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Your Money and Your Life
By: Kamil Z. Skawinski
According to the April 2005 issue of Money magazine, 51 percent
of Americans consider the subject of money a most sensitive
topic. It has, for many, become the emotionally charged locus of
fear and apprehension, the subject of lies and deception, and
the flash-point of untold arguments and recriminations.There are those who claim that our attitudes and behaviors with respect to money-the saving of it, the spending of it, the borrowing of it, and the investing of it-become crystallized sometime during our childhood and that they are modeled, for the most part, upon our parents' handling or mishandling of their own financial affairs. If this is true, it's not surprising that the skill sets and experiences many of us have with money during our youth are either handicapping or insufficient enough to allow us to adequately address the complex and manifold fiscal challenges we must grapple with in our own adult lives. And this is a shame, for we must now possess a sound working knowledge of what constitutes prudent saving, spending, borrowing and investing. Today, we must increasingly look to ourselves to ensure that we will have the means and financial wherewithal to attain all of the not insignificant life-goals we set for ourselves and for our families. It's up to us to know how to take maximum advantage of the investment vehicles, instruments, and strategies that can help turn money into wealth. In order to accomplish anything, though, we actually need a reserve of capital which we can make use of, for it takes money to make money. "The borrower is slave to the lender" If your income is going solely to pay off bills and debts and not flowing into savings to some extent, you are in the unhappy position of continually working for your money, and not having money work for you. Your largest wealth-building asset is your income. When you save your money and then invest it prudently over time, you will become wealthy. On the other hand, if you tie up your income by taking on debt, you become a slave in the sense that you no longer have the liberty to use your money in other more personally productive and profitable ways. Now, debt isn't necessarily a bad thing-in fact, according to many economists, the active borrowing of money for home and other purchases is a sign of a healthy, growing economy, and an indicator of future economic confidence among our nation's citizens. Unfortunately, many Americans do not treat it as the double-edged sword it is, and they mindlessly overextend themselves and rack up tremendous amounts of non-mortgage debt, debt which then remains a financial drag on their lives for years, if not decades. Statistically, 99.5 percent of Americans are now living with debt. According to a recent USA Today article, 78 percent of "Baby Boomers" have mortgage debt, 59 percent have credit card debt, and 56 percent are making car payments. The average American family now carries $8,000 in credit card debt according to numbers provided by the American Bankers' Association. Total non-revolving credit in the United States-which includes closed-end loans for cars, tuition, boats, vacations and other items-increased to $1.36 trillion in 2005, and total household debt amounted to $11.5 trillion in 2005. Our fellow citizens are not all living high-off-the-hog or engaging in madcap spending, however. Many are increasingly getting into serious financial difficulties because they are living too close to the limits of their financial means. "Folks are just living too close to the edge because the cost of the middle-class lifestyle has gone up-the cost of medical care, the cost of insurance, the cost of housing-all of this now tends to be a lot higher than it used to be," says Amelia Warren Tyagi, coauthor of All Your Worth: The Ultimate Lifetime Money Plan. "What I see is people trying to make reasonable decisions. But what they are doing is living right up to the limits of their means-they're using almost 100 percent of their paychecks to cover their basic living expenses...the money from their paychecks is just over-committed to what are, essentially, the basics." Thirty years ago, a typical U.S. middle-class family could expect to buy a home and educate their children on one income, notes Tyagi. Today, in contrast, an average family generally requires two incomes to satisfy that same set of needs. Compounding matters further is the fact that U.S. families now live with more risks in their lives-the risk of job loss, the risk of loss of benefits, etc.-and much less economic security. And with so little extra discretionary income and savings available, many families turn to credit to stay afloat when faced with an unexpected case of hard luck. Yet when the "good times" do not return-or do not return quickly enough-that burden of debt can eventually sink a family's fiscal ship like an iceberg. Personal bankruptcy filings in the U.S., unsurprisingly, have risen steadily over the past years. In calendar year 2000, for example, there were 1.25 million such filings according to the Administrative Office of U.S. Courts. In 2004, there were 1.6 million, an increase of twenty-seven percent in a period of three years. What Are We Learning About Personal Finance? Living in a nation which extols the virtues of the nature and logic of capitalism, it's ironic to discover that few grade, high, or college students actually ever receive anything resembling a comprehensive course on the subject of personal finance in school. Although more states are now supposedly requiring that students learn something or other about managing money, this particular subject matter still remains a "fringe topic" at best in most of America's classrooms. According to 2004 survey results released by the private National Council on Economic Education (www.ncee.net), only seven U.S. states mandate that students take a course about basic finances in order to graduate high school (Alabama, Georgia, Idaho, Illinois, Kentucky, New York and Utah). This, believe it or not, is actually an improvement on figures compiled in 2002, back when only four states required such coursework. Despite the fact that most of the states surveyed by the NCEE declared that they want money-related matters taught somewhere along the way in their standard curriculum-38 states actually say they include the ideas of saving, investing, risk management and other finance themes in their standards or guidelines (an increase from 31 states in 2002)-many in reality have done little to actually enforce these standards, let alone require the completion of any financially-oriented, stand-alone coursework. And the results of such ambivalence with respect to this critical subject matter are becoming increasingly apparent and embarrassing. In a nationwide survey conducted in 2004, for example, only 52 percent of high school seniors answered questions related to personal finance and economics correctly. Students struggled with basic questions on income tax, stocks and bonds, credit card liability and retirement plans. While some might eventually go on to learn something or other about such critical information in future college or technical school courses-or so one hopes-the majority will not receive such "remediation" because high school will be their last stop within the educational system before they enter the real world. And once out there, for many, it'll literally become a case of sink-or-swim.... "There is more good economic and financial education being offered in schools than ever," said Robert Duvall, president of the national council, which released its findings during an economic literacy summit. "But as a subject area, it continues to be marginalized as an add-on in an already crowded curriculum. We need to keep pushing to make it part of the core." The problem of bad money management is not escaping federal attention, either. Former Federal Reserve Chairman Alan Greenspan publicly urged educators to teach children the rudiments of financial literacy so that they will not be saddled by poor financial decisions as adults. The Financial Literacy and Education Commission, which represents 20 federal agencies and commissions, is also working on ways to help people understand and make sensible money decisions. If such pro-financial education efforts take root, spread, and spur change in our nation's schools and beyond there is room for optimism. But if they don't, things might go from bad to worse...and the repercussions of inaction or of half-hearted measures could potentially affect the future long-term economic well-being of everyone living in the United States. One thing is very clear: if our children don't acquire a solid knowledge about money management early and throughout their academic lives, then their futures will be unnecessarily much more complicated and unhappy because the consequences of bad financial decision-making cannot be easily or painlessly undone. Money Management Isn't "Mission Impossible" "It's not magic, it's just math," emphasizes Tyagi. "You shouldn't be spending more than you are making. But young people are optimists: they look at the world and they see potential and opportunity. They look at their financial affairs and say, ‘Hey, we're young, there's still time, we're both working....' But in living your financial life, you have to think like an optimist but walk like a pessimist and carry an umbrella. This means you need to set aside money in a ‘sleep-tight fund' so that your concerns, worries, and thoughts about future college costs, retirement, the mortgage, and whatever else don't keep you up at night." Knowing where your money is going and what it is and is not doing for the proverbial bottom-line is a good start, says Tyagi, for this sort of information, if it is clearly made known, can prove immensely helpful in setting up long-term saving, investing, and debt-management strategies. Such information, moreover, can be critical in helping individuals and families better assess how well or how poorly they could ultimately weather any unanticipated financial setback(s) in their lives. Maintaining pen-and-paper ledgers, account books, and budget planners, unfortunately, is not the easiest or most enjoyable of undertakings. Using a personal computer to keep track of such details via a spreadsheet can be easier, but the utilization of well-developed software products like Intuit's Quicken or Microsoft's Money is probably the best way of transforming the drudgery of financial record-keeping into a more agreeable activity. Even so, not everyone will be good at scrupulously tracking inflows and outflows of money over time. And for those who feel that their use of personal finance software would all too closely resemble the way in which they've adopted and followed past New Year's resolutions, Tyagi has a simple formula that can be of enormous help in addressing debt and improving the savings rate. "Simply spend no more than 50 percent of your paycheck on your ‘must-have' expenses. ‘Must-haves' constitute your insurance, your rent or mortgage, your car payment, the food you put on your table-basically, all the stuff you have to pay month in and month out. The ‘wants,' all of the ‘fun' cash, should represent no more than 30 percent of your total paycheck, and this money should be spent without any guilt associated with it. ‘Debt-payment and savings,' finally, should represent the last 20 percent of your paycheck." "The balanced money formula gives families a bulls-eye, a place to aim as they work out their spending," says co-author Elizabeth Warren, a Harvard Law Professor. Implemented gradually and systematically along the lines outlined in their book, this formula can do much to improve the fiscal situation of any financially challenged American family. "We spend an entire chapter showing people how they can bring their ‘must-have' expenses into line with the 50-30-20 approach," says Warren. "We also try to emphasize that budget categories help people understand competing demands. If someone is very heavy on housing, for example, then that person needs to go very light on cars-used cars, cash only-to keep monthly expenses manageable. We also spend time in the book talking about times in a person's life when it makes sense to deviate from the formula-for example, when you are in school, or when you want to keep a parent at home temporarily after the birth of a baby." Once you get into the habit of allocating your money according to these set percentages, Tyagi underscores, you'll find that you'll start making positive steps, positive inroads, towards debt-elimination and, ultimately, savings. "The neat thing is that, once you repay your debts, you can just take the money you otherwise would have been applying to them and you then move it directly into savings-it's a simple and relatively painless way of accomplishing your savings goals without feeling like your having to make major sacrifices to do so." And once you eventually build up an adequate reserve of savings that you can then invest for the longer-term-this is money that doesn't constitute your "emergency fund" (a sum roughly equivalent to three to six months of your current salary)-Tyagi recommends dedicating that surplus to an investment in a no-load, relatively inexpensive, stock-based index fund. "If you read any of the investment-oriented books, reports, and so on that are out there, you get the feeling that all this is something hard, that you've got to pick up this new vocabulary and that you need the skills of Warren Buffet to invest. And the truth is, you don't-this is not that hard. For most folks, most of the time, you can make some really simple investment moves that can go a long way towards shoring up or making the most of your long-term savings for the future. Ordinary folks, in my opinion, have no business buying individual stocks...however, putting money into an ordinary, diversified, indexed mutual fund is a great way to go: low-overhead, no stress over any individual stock, no special vocabulary you need to learn. This is a good place to put your retirement money...and a lot of analysts and even Nobel laureates will tell you that index funds have outperformed mutual funds managed by so-called high-flying stock managers. Index funds give you the best possible return on your money without making you do any extra research or shopping: they're all the same." Obviously There's More to Say on the Subject The information conveyed in this article shouldn't be considered the "last word" on the subject of rational money management and investing. There's much more guidance to be found in practical advice books and radio programs dedicated to this subject and each will include more than their share of useful information and sound recommendations. This Making Money Magazine piece should be looked upon as a primer with some important points to ponder and simple yet practical advice to follow. Whether or not you choose to profit from this article, literally and metaphorically, is up to you. © 2006 by Kamil Skawinski (E-mail: skawinski@hotmail.com ) All rights reserved. This material may not be published, broadcast, rewritten or redistributed without prior written consent.
Writer Information
Written by
Kamil Z.
Skawinski, Science and Technology Editor
Kamil Z. Skawinski is a freelance writer specializing in technology issues who lives in Milwaukee.
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