The Dollar Stretcher blog will explore people and money.
December 2011 - Posts
Happy New Year to all my Frugal Friends!
Are you a big fan of New Year's resolutions? I'm not. It could be because I don't like accountability, but I probably wouldn't admit that. At least not to you! I think it's more that if I see something that needs changing there's no better time to start than right now. One of my favorite quotes is an old Chinese proverb that says that the best time to plant a tree is 10 years ago. The next best time is today.
One problem that we all recognize with resolutions is that for most of us they really don't do much to solve the motivation problem. Whether I start an exercise program in January or July I still need to start by lacing up the old sneakers.
Saw an interesting and unique motivational tool the other day on our "Live Like a Mensch" blog. Mensch suggests making a bet with yourself. I'll let you check out her blog for an explanation.
I'd love to hear your success stories on New Year's resolutions. Did you make a resolution and keep it? Was that helpful to you? If so, please shoot me an email and tell me. Perhaps we can share some in future issues.
Regardless of whether you do resolutions or not, we hope that 2012 is a great year for you. Not only financially, but in all ways!
Keep on Stretching those 2012 Dollars!
Something that I've noticed as I've gotten older. The things that learned in your youth and made habits in your life tend to stay with you. It's true whether they're good for you or not.
I'm not a big one on regrets. It's rare that you'll hear me say that I wish I could do something over again. Not that I don't make mistakes. Heaven knows that I do. It's just that I don't like looking back. I've always figured that the solution can be found in the present. So I need to acknowledge the past for what it is and then move on.
But, if I had it do over again, one thing that I would work on would be developing good habits that last a lifetime in more areas of my life. For instance, financially I've always been good about living within my income. Even when I was making 85 cents/hour at part-time jobs through high school. That habit has stood me in good stead.
In other areas, I haven't been so good. Often in areas of health and exercise (but we don't need to get into details - privacy, please!). Developing good habits early would have been helpful. Especially as I get older.
That's why I've always been a big advocate for teaching kids about money. It's almost criminal how little some of our young adults know about the subject. The fault lies with us, they're parents, grandparents and educators. So naturally I take every opportunity to encourage people to help instill good financial habits in their kids.
When I first talked with Rudy DeFelice I saw him as someone else who had an interest in seeing our kids get money smart. He told me about the effort he headed that included a site called KidWorth.com. As I've mentioned before, Rudy invited me to join their team as an Ambassador, something that I was only too happy to do.
Rudy began delivering the local paper at age 10. Growing up he worked on a farm and painted houses. He eventually graduated from Law and Business school. Today Rudy is the proud father of 3 kids who work for their allowances and take an active role in their own financial future. He has practiced law and founded a software and internet information company. After 9 years he left to start Kidworth.
To help explain Kidworth, I asked Rudy if he would be willing to anser a few questions. He graciously agreed.
Gary: Why do you have such a passion for teaching children about money?
Rudy: I’m proud to be the founder of Kidworth, but I am a parent first and foremost. And like most parents, it’s very important to me to teach my kids skills that will serve them in life. I’ve found my generation of parents very committed to helping their kids develop physically, mentally, spiritually. However, we have been less focused on the development of financial skills. Which is ironic, because comparatively, it is easier than the other challenges to parenting. Furthermore, it is universally recognized that financial skills are part of being a successful person.
I found that my kids learned quickly and got excited about handling their money productively, once there was a system and that system was engaging. When I saw my kids being successful, I knew that all kids could. A generation that was financially empowered is enormously important to society and we discovered one tool that can make that happen. Once you have that realization, it’s easy to be passionate about doing that work.
Well, we have a well meaning misunderstanding in the US, which is that we can shield our kids from financial issues. But the truth is, there are large and sophisticated industries focused on encouraging your kids towards relentless consumption – by that I mean messages from advertising, movies, TV, social media. As part of our culture, all kids are exposed to messages from those media. So if you as a parent do not instill financial values in your kids, someone else will. And that someone else will not likely have your kids’ long term interests in mind. Therefore, it is important for parents to take the lead.
Also, it is not realistic to expect kids to be ignorant of financial matters most of their lives then change into capable financial actors just because they turn 18. People don’t learn that way. It is easier to develop good habits throughout life rather than try to change them dramatically later.
Gary: What can parents do to help children be interested in learning money management?
Rudy: One way is to not approach it as a question of saving vs. spending, which is a mistake many people make. For most of us, spending seems pleasurable and saving is a sacrifice, and pleasure tends to beat sacrifice in the long run. But saving is really nothing more than deferred spending – or, smarter spending. We don’t save to build a bigger number in an account ledger, but to be able to do the things that we really want in life.
So we counsel treating spending and saving as an integrated whole. Focus on what your family and kids really value in the first instance. If the important things to you and your kid is travel, to play music, buy a cool computer, give to charities, go to college - whatever it is - start with identifying those things, and make ‘saving’ about building towards those things. We’ve found kids get excited about getting what they value, and they’re willing to dedicate their resources to that. Even to the extent of foregoing immediate purchases. It’s a powerful, learn-by-doing lesson.
That is why on Kidworth, money management starts with goal setting. Let’s start by what would make your life richer, and then use the system to get there. By the way, it works for adults too.
Gary: What financial skills will these children need to have when they reach adulthood?
Rudy: Ideally they will just continue to use the skills they’ve practiced all of their life. If we pretend that kids will flip a switch and become savvy financial actors if they have no actual experience managing their money, we are bound to be disappointed.
Kids should think about their values first, and use their financial resources for things that are consistent with their values. They should be methodical about achieving their goals, and use a system to monitor progress. Adults should do the same things. Ask your grandfather – it’s not that complicated.
Some parents have asked whether they should give their kids credit cards with low limits on them. My view is if you have to do that, you’ve already lost. At some point the kid will be able to get his/her own credit card without those limits, so if they have not built the judgment to manage their activity by then, they will end up in trouble. Better to give your kid experience in managing his/her resources as a youngster, so that an understanding develops between building to what you want, vs. squandering resources on short term whims. If someone develops that understanding as a kid, they’ll have everything they need to be successful adults.
Gary: Can parents who are not financial professionals really help their kids learn about money?
Rudy: :Any parent can do this if they are systematic about it. What we’ve built at Kidworth is a system. If you use the system, your kid will build wealth and develop financial skills. Simple as that. You don’t need to be an expert. The power comes from bringing together resources that already exist, but which are not working together – your values, your kid’s desires, the support of people in your kid’s life.
Understanding the financial markets, the vagaries of various bank accounts and the things we typically consider ‘financial literacy’ can be complicated. But none of that is necessary. My view is that if we start our kids on a system that empowers them to build wealth and use that wealth to give them a better life, they’ll have all they need.
So the most important thing to do is get started. Take the first step – that’s the hardest one for most people. It’s not just for rich kids, or the children of financial professionals. All kids can succeed financially if they use a system that works. That’s why we do this work at Kidworth. Have faith in yourself and your kids. We do.
I'd like to thank Rudy for taking the time to share his thoughts with us. Thoughts that I largely agree with, BTW.
I'd also like to encourage you to use the resources available to you like The Dollar Stretcher.com and Kidworth.com to help your children develop habits and financial skills that will serve them well throughout their lives. Rudy put it well. As parents we make the effort to teach many things to our children to prepare them for adulthood. It would truly be a shame if we neglected their financial educations.
Keep on Stretching those Dollars!
Our family just bought a new refridgerator. Nothing fancy. Just a box to keep things cold. We hope that it lasts as long as the one that it replaced. The day after it was delivered I glanced at the package of papers that came with it. One featured big print suggesting that we should "Protect Your Investment With an Extended Warrantee".
Don't know whether it was that I was a financial planner before starting The Dollar Stretcher.com or that I use written words to communicate everyday, but the use of the word 'investment' really bugged me.
Back in my financial planner days I was trained to know that an 'investment' is something that returns more than you put into it. For instance, when you invest in a stock you expect that it will go up in value and you'll be able to sell it for more than you paid for it. Or a bond or CD. You invest a certain number of dollars with the expectation that you'll get your money back and earn interest either paid during the investment or at the end. But, you'll end up with more money than when you started.
Just to make sure that my memory wasn't going bad, I checked a professional source. nvestopedia defines investment as: "An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price."
Back in the 80's we first started seeing 'investment' used a little more creatively. Parents were told to invest in their children's education by sending them to college. The argument was that whatever was spent sending them to college would be more than repaid in higher earnings during their lifetime. And, for awhile, that was true. But recent years has brought ever increasing costs for college and some degrees with questionable marketability. Add to that the student loans that now total more than all the credit card debt (approximately $850 billion!). The result is that college might not be the 'investment' that was claimed. In fact, I did a post about that awhile back. In fact, some are calling recent college graduates "the lost generation" in part because of the debt and economy they're facing. For many young people college crossed the link from 'investment' to something that's consumed today.
As time went on our friends in Washington and the statehouses took it even further. They've attempted to redefine much of government's spending as an 'investment'. In fact (yes, I know that I'm a tightwad) it almost appears to me that they've confused the terms "spending" and "investment".
Now marketers for things like appliances are getting into the act! Let's think clearly about this. A refridgerator is NOT an investment! It's an expense. A necessary expense no doubt, but still an expense. That box will never be worth more than what I paid for it. And, unless I open a restraurant (highly unlikely), it will never earn me any money.
What's the point? Consumers need to see through the words used to sell them. We all like investments. Investments are a good thing. They're what we put in retirement accounts so that we'll have money after we retire. Investments represent money we've saved for a rainy day. So when we hear the word investment we tend to think favorably about it.
But, we shouldn't let politicians or marketers or anyone else fool us. If something does not increase in value or pay income to us it is not an investment. No matter what they tell us. It may be a worthwhile expense (our fridge was). But if I believe that it's an investment I'd be a bigger fool than the guy who wrote the headline on the extended warrantee sales flyer. And, that's not a title I plan on accepting this month!
Had an interesting conversation with my daughter last night. We had just watched a movie together (Margin Call - meh!) and we're discussing whether people always acted in their own best interests.
She was advocating the Univ. of Chicago's economic theory which says that people do make decisions based on what's best for good ole me. For the most part I agree. I've been a fan of Milton Friedman (I believe that he's one of the originators of the theory) since the 1980s.
But, I think that sometimes people are wrong about what's in their own best interests. Especially when it comes to finances.
Sometimes they don't know enough to tell what's in their best interest. For instance many have never been taught about compound interest, the time value of money, opportunity costs and other financial concepts. They honestly don't know how to determine what's best for them so they just take a guess and hope that they're right.
Sometimes they're being misled. No one would willingly fall for a scam. Yet, people are scammed every day. Often it's because someone hid the truth or lied to them and they didn't catch it.
Sometimes they've been convinced that an action is in their own best interests when that might not be true. Not to pick on salespeople, but occasionally some (a distinct minority I'm sure!) have been known to confuse the buyer's and their own best interests.
OK, so why would I be blogging about this during the holiday season? Because this is the time of year when many people think about making New Year's resolutions. The time when people try to change their lives. Often in the area of finances.
So, I'd encourage you to learn as much as you can. Especially in the area that you're working on. If you're trying to pay off debt, search 'debt' on The Dollar Stretcher and other good financial sites.
Use the resources available to you so that you know enough to identify scams and salepeople's arguments that might not be the complete truth.
We'll do our part to help provide the resources you'll need. Not only in our newsletters and on our site, but pointing you to other good resources wherever we find it.
Your part is to put yourself in a position where you'll truly know what's in your best interest. That way your financial decisions will really benefit you. (oh, and you'll help to close the gap between my daughter's and my side of the discussion! We can't have her thinking she can best her old man anytime she wants!)
Keep on Stretching those 2012 Dollars!
What's that popular song? "It's the most wonderful time of the year!" For some people of faith and many who enjoy the season that's definitely true.
So to our friends of the Jewish faith we wish you a very Happy Hannukah. May your family celebrate all of the blessings of the holiday!
To our Christian brothers and sisters we wish you the merriest of Christmases. May your family rejoice just like the angels did that first Christmas morning! One final note.
Many of us are struggling with finances, health, family or other life shaking issues. That can be especially hard and lonely when everyone around you is making merry. So if you know someone who could be feeling alone and abandoned, please honor the season by reaching out to them. Sometimes a hug or an available ear is all it takes to make a difference.
And, if you are the one suffering, please don't struggle alone. It may not seem like it right now, but there are people who care. Reach out to them. Call or visit a church, synagogue or community center. Call a radio station or help line. Don't listen to that voice saying that you'll just be a bother if you ask for help. It's not true. You'll be giving them a chance to give a meaningful gift this season. A gift of love.
Keep on Stretching those holiday Dollars!
As I've mentioned before, I've accepted a roll as an Ambassador for KidWorth.com. Over the years I've tried to share good sites and companies with you. I look at this as a real opportunity to help reach a goal that's bothered me for years. You see, I'm convinced that much of the economic hardships that we face as individuals and as a country are caused by a lack of financial education.
Let's all agree that money and how we handle it will play a large roll in our lives. It can bring much happiness or pain into our lives. In part, because it affects so many different parts of our lives.
Let's also recognize that we simply don't teach our children enough about money before we send them off into the world. You wouldn't allow them to drive a 3,000 pound car without some training. Or hand them a chainsaw without warning them of the danger of using it incorrectly. But, we will let them grow up to handle a million (yes, million) dollars or more during their lives wihout proper instruction.
What should we be teaching them? A number of things. Let's look at some that could make the difference between happiness and pain in their lives.
They need to understand compound interest. Both the positive and negative sides of it. Because compound interest is a two-edged sword. It can do much good or much harm depending on how it's used.
Ideally youngsters would learn that money earning interest will grow all by itself. Once it's saved and goes to work, you don't have to work to make it grow. Experts recognize that the surest way to accumulate wealth is to save a little on a regular basis and let that money earn more money.
But, compound interest also has a negative side. Ask anyone who's struggling with loans (student, credit card, home or auto). That's because for every dollar you borrowed you have to pay back that dollar plus interest. So instead of working for you, time and compound interest work against you. As long as you owe money, part of your work will always go to paying interest on those loans. A portion of your efforts isn't for yourself. It's for someone else. Understand those two concepts and you begin to grasp the importance of compound interest.
Young people also need to learn about 'delayed gratification'. It's a major problem for many adults. Unless your last name is Hilton, you can't afford to buy everything you want today. In fact, some things you'll never be able to buy. Others will require you to pay for them a little bit each month for months or even years. You have the choice of saving the money before you buy, or you can buy and then pay the finance company interest on your borrowed money (see compound interest above). If you borrow the money the item will cost you more than if you save up for it. Delaying purchases will almost always save you money.
One way to demonstrate this for youngsters is to help them save for something that's worthwhile. Share with them the experience of sacrificing for a goal and how good it feels when you've achieved that goal. Adults know (or should know) that anything that we save for has more value to us.
Kids need to learn how to read bank, brokerage and other financial statements. Financial statements can be dangerous. If you don't understand them (or if you think that you can't understand them) it's very easy to just set them aside. If you do, sooner or later you'll miss something important. And, it will cost you. Perhaps quite dearly.
But, learning to read a financial statement isn't that hard if you go about it one piece at a time. For instance, children should learn how to read a bank statement to see their deposits and withdrawals. Give them the opportunity to see their money earning money as interest is credited to the account. When they're older they can learn how to read a credit or debit card statement. Best of all, by teaching them at a young age you'll be removing the fear factor. Too many adults today are afraid of financial statements and avoid them to their own harm.
They need to understand the basics of accounting. The subject may seem scary to the unitiated. But, basic accounting is not all that difficult. Any gradeschooler who can trade a PB&J for a baloney sandwich can grasp the basics. The key is understanding what's called 'double entry bookkeeping'. That's a fancy way of saying that every financial move has two parts. For instance if you buy a car with cash you've added a new asset (car) and reduced another asset (cash) by the same amount. If you borrowed the money you increased the car asset, but added a liability (car loan). Learning how to calculate your net worth (assets minus liabilities) is essential to monitoring your financial health.
They also need to understand the basics of economics. Another frightening subject. At least in theory. But it really doesn't need to be. Again, if economics is broken down into it's smaller building blocks it's easy to understand. Two concepts are especially important for kids to learn.
The first is the 'law of supply and demand'. When demand is greater than supply, prices will go up. When the opposite is true prices will decline. Knowing that can help you buy the right item at the right time. Buying appliances and autos at the end of the model year, or clothing and holiday items at the end of the season.
It's also good to keep supply and demand in mind when you're planning a career path. Some fields have too many workers chasing a few jobs. But, others seem to be chronically short of qualified people. Teaching our kids to be among the later group could make their work life much easier.
The second economic rule for our children to learn is called 'opportunity cost'. That's a fancy term for a very simple concept. It means that often when you choose one thing that you automatically eliminate another choice. For instance when Junior spends his allowance on a video game he can't spend it on a new skateboard. The 'cost' of choosing one option is the passing up of another.
That'll play out as an adult often. Everything from choosing one car over another, to the choice of a career path. Or by spending money today that might have been saved for retirement. The opportunity cost of that soda at breaktime could be a steak in their retirement years!
Those are just a few of the key concepts that are important for our kids to know before they reach adulthood. Which brings us back to why I'm excited about KidWorth.com. By registering your child (which is free BTW), you'll be creating a wonderful teaching environment. A place where they can save for that skateboard and see how their savings grows. A place where learning is easy because it's part of everyday events and choices. An experience that will help them prepare for a life full of financial choices. Choices that they'll be better able to make because they learned the basics of personal finance as children. So let me encourage you to spend a few minutes and visit KidWorth.com. The time that you spend today could pay dividends for the rest of their life.
Wanted to share a really pleasant conversation I had the other night with Vickilynn Haycraft. She invited me to be a guest on her "Get Real - Get Prepared" show. We've communicated a few times over the years and have some common friends in the frugal living world (our own blogger Donna Miller comes to mind).
We got to discuss a whole bunch of frugal living topics including where's the best place to save money, what's the most important thing for people to know about money and even some holiday ideas. It was so much fun that we agreed to do it again after the holidays!
If you'd like to listen in the show is archived here. You can listen from the link or download an mp3 for later. Drop me an email and let me know what you think.
And, while you're at it, take a few minutest to visit Vickilynn's site RealFoodLiving.com. You'll find all kinds of info and product reviews designed for those of you who love to prepare your own food or wish that you knew how to cook! Either way I'm sure you'll find something that will help you save time and money in the kitchen.
Last Saturday I went to the drag strip with some friends of mine. It's an annual event for us. We're a bunch of car enthusiasts who get to spend a day with some truly amazing equipment. For those of you who are not familiar with drag races here's a brief explanation. Each race is a 2 car competition to see who can cover an 1/8 or 1/4 mile in the fastest time. They both start from a standstill. An electronic signal tells them when they can go.
And then they explode off the starting line to cover the agreed distance (which is set at different legnths for different classes of cars). Huge tires spin trying to get traction. Smoke fills the air. The sound of the engines is earsplitting. An extraordinary amount of power is unleashed in just a moment. You can't help but be impressed as these cars go from a standing start to over 200 miles per hour and cover 1/4 mile in just seconds!
There were some exceptions. Not every car was designed just to go as fast it could. Some were built with a sense of humor. For instance someone had a car that looked like a small railway engine. As you can imagine it attracted a lot of attention from the kids! I'm sure it goes fast, but that's not it's sole purpose. It was also meant to create a few smiles!
I had a great time. Always do. But, unlike my friend, who has been a drag racer since his teens, I tend more toward classic and custom cars. Which are an entirely different breed of car. They're often restored to like new condition. Or, in the case of customs, modified into a work of art in sheetmetal. They're driven with extreme care to minimize any chance of accidents or paint chips.
One frustrating thing about a day at the drag strip is the occasional car that has an equipment failure on the track. We saw one where the differential blew up and spewed grease for 1/16 mile. It took the clean-up crew the best part of an hour to make the track safe to use again. During those cleanup times you get to swap stories with your friends and other spectators (some of the stories are even true!) or go down to the concession stand to pay for an overpriced hotdog and drink.
Sometimes in those quieter moments I tend to think of how life illustrates our finances. This happened to be one of those cases.
It occurred to me that just as dragsters and classic cars are different and well-suited to their purpose, so should our financial tools and methods be chosen for the goal we want to achive. Let me try to draw an analogy that makes sense.
You'd be foolish to take a classic car that took years and many dollars to restore and run it on the drag strip. One trip could ruin paint you spent hours polishing or break parts that you can't replace. That classic car's purpose isn't to go fast. If your goal was to go fast you'd be much better off to use a dragster. It is designed to accomplish your purpose.
The same thing is true of our finances. We need to know what our goal is before we decide which method to use. Take, for instance, our desire to get out of debt. We'd like to use a dragster to solve the problem. A quick burst of effort and the whole deal is over quickly. But, conquering debt doesn't work that way. Chances are we built up the debt over years and years. We're not going to get rid of it overnight. It's going to take a longer, more dedicated effort to keep on repaying past debts for months and even years. More like our classic cruiser than the dragster.
We'll need tools that can help us select which debt to pay first. Ways to keep track of what progress we're making month by month. Even some rewards as we hit the quarter and half-way point to keep us motivated to continue pushing to our goal of being debt-free.
Just like the cars, we need to be tuned differently too. We all know someone who starts a financial program with a lot of tire smoke. And they travel the first quarter mile quickly. But then they lose interest and don't make any real progress towards their goal.
It's not how much enthusiasm we bring to the starting line that counts. Rather it's the determination to continue to journey even when it's tough to go on. When events make it hard to stay the course.
On the other hand our goal may be to get the best deal possible on a new refrigerator. This time we need to select tools and techniques that will help us right now. Knowing where to find reviews, looking for discounts and brushing up on how to negotiate are all immediate activities. This time the amount of energy we bring to the task today is really important. Much like the dragster taking off. A cruiser will not get the job done. We need our tools to work together right now.
So as we set financial goals, both now and as part of New Year's resolutions, don't forget to make sure that you're driving the right financial tool or technique. Failure to get this right could leave you standing along the money highway waiting for a tow truck!
Keep on Stretching those Dollars!