is the Federal Reserve Bank system. Each regional office has a host of financial resources. The two that I primarily use are the Federal Reserve Bank of Cleveland and the Federal Reserve Bank of Richmond. There include both online games as well as printed materials. I like to use the Great Minds Think: A New Guide to Money and My Money. Both are workbooks that can be ordered or downloaded which include several activities that promote personal finance.

If you would like a broader search you can use the Jump$tart coalition. There are over 100 organizations and state coalitions that make up the coalition that focuses on advancing youth financial literacy. Their site includes a list of resources. A quick search of children and money found 162 resources available.

I would also invite you to check out my Extension colleagues in 4-H and Family and Consumer Sciences. There are local offices in every county, in every state in the U.S. A resource available to you from 4-H is Reading Makes Cents. This booklet includes 53 activities focused on saving, spending, sharing, earning, and borrowing.

I encourage you to take a step forward and teach your youth about finances. As you are aware, this is a topic youth will deal with throughout their lifetime. With that said, start your youth on a solid foundation.

Investing Basics: Buy Nikes, or Buy Nike? 

Which would you prefer to own: a pair of Nike Air Jordan Deluxe Year of the Dragon™ shoes, or some of Nike Corporation? There could be many reasons to select the shoes. Clothing is a necessity, and if you play a sport, having the right footwear can help performance and protect from injury. Shoes might be desirable for the image they project or the way they look you wear them. Nike shoes could even be considered a collector’s item. But if you have an investing mindset, you might consider owning a piece of Nike Corporation instead. 

Let’s discuss what that means.

Investing is buying something with the expectation that it will make money for you, usually by increasing in value.  You won’t have the actual money to spend until you sell your investment. Investing is different than saving money. Saving is setting aside money instead of spending it, so it can be used for something later. Savings are usually safe and available when you need money to spend.

How can someone who is not a billionaire buy Nike Corporation? The answer is to buy Nike stock. Most large corporations are publicly owned, meaning individuals can buy and sell pieces of ownership in them. The ownership is represented by shares of stock.

Companies need money to grow. One way to raise this money by issuing and selling shares of stock.  They use the money to build new factories, develop new technology, hire more workers, and buy more resources for making products. Stocks in large companies, such as Nike, are traded on the stock market.  Anyone can open an account with an investment company and request to buy and sell stocks. 

Now let’s compare buying Nike shoes to buying Nike stock. The Air Jordan Deluxe Year of the Dragon was introduced around February 15, 2012. Depending on the seller, the shoes could be purchased at an average of approximately $290. The shares of stock were selling that same day for $23.70, so 12 ¼ shares could be purchased for the cost of the shoes.  Ten years later, the same shoes new could be sold for $200, but the stock was worth $1,777! 

ChoiceMoney Spent February 15, 2012Value February 15, 2022 (average)
Buy Nike Air Jordan Deluxe Year of the Dragon™ shoes$290$200
Buy Shares of Nike Stock Instead (12 ¼ shares)$290$1,777

It is important to know that buying stock can be risky, and shares can decrease in value. Shares can even become worthless. It is important to research and select stock purchases carefully. Nike was used in this example because it is a product that people like to buy. That is a good consideration when choosing an investment. 

Wise investors understand the company that they are buying, as well as their products or services. 

Financial Influencers in Your Home

When we hear the word “influencer,” many of us think of people with large social media followings who use their prestige to sell products and services.

What do you think has the greatest influence on our money habits?

  1. TV and movies
  2. Friends
  3. Parents
  4. Social media

If you answered 3. parents, you are correct! While media and friends do influence our money choices, our parents have the most profound impact on the attitudes and values we hold concerning money. This influence begins early in childhood. 

What does this mean? First of all, “parents” in this case does not only refer to biological mom and dad.  It means the people who are doing the parenting – those who have taken responsibility for raising the child. These are the biological parents, step parents, foster, or adoptive parents, grandparents, or other family members. 

Secondly, it means that there are many ways that children learn from their parents about money. The two primary ways are through our explicit actions and through our implicit example. The characterization of learning as implicit or explicit simply refers to the parent’s level of intentionality.

Implicit, sometimes called vicarious learning, occurs when a child’s attitudes and behaviors about money develop through observation. Some examples of how this might happen include when a child sees a parent’s charitable giving, watches a parent compare prices while grocery shopping, notices a parent’s stress while paying bills, or hears money related arguments between parents. More in general, a child may learn through these implicit scenarios by observing parents’ money management practices and absorbing the level financial of well-being expressed by the parent.

On the other hand, explicit learning occurs through direct experience with money. Perhaps this happens when a parent provides an allowance and guides the child in spending. An older child with a new job might learn budgeting by sitting down with a parent to discuss spending and saving priorities. Just like implicit learning, it could also happen during parent child grocery trips, if the parent actively demonstrates the process and skills needed to compare prices and provides opportunity for the child to try. Explicit learning also occurs when parents engage their children in discussion about money values or provide direct instruction about financial products. 

Lastly, for parents, this means that your actions are being noticed, and your lessons are being remembered. It is important to be purposeful in teaching children money skills so they can more successfully manage their money when they enter into adulthood. Take them shopping with you, show them how to make good decisions. Tell them about your successes and your mistakes. If you are unsure about your own money skills, University of Maryland offers personal finance workshops for both youth and adults. For additional workshop information and tips, contact your local Extension office, check out Extension’s Financial Wellness pages, and follow the financial Facebook and Instagram accounts. 

Cash or Charge? Credit For Young Adults and Teens

Credit is the ability to borrow money to purchase goods and services.  A credit card gives you access to credit, and when a credit card is used to make purchases, the amount spent becomes borrowed debt that must be repaid. 

A credit card can be an easy way to pay for things you want or need, especially if you don’t have enough money with you at the time.  However, credit cards can also create the temptation to buy things you might regret spending money on later. Saving money first before buying an item reduces the risk of overspending, can cost much less, and could even earn you a little money, but also means a delay in making the purchases you want.

Usually, when the full balance of a credit card is paid off when the bill arrives, there is no additional cost.  However, when the amount borrowed is paid incrementally, interest will be added to the amount due, and interest can be costly.  

Here are some things to think about before getting your first credit card, or adding another. 

Some advantages:

  • A credit card, used wisely, can be a good way to establish credit
  • Credit is useful if you need to make an emergency purchase
  • Credit allows you to buy expensive items without having to pay for it all at once
  • A credit card allows you to avoid carrying cash with you
  • Some credit cards offer bonuses, such as cash back or discounts on travel

Some Disadvantages:

  • You might overspend
  • People tend to buy on impulse, without shopping around or check prices as carefully
  • You will pay more for what you buy when interest is considered
  • Owing money can be stressful
  • Making minimum payments required by credit card companies can mean taking years to pay off the items you are buying

Some things to ask yourself before using credit to borrow money:

  • Do I really need this now, or can I wait and save for it?
  • How much will this cost me in interest? Is it worth it?
  • How long will it take me to re-pay?  Will I need to buy more before I pay it off?
  • Can I afford the monthly payment?

Credit, and having a credit card, are privileges that are kept by demonstrating the willingness and ability to pay off any debt incurred. It is important to think through the use of credit and credit cards, and make smart decisions before obligating yourself to pay back large sums of money.

Build and keep a good credit score

Many people confuse credit scores with a credit report.  A credit score predicts how likely you are to pay back a loan on time.  Companies use a mathematical formula called a scoring model to create your credit score from the information in your credit report. These scores usually range from 300 to 850. Banks, credit card companies, and lenders may use different credit scores to make decisions about offering you credit. Two of the most commonly used credit scores are FICO (calculated using formulas from Fair Isaac Corporation) and VantageScore (calculated using formulas from VantageScore Solutions). FICO shares this information with the public about what goes into its scores. 

How are FICO Scores Calculated? | myFICO | myFICO

The payment history tracks whether you’re paying your bills on time. The amounts owed tracks what you owe, including debts that you are paying down over time.  The length of credit history tracks how long you’ve had credit accounts. The longer the history, the more positive effect on your scores. New credit is tracked by measuring the credit inquiries about you made by creditors and others.  Lastly, it’s considered a good thing to have a mix of credit, such as a mortgage, an auto loan, and not too many credit cards.  These are some guidelines that can help you build a strong credit score.  

  • Pay your loans on time, every time. One way to make sure your payments are on time is to set up automatic payments or set up electronic reminders. If you’ve missed payments, get current and stay current.
  • Don’t get close to your credit limit. Credit scoring models look at how close you are to being “maxed out,” keep your balances low compared to your total credit limit. If you close some credit card accounts and put most or all of your credit card balances onto one card, it may hurt your credit score if this means that you are using a high percentage of your total credit limit. Experts advise keeping your use of credit at no more than 30 percent of your total credit limit. Paying off the balance each month helps get you the best scores.
  • Long credit history will help your score. The more experience your credit report shows with paying your loans on time, the more information there is to determine whether you are a good credit recipient.
  • Only apply for credit that you need. Credit scoring formulas look at your recent credit activity as a signal of your need for credit. If you apply for a lot of credit over a short period of time, it may appear to lenders that your economic circumstances have changed negatively. 
  • Fact-check your credit reports. If you spot suspected errors, dispute them. If you have old credit card accounts you are not using, keep an eye on them to make sure that an identity thief is not using them.

Pass the Envelope

Envelopes and money have many associations. Tellers at the bank would traditionally give cash back to clients in a money envelope. If you were lucky, maybe a birthday card had a few dollars in it. And before we had the choice of cash transfer apps like Venmo and Paypal, coworkers might pass an envelope around to collect money for a special occasion or to help someone facing hard times. 

Envelopes are also a great budgeting tool. They are a cheap, easy, and a very effective way to plan and control spending. For parents, they can be a helpful resource for teaching kids how to manage money.  

There are many different envelope budgeting strategies, and two of the most common make use of actual paper envelopes. One system is to label an envelope for every major expense category in your budget and put enough cash in each envelope to cover that expense. Many people choose to budget by the month. However, you can choose weekly, bi-weekly (every two weeks), or any other time segment that works best for you. 

Another method is to choose to make envelopes for only two to three budget categories that involve frequent, fluctuating spending, like food, household goods, or entertainment. Either way, as purchases are made from that category, money comes only from the assigned envelope. This helps to avoid overspending. 

A third method is similar but involves using virtual envelopes on a phone or computer app to track spending, which can be helpful if you pay your bills online. There are several available for you to try.  

Budgeting with envelopes is effective for several reasons:

  • Using cash from an envelope involves multiple senses as cash is removed from the envelope to make purchase and we better experience the action of spending. 
  • It helps reinforce the fact that our money is a limited resource.
  • There is less temptation to overspend.  

The envelope method of budgeting is most effective when you commit to only spending what is in the envelope. If this becomes problematic, you may need to assess your budget and make adjustments. You can then boost the benefit by putting any money left unspent at the end of the month into additional savings.  

For kids, envelopes are a simple way to introduce budgeting and saving concepts. And we can sneak a little consumer math practice in at the same time! Have your child place spending money in an envelope and write the amount on the outside. Then teach that they should only use cash from the envelope to make purchases, recording the item and amount and subtracting each time money is spent. Do the same when cash is added — record the source and add it in. This process helps kids to understand how to track their cash flow and gives them the elementary basis for balancing a bank account.

If controlling spending is a challenge, try the envelope method — it really works!  

Teaching Youth About Money

Your kids are in the middle of summer and loving it. The thought of no classes or homework is exciting for youth. As a parent, you may be concerned about your children spending too much time in front of the television and playing video games, especially this summer with limited options for kids due to the coronavirus pandemic. 

Although kids may be a little resistant to summer learning, it’s never too early to start teaching children about smart money management. I would like to give you an option for your children between the ages of 9 and 12 to begin learning about finances this summer. If you don’t have children, keep reading, as you may want to share with others. 

The Federal Reserve Bank of Cleveland has an activity book that introduces youth to basic financial concepts. The activity book, Great Minds Think, A New Guide to Money, can be downloaded or ordered as a print workbook. The activities cover four broad concepts important for understanding responsible money management — decision-making, saving, spending, and budgeting.

This entertaining workbook is full of activities, developed for youth ages 9 to 12. This is an important age for kids who may begin earning allowances or chore money, and developing skills that will be essential when they are able to take on official jobs as teenagers. Kids are given an activity to complete, followed by an opportunity to apply that concept to their personal situations. Throughout the book are terms with definitions. At the end of the book there is a money crossword and links for additional information to include some money games available online. 

The book is relatively short with only 20 pages in total, but it is designed to act as a companion to parental help. Each of the four sections take an hour or less to complete, and after each lesson, you should take time to discuss the concepts with your child. You can share how that concept applies to your own life and your family’s budget. You may even find you learn something in the process. 

If you are interested in more books for your children about money, check out the blog that I wrote for Reading and Financial Literacy month. The blog shares information about the Money as Your Grow Bookshelf by the Consumer Financial Protection Bureau. 

Enjoy your summer!