To Manage Your Money, Manage Your Emotions

Building up your wealth is simple:  spend less than you get.  But it's hard for many people even though it's simple.  Put a little money in their hands and it's gone as quick as a flash.  Put a lot of money in their hands and it's gone quicker than a flash.  This is no way to get rich.  If you spend everything you get, how will you put together a down payment for a house, college costs for your kid(s), or retirement?  Sometimes, you can borrow.  But loans have to be repaid, so you'll enrich banks, not yourself.  Retirement on just Social Security can be okay--if you move to Panama or Cambodia, places where your only option may be McDonald's if you want a taste of America.

Controlling your spending is the first and most important step to building wealth.  Don't begin by reading the vast array of materials that discuss how to invest.  It doesn't matter how you make money investing in ETFs, mutual funds, S&P 500 futures contracts, or covered stock options if you don't have any capital to invest. 

First, learn how to save.  This means getting control over your emotions.  Learn how to deny yourself immediate gratification.  Learn how to value long term rewards.  Learn how to ignore the latest trends.  Learn that keeping up with the neighbors could mean you're just as foolish as the neighbors.  Aside from basic spending for food, shelter, clothing and transportation,  essentially all spending decisions are driven by emotion.  The latest smart phone?  Designer clothes and accessories?  The trendiest restaurant?  A luxury nameplate on your car?  An extra 500 square feet in your house?   These things are marketed to people with impulse control problems.  Status won't give you a comfortable retirement.  You need money for that.

You've probably seen the news stories reporting that half of all Americans have no retirement savings and most of the rest don't have very much.  How could this be when America is one of the wealthiest nations in the world?  The hard truth is most people don't have the emotional composition to get rich.  And they don't have the willpower to get control over their emotions enough to begin the process of saving.  Sure, an illness or layoff can wreck your financial plans.  But they're not an excuse not to try.  If you don't try, you'll fail for sure.  Those who try actually succeed in many cases.  Give yourself a chance.  Get control over your spending impulses and save.  The only people who laugh all the way to the bank are people who have money to deposit in the bank. 

For more, see (a) http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html; (b) http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html; (c) http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html; (d) http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html; (e) http://blogger.uncleleosden.com/2011/03/how-to-avoid-running-out-of-money-in.html; and (f) http://blogger.uncleleosden.com/2010/11/how-much-do-you-need-for-retirement.html.

How to Teach a Child to Manage Money and Save

The easiest way to build wealth is to start early and save often. A child who learns basic money management skills will spend sensibly and save as soon as he or she enters the adult work force. A person in his or her 20's that has the habit of saving and investing will benefit from a lifetime of good money habits. How do you teach a child to manage money?

1. Give the child an allowance and a piggy bank. After the child has learned to count (at least up to 100), and is familiar with cash (coins and bills), give the child two things simultaneously.

First is an allowance appropriate to the child's age. At age 7, 8 or thereabouts, something like $2 a week might be a good place to start. That's enough to buy a few little things, but not enough for the little one to get into trouble. This allows the child to become familiar with money.

Second is a piggy bank. It is important for the child to understand from the outset that money can be saved for future use and that saving some or all of the allowance will build up money for more expensive things. The child will learn very quickly to think about money as a resource that can be conserved and made to grow over time.

It's important to give the child the allowance and the piggy bank at the same time. Receiving money and saving it should be associated in his or her mind from an early age.

2. Hold the Line on the Allowance. If the child spends all of his or her allowance and then wants a supplement before next week's allowance, don't give in. The child should learn that money is a limited resource and must be spent wisely. Increasing the allowance as the child grows older makes sense. But whatever the amount, don't supplement it. It's important for the young one to learn how to control the impulse to spend.

3. Encourage Math Skills. All aspects of handling money--spending, saving and investing--require an understanding of math. Basic elementary school arithmetic--addition, subtraction, multiplication and division--is sufficient to handle most daily money problems. A middle school level understanding of decimals, exponents and how to read charts and graphs is helpful to understanding investments. Financial markets enthusiasts and Wall Street professionals often use more advanced math, such as statistics and differential equations. The more easily a child grasps mathematical concepts, the better prepared he or she will be to deal with money and investments. It helps if the child can do simple arithmetic in his or her head, without the need for a calculator. Make a game or contest of memorizing multiplication tables; your child will reap a lifetime of rewards from this bit of knowledge.

4. Have the Child Open a Savings Account During High School. Many parents give their kids credit cards (usually with a very small limit) at some point during high school. This isn't a bad idea, since it helps the child to learn about the modern financial system. But don't just give the young one the means to spend. Teach the child how to use the financial system to save and build wealth. Many banks offer special interest bearing accounts for children that allow very small balances without any fees or charges. These accounts can sometimes be opened for as little as $25 or $50. Make sure your child has one, preferably during high school. Watching the balance grow and accrue interest will teach your child about the process of building wealth. This is something a young person should understand before going off into adulthood.

5. Set a Good Example. Kids take after their parents. We all know that. Set a good example for your kids and be sensible about money. You'll not only be rewarded with financially skillful children, but may boost your own retirement portfolio in the process.

For more ideas about kids and money, check out Kids & Money at http://www.money-hacks.com/2008/05/kids-money-may-9-2008-found-edition.html.

For more ideas about money and personal development, check out the Personal Development Carnival: http://personaldevelopmentcarnival.com/.

More on Kids: Children conceived in the summer tend to do less well on a standardized test. See http://www.nbc4.com/family/13270087/detail.html. Hmmmmm. Well, summer's not a bad time to take cold showers anyway. But health care workers beware. There could be seasonal layoffs in the maternity wards from March through May.

Strange News: For all you fashion plates, read the latest about antibacterial ties: www.nbc4.com/technology/13271695/detail.html. Is someone getting a little too obsessive?

Spend Smart and Avoid that Sinking Feeling

One way to increase the amounts you save for retirement is to buy high quality goods and make them last by taking care of them. That way, you'll devote less money to buying things and save more. A look at cars illustrates the point.

A new car loses value the minute you drive it off the dealer's lot. In the first three years of their lives, many cars lose half their value. After five years, the total loss might be 70%. If you buy a new car every five years, you will lose up to 70% of the value of the car every five years.

But if you buy a new car and keep it for ten years, you'll lose around 70% of the value in the first five years, but only about 20% in the next five years. That beats having to make payments on a new car. Sure, you'd have to drive an older car. But, if you save the money you didn't spend on a new car, you'd have a larger net worth. Considering the price of a new car today (on average, something like $28,000), we aren't talking about pocket change. There's nothing wrong with driving an eight-year old car, especially if you have a better retirement as a result.

Smart spending means buying high quality, long lasting goods, and maintaining them carefully. Do this as a way of life and the money you save can go a long way to building wealth.

Consumer goods depreciate in value. They do not build wealth. Cars, furniture, TVs, entertainment equipment, computers, sports equipment, home furnishings, clothes, shoes, appliances, backyard grills, and lawn tractors all lose value over time. It's fair to say that the average American household contains a great big mass of depreciating goods that detract from one's ability to build wealth. And consumption items like cable TV, restaurant meals, pet grooming services, and $200 haircuts have no monetary value after you buy them. Of course, you have to buy some consumer goods and services to live in today's world. Heaven forbid that you should be unable to watch the shows that everyone else is talking about. Maybe you work hard and feel you deserve nice things. Okay. How about a nice big retirement portfolio?

Limiting the amounts you spend on depreciating goods allows you to invest more money in appreciating assets. You'll have less of a sinking feeling about your finances if you spend smart and invest more.

June 24, 2007 Answer to Comment Below: your debt-to-income ratio should not, if you are prudent, exceed approximately 35% of pre-tax income. This ratio is commonly recognized in the United States, and the figure for residents of other nations may be different because of differing tax and social welfare systems.

Driving Carzilla

Some people can't keep two nickels in their hands. They've never met a mall they didn't like. The shopping channels on cable TV beckon. Collecting rebate points on their credit cards feels better than earning interest on savings. Having a big screen TV feels better than having a big net worth. And a backyard grill that can roast a steer is worth having even when they can't afford a steer.

Serial spending undermines your ability to build wealth. It robs your future of the dollars needed to make retirement comfortable. While everyone needs to spend to survive, and also to enjoy life, when the spending becomes pathological, dog food looms as part of your retirement diet. You have only a finite amount of lifetime income and if you spend it as you earn it, none will be left to supplement Social Security in your "golden" years.

Do you really think people admire you when you're driving Carzilla? Maybe they'll envy you if you have the loudest speakers, the baddest rims and a navigation system that will guide you to the Moon. But remember that envy is the first cousin of dislike.

Don't buy something simply because you can pay for it. If you use a credit card to buy a suit, and then make just the minimum monthly payments, you could be paying for that suit 10 years after you donate it to charity. Ask yourself whether something is really worth the money before buying it. Savings have value, too. So does sleep, which comes easier if you're not bouncing checks.

Spend sensibly. Save part of your income. Ignore people who measure you by how much stuff you have. They won't support you in your old age. If you have to supersize something, supersize your wealth.