Money Listens

Don’t know much about history

Don’t know much biology

Don’t know much about a science book

Don’t know much about the French I took

Sam Cooke wrote the song “Wonderful World” in 1960.  Go ahead, take a minute and hum along.  I’ll wait.

How much do you remember about your history or biology classes?  Maybe it doesn’t make much difference.  Did you even have a class in finance or money management?  I never did.  Does it really matter if we know much about finance?

Last week I wrote that we’re basically on our own when it comes to managing our money. How do we know if we’re OK on our own?  How much do we really need to know?  A Dartmouth economics professor, Annamaria Lusardi,  has developed a simple test to determine if you’re financially literate.  Don’t worry, it’s only 3 questions and nobody has to know your score.

Here are the questions:

1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a) More than $102
b) Exactly $102
c) Less than $102
d) Do not know

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
a) More than today
b) Exactly the same as today
c) Less than today
d) Do not know

3) Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
a) True
b) False
c) Do not know

If you answered all 3 questions correctly, congratulations, you are financially literate.  If you missed 1 or more, or didn’t know, you need some more financial education.  Even if you answered all 3 correctly, you need to keep learning to stay one step ahead of all the traps the banks and credit card companies are setting up for you.  Just keep reading this blog.

The answers?  A) More than $102,   C) Less than today, and   B)False

Read more about financial illiteracy at the Freakonomics blog from the New York Times.

The stark truth about managing our money these days is that we are mostly on our own.

This was the first line of a column in the New York Times a few months ago and it has stuck with me.

In our parents’ days, managing money was easy.  My mom and dad had  one checking account and one savings account.  Later in life they had a credit card, but used it mainly for traveling.  If they wanted to buy something and didn’t have enough in the checking account, they saved up for it.  My mom put clothes on “lay away,” and even had a “Christmas Club.”  That’s a savings account for Christmas.  My mom would put in $25 a month.  Usually, she would get a calendar or some small promo item in January.  You couldn’t touch the money until November.  At that time you got your shopping money, with interest, and a Christmas tree ornament.

When my mom got a credit card, that took the place of the Christmas Club.  Unfortunately, it was backwards.  She would charge the presents, then spend the next few months paying them off.  Instead of earning interest, she had to pay interest to the credit card company.  Which way sounds like the better deal?

Mom and dad never got into debt or had trouble managing money.  At that time there were no sub-prime or zero down mortgages.  The banks made sure people didn’t buy more house than they could afford.  Everyone had a down payment and a fixed rate on their mortgage.  If you didn’t have the cash, you didn’t buy it.  And nobody had a house over 2,000 sq. ft.

Retirement was also simple.  My dad worked for the U.S. Dept. of Agriculture his entire career.  Who does that anymore?  He got a pension when he retired, and my mom got survivor benefits when he died.  Plus, he got health insurance during retirement.  And social security.  Retirement planning?  There was no such thing.  Maybe for rich people that owned their own business, but not for ordinary people.

College planning?  If your parents couldn’t pay, you worked your way through.  Maybe you took out a $1,000 loan.  No college student had a new car.  Or a credit card.  I was 27 years old before I got my first credit card.

Those were the good old days.  At least when it came to managing money.  Today we are on our own.  I heard someone say it’s as if you’re sick and go to the doctor and your doctor hands you the x-rays, blood work, and lab results, and says “here you go, you’re pretty smart, I’m sure you’ll figure out what to do.“  We feel lost and out of our league.  It’s all so complicated, this money stuff.

So, what do we do?  Even if your doctor prescribes treatment, it’s up to you to follow  through.  To stay healthy you have to monitor what you eat and how much you exercise, take your medicine, and listen to your body.  You have to develop good habits and give up bad habits.  You’ll probably read up on whatever area you need help on, and ask friends for advice.

Money-wise, it’s pretty much the same thing.  Even if you have a financial planner, you still have to implement the plan, work on a budget, check the fine print on your IRA, and read up on the various types of checking and savings accounts.   But a multitude of resources are available to you that weren’t available to your parents.  Take advantage of the internet, the library, and your own bank. Take a class and read some books.  Talk with your friends.  Maybe you’ve gotten into debt or made some less than stellar investment choices.  There are so many resources to help you turn things around– to develop  good saving habits.  Though you’re on your own, you’re not alone.

Quick now, who is the world’s richest person? Bill Gates, right? Wrong. It’s Warren Buffett. This year Forbes magazine named him the world’s richest person. Who? He’s the 77 year old CEO and largest shareholder of Berkshire Hathaway, a wildly successful company. He is arguably the greatest stock market investor of all time. He’s known for his frugality, despite having a net worth of over $60 billion dollars. Yes, you read that right, billion. His annual salary is about $100,000 which is pretty low so far as CEOs go. He still lives in the same house in Omaha, Nebraska that he bought for $31,500 in 1958. (Most of this info is from Wikipedia. )

I’m giving you this background so you’ll sit up and listen to what he says. He knows his stuff. Last weekend he held a question-and-answer session at the annual meeting of Berkshire Hathaway. CNBC dubbed it Buffettstock ‘08.Over 31,000 rabid fans (shareholders) attended the meeting. Hence the wordplay on Woodstock. And you know Omaha isn’t exactly a major tourist destination. You can read a transcript of the meeting at CNBC.com. Here are a few of the answers he gave in that session:

Buffett says any money he’s given to charity hasn’t really affected his life because he’s given from his surplus. He admires those with much less who still give money and time to others.

How would you invest your money if you were just starting out and were not a full-time investor? Buffett’s answer: a low-cost stock index fund with a company like Vanguard.

What advice would you give to children on finances? Buffett says generally children will follow the example of their parents, and will be sensible if the parents are sensible and live within their means with an eye to the future. He says it may sometimes be best to spend money on some things when you’re young, such as a trip to Disney World that can create memories for your family. “I do not advocate extreme frugality.”

If you want to go to the meeting next year, you’ll have to buy at least one share of company stock. It’s on the NYSE, symbol BRK. Last time I checked, one share was trading at $129,990. Or a Berkshire “Class B” Share is a mere $4,500. Start saving your money.

I have to comment on an article in Thursday’s The New York Times. Low Spending is Taking Toll on Economy was the headline. The writer called it “ominous” that Americans were cutting back on discretionary purchases to save their money for necessities. Consumer spending for cars, furniture, recreation and Starbucks has fallen, “reflecting a growing inclination toward thrift.” Since home prices have dropped, families are running up against their credit limits without being able to borrow more against their homes, “forcing many to live within their incomes. [T]he basic laws of arithmetic are now impinging on millions of households.”

Since when is thrift a bad thing? Why is living within your income ominous?

The basic law of arithmetic says that if you spend more than you make, you end up with a negative number. And that number is called broke.

Finally, it looks like some Americans are waking up and finding that saving is the new splurging. Why should you buy stuff you can live without with money you don’t have? Just to help the economy?

About those government rebate checks. Economists agree they won’t do much for the economy. So here’s some advice. That check can do a lot for you. Don’t spend your check. Pay off some debt, put some in your retirement fund, and save some for an emergency fund.

This might make you feel better– here’s another article (in the same Business section).

For Europe’s Middle-Class, Stagnant Wages Stunt Lifestyle

I guess the basic laws of arithmetic apply everywhere.

When you’re browsing at a bookstore, don’t you tend to look at the stuff that agrees with you? You already have your mind made up. You know where you stand on an issue. You know that you need to do your part on global warming, so you gravitate toward books such as Good Green Homes and You Can Prevent Global Warming (and Save Money): 51 Easy Ways. If you see a book titled Climate Confusion: How Global Warming Hysteria Leads to Bad Science, you bypass it.

You know that buying a home is a smart idea. So if you see the book Who Says You Can’t Buy a Home!: How to Put Credit Problems, Down Payment Challenges, and Income Issues Behind You, you grab it. You’re not going to read a book that tells you to save up for a down payment first, or wait until your income is higher. Why? Because that’s not what you want to hear.

Psychologists call this tendency to seek information that agrees with us confirmatory bias. When we ask for advice we are biased toward sources that “confirm” what we “know.” Is this the best way to make decisions? Probably not. We should seek out people who have the opposite view, and evaluate their thinking. If you can’t find fault with their position, perhaps you don’t “know” as much as you think.

One of the hardest things to do is to change our minds about what we “know.” Part of this is our reluctance to admit being wrong, and part is the difficulty of breaking habits. I would even say the more certain you are of a position, the more “everyone” agrees with you, the more you need to seek opposing views. If you can understand and refute the opposing view, you can have confidence in your decision.

I enjoy reading about investing in mutual funds, about not using credit cards, and about following a budget. These are all issues I “know.” Next time I’m reading blogs, I’ll pick some that discuss investing in things other than mutual funds, or sites that favor credit cards. (I’ll need to hunt for them, they sure aren’t in my Favorites.) Or maybe I’ll read some books by authors I’m not familiar with. After all, how many times can I read those Ben Stein books. I think I can learn more about myself by listening to people who disagree with me.

Anyone disagree with this? I’m ready to listen.

It’s Monday.

Make some time today to read the business section in the newspaper. You’ll learn something about personal finance that will help you manage your money. And I promise it won’t be boring. You’ll start your week off right, thinking about what to tell your money.

When you’re making conversation today, instead of talking about the weather or the Spurs game, ask your friend, “Did you read what Scott Burns wrote in the paper?”

Every Monday is your day in the newspaper.

Do you read the newspaper on Monday? You should. If you don’t know how an IRA works, or what an ARM is, chances are you’re going to make some poor decisions with your money. It’s not always your fault– after all, you weren’t taught this stuff in school. But if you want to start making good decisions you’ll need a financial education. One of the easiest and least expensive ways is by reading the newspaper every Monday.

For most major newspapers Monday is “personal finance” day. The newspapers don’t have the usual stock market and corporation news since companies are closed on the weekend. So they focus on news for you.

Last Monday my newspaper had an article titled “Frugal Strategies Counter Rising Costs.” It had some good tips on saving money on food and fuel. A financial planner said, “It really doesn’t matter what you make. It matters what you spend.”

Columnist Scott Burns answered the question of whether buying a big house is a good hedge against rising inflation. (It’s not.) Humberto Cruz discussed how taxpayers can know if they’re eligible to contribute to an IRA. (You can if you’re under age 70 and have income from work.)

Jeanie Wyatt shared bits of wisdom from a dinner with Ben Stein. “My take-away from his remarks? That those 78 million baby boomers approaching retirement should accelerate their savings drastically and prod their kids and grandkids to learn economics.”

If you go on-line, you can read the Wall Street Journal’s excellent Monday business section for free. It, too, is all about you. Get in the habit of making Mondays “educate me day.” Just by reading the newspaper you can end up with a pretty good financial education.

Here’s a bonus. The “Science” page is on the back of the business section. Did you learn much science in school? It’s Monday, so dig up your newspaper and continue your financial education today.