The 15th of April is the deadline for filing income tax returns in the US, so for the last month our news media has been full of money related stories. Most of them provided good advice regarding personal finance, but I came across one story that really ticked me off. The headline read 'Invest Your Tax Return in a Plasma Screen TV!' Oh, now there's a responsible suggestion. And we wonder why lots of people get themselves into financial trouble.
This has to stop. So I've decided to shift gears a bit and, in the coming weeks (with our esteemed Editor's indulgence), I'm going to talk about various topics related to making ends meet. So what qualifies me to talk about such things? Well, in the late 1990s I worked for a large brokerage house as a licensed financial services rep, so I do know my way around the investment world. Also, my parents were frugal by nature and they passed on their tightwad genes to me. And last, I practice what I preach. Around 1990 I had a job that I just despised (think 'Dilbert'), and my way of getting even was to save every penny I could and invest it in the stock market1. All of this penny-pinching finally allowed me to leave paid employment for the lucrative (ha!) career of freelance writing.
So, been there, done that. Still, I approach the topic of money with some trepidation. Why? Well, mostly because people have very different attitudes toward it. My mother once told me that she had a hard time getting used to people's willingness to discuss finances. She was born and raised in Europe, and grew up with the idea that talking about money was vulgar and just not done. Then she married an American and found herself surrounded by folks for whom money was just another subject to toss around at a dinner party. Not only is the topic not considered vulgar; it's embraced whole-heartedly. These days much of this is due to necessity. Our aging population is making the traditional retirement of my parents' generation a thing of the past. If we youngsters expect to retire at any point, we need to accumulate enough savings to live on. This has meant that stocks, bonds and other investments are no longer just for the rich or the pretend-rich. The average middle class person needs to save as much as possible to provide for his children's education, his own financial well-being, and possibly that of his parents as well.
So at the risk of being thought vulgar, here we go. This week I'll start off with my tried-and-true, approved-by-Mom-and-Dad tips for making ends meet. In coming weeks I'll elaborate on these tips and throw in some other timely topics.
The Fine Print
The articles in this series do not offer specific financial advice. Instead they will present financial tips, with occasional smart-aleck observations and commentary, that may or may not be useful in the reader's particular situation. You should always seek advice from a professional who is familiar with your specific circumstances before acting on any of the information presented in this series.
OK, everyone. Worried about unemployment? Tired of living on tinned soup or peanut butter sandwiches? Tired of juggling bills? Has the stock market turned your 401(k) plan into a 201(k)2? Tempted to smack the next person who tells you 'the best things in life are free'? Not to worry. Here are some ideas to help you survive in the 21st Century. These tips have been tested by, or at least frowned over, by some of the Big Names in the financial services industry who spoke with me after I promised them anonymity.
- Live Below Your Means
- Pay Yourself First
- Don't Try to Keep Up with the Joneses
- Be a Cheapskate (Corollary: Never Pay for Anything You Can Get for Free)
- Stay Healthy
- Beware of Credit Cards
- If You're Going to Stick Your Money Underneath Your Mattress, Make Sure It's a Good Mattress
Done laughing yet? Good. I'm quite serious. This is the single most effective thing you can do to ensure that you have the money you need. People who live paycheque to paycheque are one cheque away from real trouble. You have two choices: either earn more or spend less. Fortunately we're no longer living in the go-go 1980s, when conspicuous consumption was in fashion. Nowadays living below your means is considered smart, at least by some. And if you run across someone still stuck in the 80s, ignore 'em and grin all the way to the bank.
Years ago I read a delightful little book called The Richest Man in Babylon that illustrates the power of long-term planning. The theme of the book can be summed up as follows: whenever you are paid, before you pay your debts, put aside some of the money in a savings account. Start doing this as soon as you start earning money. The wise parent will insist that his child save a certain percentage (say 10%) of his allowance and any gifts or part-time earnings, thus helping his child establish good habits early on.
They're probably busy trying to keep up with you, thus resulting in an arms race of consumerism. This is like supporting both sides in a war; it's silly and it's financially ruinous.
And hold your head up high. Advertisers will try to convince you that you're a complete loser if you don't buy whatever it is they're selling. Don't listen to them. They do not have your best interests at heart; they make their money by parting you from yours. Fortunately nowadays frugality is back in style, and the savvy shopper can find plenty of places with low prices and decent quality merchandise. And there's eBay.
On the other hand, you don't need to be completely ridiculous about it, either. Turning the heat down to 58°F (14°C) to save on fuel bills is short-sighted, as you'll probably end up giving whatever you saved to the doctor when you get sick, which brings us to the next point...
In Having Our Say, the authors talked about growing up in a large family of modest means. Their parents realised that they didn't have the money to afford a doctor for their ten children, so they planted a huge vegetable garden; they figured if the children ate well, they'd stay healthy. Apparently it worked, as Having Our Say was published when the authors were 101 and 103 years old.
By way of contrast, consider cigarettes. They're the gift that keeps on giving: to the tobacco companies and their shareholders when you buy their product; to the medical community, which you support with your poor health; to the funeral industry, when you shuffle off young. The only person who doesn't appear to benefit is the smoker, who is both sick and broke. Such a deal.
It's great, isn't it? You open your mailbox and there is another company offering you a credit card. These companies must really think a lot of you.
Wise up, friend. These companies think you're stupid enough to rack up tons of debt, upon which they'll collect tons of interest and make their shareholders very, very, very happy. Unfortunately, a lot of consumers have proven the companies correct, to the point where we're seeing record numbers of bankruptcies. Does this hurt the credit card issuers? Not on your life — they just charge the rest of their customers a high-enough interest rate to cover the losses from folks who've committed financial suicide.
This tip comes from my mother, whose uncle decided one day that he distrusted banks. Late one night he got up and buried his nest egg out in the back yard. Afterwards he came back inside, not realising that a curious neighbour had spotted him and decided to dig up whatever it was that Uncle Joe had just buried.
If all this penny-pinching sounds depressing, think of it this way. By not over-spending, you are in fact buying something: your freedom. Freedom from money worries; freedom from indentured servitude to credit card companies; freedom to hit the road if you find yourself in a job that's killing your soul. You stop feeling like a victim and start feeling in control of your life. These are not small things. You think a plasma screen TV can compete with them? The manufacturer of said television would say 'yes'; I say it's my money and my life, and I'd like to hang onto both.
Food For Thought
The Richest Man in Babylon by George Clason — A classic. It's a short book, worth the time it takes to read it.
Your Money or Your Life by Joe Dominguez — An eye-opening how-to book on living within your means. The author takes you through various steps to see where your money is going, just how long you have to work to pay for the latest consumer goods, and how you might free yourself from wage slavery. (Note: there is another book by the same name, written by Alvin Hall, that is available in the UK and appears to cover the same topics. I haven't read Hall's books and have no opinion about it.)
Having Our Say by Sarah Delany, A Elizabeth Delany and Amy Hill-Hearth — A fascinating and entertaining memoir by two black American women. The Delany sisters talk about their upbringing in modest circumstances and how their parents managed to raise and educate ten children. (Note: one of their brothers is science fiction writer Samuel Delany.)
There are also plenty of Web sites devoted to living below your means. The Motley Fool site in particular offers a lively forum on the topic, but unfortunately you have to pay for access, which sort of violates principle #4 above. Individuals have to decide for themselves if the information provided is worth the price.