Saturday, May 7, 2011

Why Money isn't Funny - but Serious Business

Money is deadly serious business and should not be treated in a lighthearted or casual manner.

As I noted in Money - the Greatest Invention of Mankind, money is an invention - an artificial construct, that was created by man.  And yet many people treat it as if it were a natural phenomenon - a creation of God, not man.  But that is not the case.

And like most inventions, it has a good side and a bad side.  Like a loaded handgun, it can protect you, or kill you - or one of your loved ones.  It is all in how you use it.  Use it carefully, and it is useful.  And like a loaded handgun, not having it laying around is probably a good idea.

I received a nice e-mail the other day from a young lady.  She was very sincere, I think (or a very clever troll!).  But her relationship with her spouse and her relationship with money are going to lead to trouble, I think.  Like most young people, her attitude toward money is about the same as that toward a fancy shiny new convertible - "Whee!  Let's put the top down and drive fast!  Let's have FUN!"

But money is a very serious responsibility, particularly for our generation.  Unlike generations past, who lived in a quasi-Socialist era, where healthcare, retirement, and other benefits were provided by benevolent multi-national Corporations, today we have to fend for ourselves - and fund for ourselves.

This means, that, Health Care Reform notwithstanding, that most of us will have to fund our own retirements, pay for our own health care, and basically take care of our own needs.

And funny thing, too, the teabaggers claim we are sliding toward "Socialism" in this modern age.  The reality is, we are sliding toward anarchy if anything - it is a far more dog-eat-dog world today than 30-40 years ago.

But politics aside (because fighting for social change is not a very good plan for retirement - these trends are not likely to reverse, nor should you predicate your life on them doing so) you have to take care of yourself under this new paradigm.

And therein lies the rub.  Today, our Corporate overlords don't fund a defined-benefit pension plan.  They pay us in cash and then offer us a 401(k) plan.  And you have to choose to participate in it.  And if you choose not to, or choose poorly, well, bad things will happen to you later in life.

And since those bad things are going to happen 20-50 years later, most people don't see the connection.  They disassociate the fun-loving partying "have it all now" person of today with that stingy, miserly, greedy old man or woman, who, 50 years later, will hate the younger version of themselves for putting them in the pickle of trying to live on $1500 a month Social Security.

So young people today think that spending $10 on a coffee drink is OK on a $75,000 annual salary.  Because, as well all know, $75,000 is "a lot of money" and $10 is "just a tiny amount".  And the same goes for a lot of other silly purchases we all make at that age - usually status items, usually things we think we can "afford" at the time, because our checkbook balances at the end of each month.

But unless you have an overall long-term financial plan, you are heading for disaster.  And yes, our government plans the way a teenager does with money.  But that is all the more reason you should not.

Before you decide you can "afford" a new Jet-Ski or $10 a day in coffee drinks, or spin classes at the local gym, ask yourself the following:

1.  Have I maxed out my 401(k) and/or IRA donations to take the best advantage of the tax deductions?  As I noted time and again, you cannot deduct your way to wealth but this is the one "gimmie" from Uncle Sugar you should be humping like mad.  15% of your income does seem like a lot, but if you can do this early on in life, you will make out like a bandit later on.  And all it takes is cutting back on a lot of non-essential items in your life - and if you really think hard, a lot of what you think of as "needs" are really actually "wants".

2.  Do I have Any Debt?  And if So, what is my detailed plan for getting out of debt over time?  If you have car payments, student loan payments, or worse - credit card debt, you have no business spending money on foolish things.  The first priority is to get out of debt and stay out of debt.  Debt is not a natural condition, but if you stay in debt long enough, you will start to think it is.  And eventually you will get into trouble - that your income may not bail you out of.

3.  Do you have a mortgage?  What is your plan to pay it off?  If you don't own a home, you should be saving for the down payment - as 10%-20% down payments are once again the norm these days, and a larger down payment means better mortgage terms (no PMI, lower rates, less fees, etc.).  If you do have a mortgage, have a plan to pay it off over time - and not just refinance again and again to perpetuate the debt.  Laugh all you want, a LOT OF PEOPLE do this - I know I did - and end up in a lot of trouble.  They "live large" on credit card debt, and then pay it off with a home equity loan.  They think they are balancing their books, but are just getting deeper and deeper in DEBT.

4.  Is your Net Worth Increasing or Decreasing?  If you don't know your net worth, or it is zero, a pathetically small amount, or worse - negative, then you got no business going to Starbucks.  You have to build up your estate - create wealth - by saving more than spending.  And if you spend $10 a day at the coffee shop, but have a negative net worth, you will be in financial trouble in about 5-10 years.  Contact a bankruptcy attorney now, just so you have his card when you need it.  Have a plan to build your estate over time.  Time, yes time - it will take a lot of time.  But if you start now, you will become wealthy.  Don't count on "making more money when I'm older".  Chances are, you'll spend it just as fast.  And don't expect to work until you are 70, or even 65 - or even 55 these days.  Build up wealth so you can retire early. Isn't not working better than a status coffee drink?


5. After-Tax Savings:  Many people have little or none, and yet every financial adviser says you should have 6 months to a year in savings.  Not being in debt makes whatever savings you have, larger in that regard.  $20,000 in savings lasts many more months if you don't have car payments, student loan debt, and credit card debt.  But regardless, you should be building up enough savings to have enough to live on, if you lose your job (it happens!) and enough to buy that next car, secondhand, paying CASH.  When you save money, you end up saving money on purchases as well, as so few people have the leverage that CASH provides.

Yes, all of that seems harsh, and the sort of advice your Dad might give.  But Dad was right (even if he never saved much!).  It is tempting, when you are young, to want to "live large" and buy all the things your "stingy parents" wouldn't get you.  You are making a couple of dollars now, why not "treat yourself?"

And I'll tell you why.  Because not too much later in life, when you decide to settle down, buy a house, perhaps have kids, you will wish you saved rather than spent.  And you will be doubly bitter, staying at home with a baby in your arms, thinking about your carefree youth in the shiny convertible, sipping $10 latte drinks, while today you drive a secondhand Hyundai and clip coupons.

And when you are 70 and run out of savings prematurely, you will surely hate life.  And the transitory experience of having shiny things as a youth will be little comfort.

Take care of yourself first - be kind to yourself. And this means disciplining yourself.  It is no kindness to a child to indulge them in their every whim - but a form of cruelty.  And similarly, it is no kindness to "treat yourself" to eye-candy consumer goods and status items as a youth, when you should be thinking of your long-term needs.

* * * 

Do I follow my own advice?  Yes and no.  I worked hard as a youth - 14 years of night school - and did get ahead and make good money.  We worked hard and made a lot of money in Real Estate.  We Got Lucky, too in that we sold out and made a lot of dough before the shit hit the fan.  Don't count on Getting Lucky.

But even if we didn't get lucky, we would have done well, as we learned to do without a lot of things like $10 latte drinks and cable television.  But we could have done a lot better - and later in life, you don't get "do overs" on these things.

So think hard before you pull out your wallet.  Don't make your financial plans - including spending on "little things" based on what your friends or neighbors do.  Make an overall plan and then figure out what makes sense in terms of discretionary spending.  You may discover that you are spending faster than your are making, or that you are merely treading water - which is a dangerous place to be, when a financial tsunami comes.

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