The Big Choice
In today’s reader mailbag, I answered a question about digging out from under a pile of debt with some comments about a big choice people have to make in their twenties:
The problem you’re having is the problem a lot of people our age have: we want everything but we don’t have the resources to pay for it.
Many people solve that problem by taking on an absurd amount of debt, an amount that they’ll spend most of their life repaying. It’ll cause them to walk a financial tightrope for most of the rest of their lives, making it impossible to do anything but work at whatever job will pay the most, at the complete mercy of their boss.
I prefer the other solution. Put off some of those “needs” until you’re a little older. You don’t need the new car and the new house and the kids immediately. Live cheap when you’re in your twenties and early thirties and channel everything into your career and freeing yourself from your student loan debt.
It’s a decision most of us have to make at some point. I think many people dive into the first choice without reflecting on the consequences – but I think that solution sometimes ends in miserable lives. You have an opportunity right now to figure out which path you want to take.
All throughout the last several days, as we had family visiting and we spent some time with several of our friends, this choice kept popping into my head. I kept looking at the decisions various people had made in their twenties and how it affected their life today.
John, for example, chose to put off his “needs.” After college, he got a very good job right in his career path and he could have easily afforded a shiny car, a nice house, and the like. Instead, he spent his twenties living in a small apartment in a poor neighborhood, driving a beat-up used car, and focusing on succeeding in his career path. Where’s he at today at age thirty two? He owns twenty acres of land – and by “owns” I mean he doesn’t have a mortgage. He has absolutely no debt. He has tens of thousands of dollars in savings. He has a very strong position at his current job. And he’s only thirty two.
I chose a different path, at least at first. I also got a great job in my career path (based on the degree I earned in college), but I got married very quickly. We had an expensive honeymoon. We racked up credit card debt left and right. We had kids very quickly. Eventually, we had lots of stuff, but we had no financial foundation at all. I had a career path that had no flexibility. We didn’t have money for a house down payment. We could barely cover the bills we had.
The truth of the matter is that one path is very easy at first and the other is harder, but not impossible. It’s easier to just say “yes” to all of the credit and live the material high life. The problem, of course, is that a person’s early professional income rarely matches up to all of the stuff that they want, but the tools are available to simply put those payments off to the future.
The problem is that if you follow that easy path, you absolutely shackle your future opportunities. Since you have so many debt payments – the house payment, the student loan payments, the car payments, credit card debt – coming at you in addition to normal monthly bills and living expenses, you become tied to the highest-paying job you can get, with that money all channeled into paying for all of your stuff. That job can be punishing – at such a job, you’re often doing nothing more than working or thinking about work. You can’t change careers. You can’t lose your job. And you’re stuck.
On the other hand, if you take the road less traveled right off the bat, you give yourself tons of opportunities down the road. John, for example, has enough cash in the bank that if he chose to go back to school and change careers right now, he could without skipping a beat. If he loses his job, it’s not panic time – instead, it’s time to sit back and just think about what comes next in his life, calmly and rationally. If an emergency happens, he can deal with it without skipping a beat. If he decides that he actually wants something, he can buy it – but the first few years of his professional life helped him to learn a lot of personal restraint, so he only buys stuff he truly wants and will get value from.
From my perspective, the real truth of the matter is we all have a choice to make in life. Do we want freedom or do we want stuff? I’ve tried both paths and freedom is a lot more enjoyable.
Continue reading The Big Choice …
From The Simple Dollar.
The Realities of Dropping Cable
Over the years, I’ve made a strong case for abandoning television watching as a good move for financial and career success. Not only does television offer up a lot of advertisements glorifying unnecessary material stuff and rampant consumerism, but many programs glorify it through product placement within the programs. Many programs solely exist to promote an expensive materialist lifestyle as well. Add on top of that the amount of otherwise productive time devoured by television watching and you have a strong case for doing without.
Over the last few years, I’ve slowly been paring down my television watching. I’ve stopped channel surfing, only turning on the television to watch specific programs. I’ve gradually pared down the number of programs I regularly watch.
As of May 1, I have ceased all television watching at home (excepting Lost, which ends for good this Sunday). This coincided pretty conveniently with the birth of our third child.
What exactly does this mean? Here are a few of the consequences of doing this.
I have plenty of time for other projects. Of course, I’m not directly seeing the time benefit yet as I’m spending a lot of time holding the baby and also playing with our two older children. The biggest impact I’ve seen is that I’ve managed to add this third child to my life without really reducing time spent on other hobbies and activities.
I don’t want “stuff” at all. I have no interest in new cars. I have no interest in whatever new food product is out there. I have no interest in great new home decor or furnishings or countless other things like this. The only things I can think of that I even want at all right now are a couple of items for the kitchen to aid with cooking, a few books, and eventually some sort of tablet computer to aid with notetaking in a wide variety of situations. That’s it. The absence of television leads to the near-absence of want.
I might not be culturally “up to date” – but I really don’t care. I don’t feel bad that I’m unaware who won Survivor or who’s still left on American Idol. Yes, conversations have come up that I’m clueless about, but I’ve still been able to participate. How? I simply say, “I don’t watch that program, but…” and then I ask a question about it. The person I ask almost always is very happy to answer the question and enjoys being the expert on the topic. My ignorance is a conversation builder.
Our cable bill won’t drop as much as it might seem on the surface. Our cable provider advertises our package as costing $55 a month. However, we get a package that includes high speed internet, phone service, and cable all together. Downgrading to the internet and phone package only drops our monthly bill by about $20 a month, so the savings isn’t that much. Even if we just keep the internet (which is a work-related need for me), the drop is only about $45 a month.
In short, I’m happy with the choice, even if it won’t save me as much directly as it might have seemed. I’m happy because of the secondary effects – the lack of cultural awareness wasn’t the hindrance I expected while the extra time has been wonderful.
Continue reading The Realities of Dropping Cable …
From The Simple Dollar.
Some Thoughts on Easter and Financial Responsibility
Easter weekend is one of my favorite times of the year with my children. The weather is finally getting nice after a long winter, so we’re starting to go outside regularly. We usually conduct some kind of Easter egg hunt for them as well, giving them a great chance to explore outdoors and work on their observation skills. They usually get a fair amount of candy during the weekend, too.
It’s a lot of fun and it’s a perfect example of the joys of childhood. Joe and Katie’s primary concern right now is hunting those Easter eggs – and coloring some, too. They don’t worry about bills or getting their book edits finished or anything like that – their biggest financial concern is saving their allowance so they can get a cooler toy.
What I realized is that this is basically the same way I operated until several years into my professional life.
I worked hard at my job, but I essentially just focused on the parts that were fun for me and avoided the parts that weren’t fun for me.
I didn’t sweat bills too much, either – I didn’t plan in advance at all for them and just paid them as best as I could whenever they came in.
Whenever I wanted something, I pretty much bought it. I didn’t really worry about the consequences of it, either.
All of these phenomena have something big in common: I just assumed that my mythical “future self” would take care of it, much in the same way I always assumed my parents would take care of it when I was a child.
In other words, my “future self” became my protector, allowing me to continue living life essentially as a child.
The only problem with relying on a protector like that is that when the protection fails, you’re usually in a very deep hole.
When I went away to college, my parents receded as my protectors. If I had been more self-aware, I would have realized that it was now up to me to protect myself. Instead, I invented a new “parent,” my “future self.” You know, the guy that would be earning a truckload of money in a few years and would solve all of my problems.
In April 2006, my protection failed. My “future self” didn’t save me. I found myself in a very, very deep financial hole and my “future self” wasn’t going to dig me out.
It was up to me and me alone.
If I had realized that whole thing a few years earler before I got into deep debt, I would have been a lot better off. I wouldn’t have missed out on anything of real value, while at the same time I wouldn’t have been in nearly as much debt or financial trouble. I wouldn’t have tossed thousands upon thousands upon thousands of dollars away in needless interest payments. I wouldn’t have to repeatedly robbed Peter to pay Paul. I wouldn’t have had a house full of stuff that just gathered dust. I would have had the home of my dreams right now.
If you convince yourself to buy stuff and do things under the belief that your “future self” will take care of it, it’s time to grow up. Your future self is completely unreliable and serves only as a crutch, an excuse to allow you to continue to behave as a child would.
My children love hunting Easter eggs, but my time for hunting Easter eggs is over. My future self isn’t a magical Easter bunny that will take care of everything. It’s up to me – right now – to make the future that I want.
Continue reading Some Thoughts on Easter and Financial Responsibility …
From The Simple Dollar.
Overcoming Bumps in the Road
As much as we’d like to believe it, our lives aren’t a smooth journey from point A to point B. Unexpected things happen all the time – we do our best to overcome them and move on, but sometimes “our best” results in some pretty challenging consequences. We revert to old, bad habits. We put ourselves in debt. We make really poor snap decisions that seem like the best option in the moment, but really aren’t.
How can we create a smoother path over those bumps? Here are five things you can do to smooth your path, no matter where it takes you.
Build an emergency fund
Simply having a cash reserve for emergency situations can be a huge difference maker when something challenging happens. Instead of panicking, selling off items, going into debt, or failing to pay and destroying your credit rating, you can simply go down to the bank, withdraw a little cash, and take care of the situation. Emergency funds help you through car problems, home maintenance emergencies, job losses, and countless other painful situations.
How do I get started? Open a savings account at your bank. Set up an automatic transfer from your checking account to your savings account, transferring some small amount you can afford each week. Try $25 or $50 or $100 – an amount you think you can handle. Then learn to live on what’s left in your checking and forget about the savings until a true emergency comes along.
Envision challenging scenarios
Imagine what would happen if you lost your job. What would happen if your car’s transmission failed? If your hot water heater failed? If your home burnt to the ground? What are your game plans in these situations? Most people don’t even think about it and just play it by ear, but by thinking of those scenarios a bit in advance, you can make a big difference with regards to how they resolve themselves.
How do I get started? Make a big list (twenty or so long) of the “emergencies” you can see happening in your life. Job loss? Check. Health crisis? Check. Home maintenance emergency? Check. Car emergency? Check. Think about each of these scenarios and imagine what happens to your life if they occur.
Solve those scenarios with “if/then” statements
Once you’ve envisioned all of the problems, it’s time to think about solutions – the “then” part of the “if/then” statement. You’re trying to come up not only with solutions for those problems that will eventually happen, but also with things you can start doing now to make those eventual solutions much easier to execute.
How do I get started? Consider each item on your list of crises. Imagine how you would handle that solution if it happened tomorrow. Come up with a plan in your mind for dealing with it. Then, imagine what things would help you solve the problem – an emergency fund, an insurance policy, and so on. Make a plan to implement some of these things in your life.
Profile your worst tendencies
How do you react to a bad situation? Most of us have a “crutch” or two that we rely on in tough situations. For me, it’s usually buying books – I fall into a “crutch” of buying a book to cheer myself up when I feel like the chips are down. For others, it could be a bad, expensive habit like smoking or drinking or overeating. Whatever your crutch is, it’s usually expensive and actually makes the problem worse rather than better.
How do I get started? Figure out what your crutch is, then seek out a replacement for that crutch. For me, the best replacement has been long walks. Instead of going to the bookstore and buying a book to be a balm for the bad feelings, I go on a long walk in my neighborhood, usually a few miles long. On this walk, I can usually calm my mind, think about happier things, and then often come up with a plan for solving whatever the problem is. When I get home, I feel much better and no longer feel like I need a “balm” to improve my mood.
Divest yourself of potentially bad situations
All of us have things in our life that are on the verge of causing problems. Bad relationships. Something that’s in imminent need of repair. A job that’s very tenuous. Those things eat up our minds and our energy and, often, our wallets, too. They’re simply poisonous, and they hold us back even before they have the chance to fall apart.
How do I get started? Figure out the bad situations in your life. Bad habits. Bad friendships that bring you down. Items in need of repair. A tenuous job. Figure out what you need to do to either improve that situation or divest yourself of it. Yes, this may mean ending a friendship or selling a car, but if these things are creating a net negative in your life, why are you keeping them around?
Preparing for the bumps in life makes it much easier to simply ride through them. Good luck.
Continue reading Overcoming Bumps in the Road …
From The Simple Dollar.
Wealth Isn’t How Much You Earn
At age 25, Jim makes $100,000 a year. He’s constantly traveling for business. He has a large home in which he often doesn’t visit some rooms for months at a time. He eats out every single night. He drives a leased Lexus, which he updates every few years at the end of the lease. He buys a whole new wardrobe every six months, taking the leftovers to Goodwill. He spends everything he brings in.
At age 25, Bill makes $35,000 a year. He lives in a smaller home and doesn’t travel much. He makes most of his own meals at home. He drives a Toyota Corolla, which he owns free and clear. He wears clothes until they’re worn, then shops at Goodwill for replacements, often picking up Jim’s barely-worn clothes. At the end of the year, he usually has about $5,000 of his income left over, which he sticks into his stock investments which earn 8% a year.
In ten years, Jim’s net worth hasn’t grown a cent. In those same ten years, Bill has $72,000 in the bank.
At the twenty year mark, Jim’s net worth still hasn’t grown a cent. In those same twenty years, Bill has built up $228,098 in the bank.
At the thirty year mark, Jim’s still breaking even. Bill, on the other hand, has $566,416 in the bank.
At age sixty five, Jim hasn’t accumulated a cent and will be working for the man for the rest of his life. At the same age, Bill has $1.3 million in the bank and can do whatever he wants for the rest of his life – and probably already started doing that a few years earlier.
It doesn’t matter how much you earn. It matters how much you save.
When I was twenty five, my net worth was negative and heading south rapidly. I spent more than I earned and I didn’t really worry about the consequences of it. I figured if I had the money – or the credit – I certainly ought to spend it in whatever way made my life more enjoyable right now.
I’m now thirty one. My net worth is still negative (although it would be positive if I counted the value of my home towards it, which I do not), but it grows every month in a positive direction and will soon become positive even without the house value.
One might immediately think that I must have made my life less enjoyable to make that change. Actually, my life is more enjoyable now.
I have a better grasp on the things that actually make me happy and I don’t waste my money on things that don’t.
I’m not chained to a desk and a career, fearing the pink slip – I set my own career rules and goals.
I’m not afraid of getting the mail any more and I don’t wake up at night worried about how I’m possibly going to make ends meet or pay all of this off in the future.
Perhaps best of all, my financial position is improving every single month and I no longer see the long-term future as some kind of musty cloud that will “work itself out.” I know it’s getting better and I know that, if I continue on this path, I’ll be able to easily have some of the big things I actually want in life, like a beautiful house in the country with some wooded land in the back.
My life now is something I’ll happily trade having a shiny new Lexus and an iPhone and a set of high-end golf clubs and eating out every night for. In exchange, I’m not worried about the future and I have career and personal freedom I would never otherwise have.
Wealth has little to do with how much you earn. It’s how you spend – or save – it.
Continue reading Wealth Isn’t How Much You Earn …
From The Simple Dollar.
Wealth Isn’t How Much You Earn
At age 25, Jim makes $100,000 a year. He’s constantly traveling for business. He has a large home in which he often doesn’t visit some rooms for months at a time. He eats out every single night. He drives a leased Lexus, which he updates every few years at the end of the lease. He buys a whole new wardrobe every six months, taking the leftovers to Goodwill. He spends everything he brings in.
At age 25, Bill makes $35,000 a year. He lives in a smaller home and doesn’t travel much. He makes most of his own meals at home. He drives a Toyota Corolla, which he owns free and clear. He wears clothes until they’re worn, then shops at Goodwill for replacements, often picking up Jim’s barely-worn clothes. At the end of the year, he usually has about $5,000 of his income left over, which he sticks into his stock investments which earn 8% a year.
In ten years, Jim’s net worth hasn’t grown a cent. In those same ten years, Bill has $72,000 in the bank.
At the twenty year mark, Jim’s net worth still hasn’t grown a cent. In those same twenty years, Bill has built up $228,098 in the bank.
At the thirty year mark, Jim’s still breaking even. Bill, on the other hand, has $566,416 in the bank.
At age sixty five, Jim hasn’t accumulated a cent and will be working for the man for the rest of his life. At the same age, Bill has $1.3 million in the bank and can do whatever he wants for the rest of his life – and probably already started doing that a few years earlier.
It doesn’t matter how much you earn. It matters how much you save.
When I was twenty five, my net worth was negative and heading south rapidly. I spent more than I earned and I didn’t really worry about the consequences of it. I figured if I had the money – or the credit – I certainly ought to spend it in whatever way made my life more enjoyable right now.
I’m now thirty one. My net worth is still negative (although it would be positive if I counted the value of my home towards it, which I do not), but it grows every month in a positive direction and will soon become positive even without the house value.
One might immediately think that I must have made my life less enjoyable to make that change. Actually, my life is more enjoyable now.
I have a better grasp on the things that actually make me happy and I don’t waste my money on things that don’t.
I’m not chained to a desk and a career, fearing the pink slip – I set my own career rules and goals.
I’m not afraid of getting the mail any more and I don’t wake up at night worried about how I’m possibly going to make ends meet or pay all of this off in the future.
Perhaps best of all, my financial position is improving every single month and I no longer see the long-term future as some kind of musty cloud that will “work itself out.” I know it’s getting better and I know that, if I continue on this path, I’ll be able to easily have some of the big things I actually want in life, like a beautiful house in the country with some wooded land in the back.
My life now is something I’ll happily trade having a shiny new Lexus and an iPhone and a set of high-end golf clubs and eating out every night for. In exchange, I’m not worried about the future and I have career and personal freedom I would never otherwise have.
Wealth has little to do with how much you earn. It’s how you spend – or save – it.
Continue reading Wealth Isn’t How Much You Earn …
From The Simple Dollar.
Wealth Isn’t How Much You Earn
At age 25, Jim makes $100,000 a year. He’s constantly traveling for business. He has a large home in which he often doesn’t visit some rooms for months at a time. He eats out every single night. He drives a leased Lexus, which he updates every few years at the end of the lease. He buys a whole new wardrobe every six months, taking the leftovers to Goodwill. He spends everything he brings in.
At age 25, Bill makes $35,000 a year. He lives in a smaller home and doesn’t travel much. He makes most of his own meals at home. He drives a Toyota Corolla, which he owns free and clear. He wears clothes until they’re worn, then shops at Goodwill for replacements, often picking up Jim’s barely-worn clothes. At the end of the year, he usually has about $5,000 of his income left over, which he sticks into his stock investments which earn 8% a year.
In ten years, Jim’s net worth hasn’t grown a cent. In those same ten years, Bill has $72,000 in the bank.
At the twenty year mark, Jim’s net worth still hasn’t grown a cent. In those same twenty years, Bill has built up $228,098 in the bank.
At the thirty year mark, Jim’s still breaking even. Bill, on the other hand, has $566,416 in the bank.
At age sixty five, Jim hasn’t accumulated a cent and will be working for the man for the rest of his life. At the same age, Bill has $1.3 million in the bank and can do whatever he wants for the rest of his life – and probably already started doing that a few years earlier.
It doesn’t matter how much you earn. It matters how much you save.
When I was twenty five, my net worth was negative and heading south rapidly. I spent more than I earned and I didn’t really worry about the consequences of it. I figured if I had the money – or the credit – I certainly ought to spend it in whatever way made my life more enjoyable right now.
I’m now thirty one. My net worth is still negative (although it would be positive if I counted the value of my home towards it, which I do not), but it grows every month in a positive direction and will soon become positive even without the house value.
One might immediately think that I must have made my life less enjoyable to make that change. Actually, my life is more enjoyable now.
I have a better grasp on the things that actually make me happy and I don’t waste my money on things that don’t.
I’m not chained to a desk and a career, fearing the pink slip – I set my own career rules and goals.
I’m not afraid of getting the mail any more and I don’t wake up at night worried about how I’m possibly going to make ends meet or pay all of this off in the future.
Perhaps best of all, my financial position is improving every single month and I no longer see the long-term future as some kind of musty cloud that will “work itself out.” I know it’s getting better and I know that, if I continue on this path, I’ll be able to easily have some of the big things I actually want in life, like a beautiful house in the country with some wooded land in the back.
My life now is something I’ll happily trade having a shiny new Lexus and an iPhone and a set of high-end golf clubs and eating out every night for. In exchange, I’m not worried about the future and I have career and personal freedom I would never otherwise have.
Wealth has little to do with how much you earn. It’s how you spend – or save – it.
Continue reading Wealth Isn’t How Much You Earn …
From The Simple Dollar.
Is Saving for Old People?
A post on a “savings generation gap” at Get Rich Slowly the other day caught my eye. In it, J.D. argued that there’s a “generation gap” between spenders and savers. People who are over some particular age threshold – somewhere around 35 or 40 – tend to save their money, whereas people who are younger than that tend to spend their money.
I agree with J.D.’s general conclusion that there is some sort of gap between spenders and savers, but I think the age thing is merely incidental. In my eyes, the real difference between spenders and savers is that the savers realize that they have something to lose.
In my own life, I was a big spender during my early professional years. I lived in an apartment with my wife and, in essence, had very little to be responsible for outside of my job and my marriage. I worked hard at both of those, but in terms of worrying about taking care of the future, there really wasn’t much to take care of. I didn’t have a house. I didn’t have dependents. I wasn’t established in the community yet – most of my friends were holdovers from college who were similarly unanchored. I had lots of free time.
Roll the clock forward several years. At that point, we’re living in a house. We have two children. I’m involved in several community projects and serve on multiple boards. We have lots of friends and acquaintances in our town, too.
Before, I didn’t really have too much that I could lose. If I spent all my money, there really wasn’t any risk involved with it. As long as I kept up with my career, I could live through my money mistakes. I felt very free to spend with reckless abandon because there was little real-world consequence to spending in that way.
Today, if I spent like that, there would be serious consequences. Would we be able to keep our home? Would we have to leave the community we’ve worked hard to establish ourselves in? What about our children? Am I doing what I can to take care of them? As I write this, I’m sitting in a home that’s a huge six-figure investment of our money – I need to make sure it’s not falling apart, either. The income from my writing career is notoriously unstable, too.
I save because I now have things in my life that I need to protect. That wasn’t true earlier in my life.
I think the idea that “saving is for old people” comes from the journey that people take in life. Early on, we have fewer elements in our life that we need to protect. We don’t have a home. We often don’t have a marriage. We often don’t have children. We often don’t have an established role in the community. We often don’t have an established career.
Later on, many people do establish these things. They begin to realize that they can indeed lose their life’s work. They want to protect all the work that they’ve done. So they begin to save. Often, this is coupled with other shifts in life perspective as well.
In that context, there is something of a correlation between age and saving tendencies, because older people have more to protect and are more aware that it needs to be protected. Older people have the fruits of many years of labor, something that younger people simply have not had the time to bring to harvest yet.
Of course, looking back on my journey, I regret not saving during my early years. Most of the things I spent money on then have left me with nothing at all now except for a worse position in life. Spending so freely for so long directly means more worries today – a result that I could have easily prevented by looking with even the slightest critical eye at my purchasing choices.
Did I need to learn that lesson? I don’t know. I think that some people need to learn it. I think that others have it ingrained in them from an early age.
Continue reading Is Saving for Old People? …
From The Simple Dollar.
Teaching Money Management Through Self-Responsibility
In the past, I’ve strongly advocated for families to introduce their teenagers to financial reality as early as possible. I know that in my own case, I went off to college with almost no idea of how to manage my money and it really showed in the spending decisions I made over the next ten years of my life.
Over the past decade, I’ve had the chance to intimately watch other families raise their children through the teenage years with lots of success and some failure. I’ve been impressed with some of the young people that are the core of Generation Y coming of age. Two in particular, my niece and my first cousin, are the kind of people that are a big net benefit to the world, and I would be incredibly proud if my own children turned out as well as they have.
At the same time, though, I’ve seen many tweens and teenagers spending money with reckless abandon, spending hundreds of dollars on completely unnecessary things and acting repeatedly as though money has no consequences at all. These people, I’m afraid, are headed down the same painful path that I went down.
When my children approach their teen years, what can I specifically do to teach my children the value of managing their money? This is a topic that’s left me thinking for a long time and I’ve been jotting down ideas and findings all the time. Today (finally), I had a chance to read through quite a few of these things and I was able to pull out several strong tactics that seem to work together to teach teenagers the value of managing money.
Start young. You’re better off starting too young than you are starting too old. Introduce an allowance as early as possible. Encourage their entrepreneurial behavior early. Introduce them to basic budgeting early on, too. You’re better off starting before they can fully understand all of the meaning than later on when their ideas for what’s normal have already been set, because it will take far more work to undo bad behaviors.
Don’t tie a basic allowance to specific chores. A basic, small allowance should be given without strings attached. It’s not a tool to leverage for good behavior, it’s a tool to teach basic money management. There should be certain behaviors expected in the home, but the allowance should not be a bludgeoning tool to force those behaviors.
Offer extra allowance in exchange for specific extra tasks. If you have extra tasks that go above and beyond normal household duties, you should offer a separate payment to your child in exchange for the task. Allow them (or even encouraged them) to negotiate for the exact amount so that they can learn the art of negotiation.
Make basic budgeting part of the equation from day one. I’m a huge fan of the Money Savvy Pig for this purpose. A child’s budget should be very simple, especially at first, and that’s exactly what the Pig helps with. It just splits a child’s allowance into four pieces – spending (they can spend it on whatever they want), saving (saving for a bigger goal), donating (giving to some cause), and investing (learning how to invest money). This forms a perfect simple budget for children. Later on, you can work on more complex budgets with them, with multiple savings goals and so on, but this type of thing forms the backbone in their mind.
Open bank accounts when the “investing” portion grows large. When they’ve built up quite a bit in the “investing” portion of their budget, take them to the local bank and open a savings account for them. Have them deposit their money. Then, when there’s an interest statement, show them the interest that’s been earned. As they grow older, you can talk about other investments with them and allow them to try these investments (stocks and so on). Set a very long term goal for their “investments,” such as college or a house down payment (seriously) so that they can begin to get a taste for the long term, plus it allows you to differentiate between short-term savings and long-term investments.
As their money grows, move to a checking account. Migrate toward allowing them to manage their entire budget themselves, incorporating saving, spending, donating, and investing to their own desires. One big step in this direction is their own checking account with a debit card – a great tool for a pre-teen. Make the card only able to access the checking account.
Give them a credit card when they’re teens. Gulp. Many parents avoid this because it seems like a recipe for disaster, but it actually serves a very important purpose. By giving them a low-limit credit card while they’re in your home, they can learn about how to use a credit card – and, likely, the dangers of getting into debt with them – while there’s still a safety net. Ideally, you want them to get into a bit of debt with it so that they can see the pain of interest.
Show them your monthly budget. Seriously. Show them how much you earn in a given month, then how that money breaks down into mortgage payments, car payments, electric bills, food, and so on. This is a firm taste of the real adult world, something that teenagers crave. Let them see the reality of adulthood and how expensive it is. Talk about the choices that you have to make along the way.
Work on distinguishing between wants and needs. This ties in perfectly with showing your children your monthly budget. Some of the items are needs – your housing, your electricity. Others are wants – entertainment. Others are somewhere in the middle – food spending. The better you’re able to distinguish between needs and wants – and to control those wants – the more likely you are to teach them to control their own wants. That’s one of the biggest keys to adult personal finance success.
This is my gameplan for raising my children to better manage their money. Hopefully, you can pull out a nugget or two for your own children or grandchildren.
Continue reading Teaching Money Management Through Self-Responsibility …
From The Simple Dollar.
Fifteen Things More Important Than Money
Three and a half years ago, I was in a desperate debt situation. My lifestyle was tied desperately to spending far more than I was bringing in – and I was finally paying the consequences.
I had let money become the most important thing in my life. It drove all of my choices and decisions. It chose my career for me. It chose my specific job for me. It chose how I spent my free time – I did expensive things to escape from the debts and the pressure-filled work, usually with a device on my hip that chained me to that job.
I was desperate and unhappy. I was in a prison made of money – and I knew I had to escape it.
Today, I realize something much more compelling. Money is not the most important thing in life. In fact, in a healthy life, money often follows behind many other elements in your life. If you put your energy and time into other things more important than money, money will follow. It will find a way to work.
Here are fifteen things I’ve found that are more important than money.
Experiences Hug someone. Kiss someone. Write someone a letter telling them how you feel. Run (or walk) a marathon. Spend all day making an exquisite meal and eat it by candlelight. Make love to someone. Face the thing you most fear right in the face. The rush you get from experiencing something amazing is one of the best parts of being human, and most of the time the financial cost is minimal.
Wisdom If you think you know the answer, you’re far from wise. Keep learning. Wisdom comes from knowing how little you actually know. Spend some time learning something new, perhaps even becoming skilled at something. You’ll surprise yourself at what you gain, often far beyond the mere knowledge you hoped to attain.
Marriage Accepting another person wholly and intimately into your life is utterly life-changing. Opening up every part of yourself to another person is constantly challenging, but constantly powerful in how it changes you and makes you strive to be a better person.
Friendships The regular companionship and camaraderie of people you care about and share interests with is continually life-affirming. Friendships don’t revolve around the things you have or the activities you can afford – they revolve around people.and shared experiences.
Physical health Health can’t be bought, but it can be helped by the personal choices we make. Exercise. Eating better. Making choices that are less sedentary. Getting involved with activities that get us moving. Practicing proper hygiene. Money pales in comparison to the value of the physical health needed to enjoy life.
Mental health On the flip side of the physical coin is mental health. Expressing our feelings in a healthy way. Finding people to talk to and relate our problems. Addressing the issues that bother us. Seeking professional help when these options don’t change things for the better. Again, money is insignificant compared to the value of mental balance.
Personal passions What activities make you feel truly excited and fulfilled? Those things are the spice of life – every one of us wins by digging into our passions. The best part? Quite often, seeking out and following your passions often means that money will follow in the wake.
Communication The ability to express our thoughts and feelings to a receptive audience is truly invaluable. it enables us to share elements of our inner world with others, something that can’t be achieved by all of the material wealth on this planet.
Self-reliance Money comes, money goes. The ability to survive and even thrive with no money means that money becomes significantly less important. The ability to do things yourself reduces the need you have for money to solve your problems.
Security If we channel our efforts into creating a sefe and secure enviroment where we’re protected from our failures, we create a situation where our fortunes are much less tied to our ability to put money in our pocket. If we put effort into security now, we have true safety later, a type of safety that can’t be broken by ordinary material needs.
Helping others For most people, the action of helping others provides a great deal of personal joy and satisfaction, something that cannot be replaced by any sort of material item. Helping others often requires no financial resources at all and can sometimes generate financial resources – free meals and such – plus goodwill in the community. Good karma has tremendous value.
Personal growth Every single person has countless opportunities to improve as a person – their behavior, their beliefs, and so forth. Working to grow as a person only improves you and rarely costs anything, but it almost always improves your income potential for the future as well as naturally improving your outlook on the world and your self-confidence.
Thankfulness When you move from desiring the things that you do not have to being thankful for the things that you do have, your perspective on the world changes drastically. Your desire for having the latest things goes down while, at the same time, your contentedness with life goes up dramatically.
Hobbies If you can discover personally fulfilling activities to fill your time, you introduce happiness into your life. Many people fall into routines by default, never asking if their choices introduce authentic happiness, then they try to chase a sense of happiness by purchasing things. Step back from this. Try new things, and dig into the things you genuinely enjoy. Often, it’s the simplest things – playing a game with our partner, going on long walks, collecting rocks or leaves – that bring us the greatest personal satisfaction.
Spirituality Does our life have a purpose? Do we have a spirit? Is there something greater than we can comprehend all around us? Digging into these questions through reading, contemplation, meditation, and prayer can bring an incredible sense of calm, peace, and even joy that can be difficult to find in other avenues – and impossible to find with money.
The more of these elements you dig into and discover in your life, the lesser the role of money, materialism, and spending occupies. In the end, you’ll find that you’re no longer chasing money, but that instead money is following you on the path to a much better life.
Continue reading Fifteen Things More Important Than Money …
From The Simple Dollar.