Money Listens

Have you heard of the 80/20 Principle?  It’s a great, quick, down and dirty way to live.  You can use it in absolutely any situation.  It works 80% of the time, and the 20% of the time it doesn’t work, it doesn’t really matter whether it works or not.  Here are some situations where I find it incredibly useful in my daily life:

1.   Meal Planning.  Kids like 80% of the food available in the world, but only 20% of what you cook.

2.  Time Management.  80% of your time is spent avoiding what you could do with the other 20%.

3.  Cleaning.  It takes 80% of your time to clean it, but only 20% of your time to mess it up.

4.   Cell Phones.  80% of your time is spent talking to the 20% of the people you don’t want to talk to.

5.   Stuff.  You use 20% of your stuff 80% of the time.  (This is actually a valid example of the 80/20 principle).

6.  Cable/Satellite.  You watch 20% of the channels 80% of the time.  (I’m guessing at this one, because I don’t have cable or satellite).

7.  Food.  80% of your calories come from 20% of the food you eat, mostly Frosted Flakes and chocolate.

8.  Starbucks.   80% of your drink is 20% froth.

9.   Babies.  80% of all girl babies are named Emily.  The other 20% have names that are spelled funny.

10.  Money.  Save 20% and spend 80%.

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.

High school is over, college is next.  Your freshman has her sheets and towels, mini-fridge, panini maker, first aid kit, shower caddy, and about 350 lbs. of “must-have” stuff.She’s registered for classes, signed up for orientation, sent her roommate 500 text messages, and has “class of 2012″ on her Facebook.  (Let’s hope she will graduate in four years.)What else is on the college to-do list?  How about money stuff?  She’s going to be using money in college and needs to tell it where to go and what to do.

1.  Bank Account

Where is she going to bank?  She has a checking account and ATM/Debit Card with a local bank.  She needs to open a checking account at a national bank with a location at home as well as a location within walking/biking distance of college.  Most banks have no-fee student checking accounts.  Find out about ATM fees and overdraft charges.   A parent can be a joint holder in order to regularly transfer an allowance, or in a time of emergency.  Make sure she knows how to balance a checkbook and stuff like how long it takes her paycheck to clear after she deposits it.

2.  Credit Card

She will be bombarded with offers to open credit card accounts.  Make her swear not to do this.  Her ATM/Debit Card will be branded with VISA or MASTERCARD, and will be all she needs.

3.   Paperwork

She needs a filing system with folders and a place to keep them. Go ahead and make some now.  Even if most statements and bills are online, there’s still plenty of paper around.  Especially financial aid forms and notices from the school.  Does she know what types of paper she must keep?  What about receipts and warranties?  She also needs to keep her social security card, passport, test scores, health records, payroll stubs, and important papers somewhere.   And under the bed doesn’t count.  Not only does she need to keep the stuff filed, she needs to fill out the forms herself.  And write the tuition check.  And tell her she gets to fill out her own tax return next year.

4.  Spending Plan

She needs a plan for how much money she can spend on eating out, recreation, clothes, Starbucks, gifts.  You get the idea.  If this sounds like a budget,  a rose by any other name. . .   How much will the parents contribute and how much will she be responsible for?  And she needs to keep track of her spending.  Quicken or a spiral notebook will get the job done.  She needs to know that you will “audit her books” at Christmas break.  And you don’t mean textbooks.

5.  Maintance

She needs to know how to take care of her stuff.  If she has a car, what will she be responsible for?  She needs to know how to run the anti-virus programs and backup the data on her computer.  She needs to know to keep passwords safe.  And do laundry.  Ruining clothes is expensive.  She needs to pay her bills on time.

6.  Student Loans

If she is taking out loans she needs to understand the terms, especially what the repayment amount will be.  She must be careful to keep up with the forms and limit her loans to the bare minimum necessary for school.  Loans can get out of hand in a hurry.  She can check out this video on how college students struggle with money management.  http://www.youtube.com/watch?v=JOt3Apl7qBA

7.  Privacy

Does she know not to give out her account numbers or passwords?  Does she have a basic idea about identity theft and scams?  Tell her not to lend money to friends.  And don’t borrow any, either.

8.  Back Up

Tell her you’ll be there for any problems.  Money listens and parents can listen, too.

This Saturday, May 10, 2008, letter carriers will collect food for the local food bank. Last week you probably got a paper bag with your mail. If not, put any non-perishable food items in a bag or box by your mailbox. Your mail carrier will pick it up on Saturday when he comes by to deliver your mail.

Any items are welcome, but peanut butter, tuna, soup, and cereal are especially needed. Nothing past its expiration date, and no glass jars, please.

One of the reasons I want to get a handle on my finances is so I’ll have more money to give away. Here’s a good opportunity. It couldn’t be any easier, I’ll just take a look in my pantry and fill up a bag.

My daughter read the 1932 Pulitzer Prize winning novel The Good Earth for her world history class. I decided to read it also, since it was one of those books I had always wanted to read. The engaging story is set in rural China in the 1800s. Although there are many cultural differences between East and West, wealth’s influence on human nature transcends time and culture.

Pearl S. Buck paints a vivid picture of two generations. The father is a hard-working farmer who accumulates wealth by his sacrifices and his respect for the land. He attains a high status in his village and uses his wealth to provide for others. He also indulges his sons with material possessions and the education he never had. He doesn’t want them to be farmers, like him, but to have a “better life.” In his old age the farmer sees how his sons have none of the qualities that enabled him to become wealthy, such as a strong work ethic, an ability to delay gratification, and frugality. His sons plot to sell the farmland to keep up their standard of living, unaware they are selling the source of their wealth. The father realizes, too late, that his sons would be better off had they been farmers.

Where do you fit in this generational picture? Are you the father, indulging your children? Or, are you more like the sons? Your parents provided you with material possessions and wanted you to have more than they had as children. You were never taught to delay gratification or how to manage your money.

How are you raising your children? Will they have a strong work ethic and value frugality? Will they be content with what they have? Will they be thankful for what they have?

Money won’t buy happiness, but it will pay the salaries of a large research staff to study the problem. –Bill Vaughan

Maybe Money Does Buy Happiness After All was the article that caught my eye in the New York Times Business section. It compared what’s known as the Easterlin paradox with a new study. The Easterlin paradox says that more money doesn’t make you happier. Two researchers from the Univ. of Pennsylvania disagree. They published a study that says more money does bring happiness, but it’s not guaranteed.

So, who do we believe?

The Times article skirts the question by concluding that “affluence is a pretty good deal.” Money can allow you to visit relatives in far away places, travel, work less, spend more time with friends or on hobbies that you enjoy. Duh!

I’ve said before that everyone needs enough money for life’s necessities. And a little more for a few fun things. But happiness, that overall feeling of positive emotions and leading a purposeful, meaningful life, won’t come from more money. It comes from those experiences that money can’t buy.

But being a poor money manager can lead to stress, anxiety, jealousy, and other decidedly non-happy emotions. For myself (and most Americans), if I am content with what money I have, manage it as well as I can, and spend it on the most meaningful things to me, I’ll be happy.

No doubt about it, except for your home and car, an elephant is the largest purchase you can make. We’re talking big money here. Anytime you contemplate making a major purchase you should consider the opportunity cost of your money. The opportunity cost is the loss of some other thing you could have had with that money.

We make decisions everyday involving opportunity cost. It doesn’t apply only to elephants. Anytime we sacrifice one activity in favor of another, we lose the benefit of one. On Saturday morning you can work out in the gym, or go visit a friend. Both are good choices, but you can only choose one. You lose the opportunity to do the other.

Same with our money. If you chose to buy something, you won’t have that money available any more. Before you make a major purchase, you should consider what else you could do with that money. Would something else be more beneficial to you? You’ve really wanted an elephant, but would that money be better used in your retirement fund? Or, you could put in a hot tub and go on a nice vacation. It’s a trade-off. We have a limited amount of money and must chose how we spend it.

An overall financial plan helps you evaluate opportunity costs. Let’s say you’ve paid off your credit cards, have an emergency fund, and are saving 15% for retirement. The next item on your plan, your next goal, is to save for your kids college. How important is an elephant vs. a college fund?

It’s a trade-off, but it’s your choice. There’s no right or wrong answer, but don’t fool yourself; consider what you’re giving up by buying that elephant.

So, you want to buy an elephant. You’ve already followed the first two suggestions to make sure it’s a good decision. First, you’ve waited. You’ve been wanting an elephant for a really long time. Last month you visited all the elephant dealers in town and found just the one for you. You’ve also done research on the Internet and have a good idea of how much you should pay. You wrote down “Elephant” on your wish list, and dropped hints like crazy, but nobody bought one for your Birthday.

You also followed suggestion #2 and examined your motives for wanting an elephant. An elephant is unlike anything you now own, and you can’t borrow one. It is versatile, and useful. You’re not buying one because it’s the “in” thing, or because of the little logo on the front, or because the kids have been begging for one.

You think you’re ready to buy. You have the cash in your savings account.

But how much do you really know about elephants? Do you understand everything about them? Sure, you know the latest model numbers and accessories. Do you know what it takes to maintain one? How often do they need servicing? How long will it take to learn how to use it? Are you good with large mammals? Where will you put it? Do you have the time and energy to take care of another thing? Or will it just hang around the garage?

Don’t buy anything that you don’t fully understand. If you don’t know how to work all the bells and whistles, maybe you need something less elaborate (like a hedgehog.) If you don’t understand how it compares to other similar items, don’t buy it. This goes for complicated items like insurance policies, investments, and funeral plans, and for simple items, like elephants.

Why do you want to buy an elephant?

Because everyone has one. I’ll really be cool if I have one. Those families on TV riding together on an elephant look so happy. I know I’ll look good on one. Because my kids have always wanted one. I need it for working in the yard. It’s on sale today. My old one doesn’t have an iPod jack.

Are there any hidden motives behind your purchase? See if you’ve been influenced by an advertisement, or a desire to keep up with the Jones’. Will an elephant make you feel good?

Some questions to ask yourself before buying something new are:

1. Is my old one still working fine?
2. Do I own anything else that will do the job?
3. Can I borrow one?
4. I this something that I am going to use often?
5. Can I wait a little longer before buying this?

You’ve just saved yourself some money. And you’ve probably realized you have a hidden motive for wanting the new item. The one that always gets me is about the kids. I’m more likely to spend money if it’s for someone else. I want to make them happy. But I know more stuff isn’t the way to do it. Stuff (even elephants) won’t make me happy. And buying things for the wrong motive won’t get me to financial peace any quicker.