Recently, two events came together in an interesting way. Just the other day my wife was teasing me. On our way into work, I suggested that we stop at Starbucks for a cup of coffee. We needed some uninterrupted time to go over some family and business matters. And, our local coffeehouse seemed like a good place to do it.
When we got there I ordered a cup of black coffee. She ordered something that was related to coffee, but probably had more in common with milk, whipped cream and other ingredients!
Normally when we go out I pay our restraurant bill. But she has a Starbucks card. So it makes sense for her to pay (at least that's what I'm told).
She brandished her Starbucks card, teasingly telling me that it's a "gold" card. And that makes her a special customer. I reply (only half in jest) that the gold card makes a special sucker.
Before I go on, let me point out that my wife is frugal. I'm not trying to paint her as a spendthrift. If she were we would have found it impossible to live with each other 30 years ago. But, like all of us, if we can afford it we have one or two areas that we like to treat ourselves. Coffee happens to be her's. (we'll keep mine a secret...)
But, it does occur to me that the things that provide us with status are often the very things that ruin our budgets. The designer clothes and sunglasses, prestige autos and watches - these are the things that often seem irresistable before we purchase them, but wreak havoc with our credit card bills later.
Fortunately for us, my wife and I can tease about the Starbucks card. It's not a significant expense. Rather it's a little luxury that she deserves.
A few days later I was being interviewed by Marty Nemko. He hosts a show on the public radio station in San Francisco. We we discussing what we can pass along to succeeding generations about money. We spoke on how much pressure there was on young adults to conform to the purchasing habits of their friends.
I remarked that the concept of a 'starter home' had disappeared. Most 20-somethings expect that their first house will be much like their parents' existing home. They assume that they can start the financial journey in the same place that took their parents 20 or 30 years to reach.
If you look at that assumption you'd say it was false. Their parents have been building equity for decades to make their mortgage payment affordable. Their kids don't have that downpayment and the mortgage payments will be too expensive for them. They need to start the financial journey at the start. Not the middle.
As we continued the discussion Marty asked me what was the most important thing that we could teach young adults. It seems to me that there are two things that will make a huge difference in their financial future.
First, learning to live without status symbols is freeing. It's a hard life when you let others define your worth based on the things you own. If my self-worth is tied up in a new car, I'll be forced to buy one every few years. And, that will get expensive.
I'll be much happier if I decide that my self-worth has nothing to do with my possessions. That buying (or not buying) an expensive new watch will make no difference in who I am and what I'm really worth. That's very liberating.
Second, all young adults would be wise to learn about the value of compound interest. It's a double edged sword that can make or break your finances.
The idea is really simple. If you save a few dollars every month and put them in a bank, IRA or invest them, over time they'll grow. You won't have to work hard to make that happen. Once you've saved the money the hard work is done. Time and a little monitoring will do the rest. And, as the years progress those savings can become significant.
But, if you spend a few dollars more than you make each month, the same compound interest will become an ever heavier burden to carry. That's because the money that you owe will will accumulate interest and the debt will grow a little bit each month. So you'll continue to pay more and more for something that you bought years ago.
The concepts are simple. No MBA needed to understand them. Look at prestige goods for what they are. A way to separate you from your money. Learning to live without them is actually very freeing emotionally. And, compound interest can make or break you financially depending on whether you save a little each month or spend a little too much.
So I'd ask one question. What gold cards do you have in your wallet?
Keep on Stretching those Dollars!