A Financial Primer

This letter isn’t going to have a lot of depth – hopefully I’ll have time to visit each of these subjects in detail at a later time.  But I wanted to give you a quick primer on a topic that will affect you every day of your adult life – finances.

Money isn’t everything, but it’s a necessary evil.  You need it to live on.  It enables you to do the things you want to.  It provides security and confidence.  And managing it is a daily effort.

I’d like to give you some quick bullet points on the absolute need-to-knows about personal finance.  I’m imagining this would be something to start with as you begin to earn money and make your way in the world.  So without further adieu,

What You Absolutely, Positively Need to Understand About Personal Finance

• Responsibility. You have to take control of your financial destiny, or it will take control of you.  If you assert control, you can do what you want, be what you want and have what you want.  If you neglect it, your financial status will determine who you are, what you do and what you have.  It’s that simple.
• Earn.  You’re going to need money.  To get this, you either need to get a job or create value for someone else in exchange for money -i.e., a product or service.  You can go get a job working for someone else and get a regular income and learn valuable skills to apply elsewhere.  You can create a product people want and sell it.  Or you can provide a service.  Neither way is better – it’s all about how you like to work and what drives you.   It would be a good idea to do some of each if possible to help you understand how you like to work – that will make future career decisions easier.
• Budget.  Figure out your obligations and desires and set aside money to cover them.  Don’t spend more than you earn.  Cover the necessities first, then the dreams.  Don’t just stick money in a bank account and wait for it to disappear.  Keep up with what you have and where it’s going.  Don’t ask your parents to bail you out of problem situations – figure out how you’re going to resolve the problem and do it.  This process will also help you understand whether or not you want to be making more money.
• Save. Spend less than what you earn and save some.  10% or 20% is a great goal.  Save for a big purchase, to pay for college or just to have a nest egg to draw on when you need it.  But get used to the idea of having money that you aren’t going to touch for regular expenses.
• Paying bills. You’ll be doing this all your life, so it’s good to get used to it early.  Pay off a car, pay your own insurance or your own subscriptions.  Get used to keeping up with regular bills and paying by check or bank draft.  Keep up with how much you owe and how much interest you could save if you paid it off early. By the time you have significant bills to worry about, you’ll be fit to address them.
• Invest. Part of that savings should be in investments.  Ask your parents or investigate mutual funds, CDs, savings bonds, money markets, “Christmas Clubs” and understand how they work. Then feel the joy of seeing your money work for you instead of vice/versa.
• Frugality. Learn how to compare and evaluate things you want to buy.  Research the differences between products to make a smart decision.  Learn how to take care of your things and make them last. Buy just what you need and avoid waste.  Learn how to make the most of what you have and to understand what’s really important to you vs what you think is important this very minute.  Understand that giving up your morning soda might pay for your Christmas gifts at the end of the year.
• Credit. Learn when it’s necessary and how to use it.  Understand the costs of interest vs paying off your debts.  Learn how to use a credit card and pay it off every month.
• Retirement.  Keep in mind that someday you will stop working or change your work habits and need some funds to fall back on.  Start contributing to a retirement plan your parents can help you set up.  Learn the power of compound interest and enjoy seeing your funds grow.  Remember that just a few dollars a month at a young age will be more valuable than hundreds a month when you’re older.
• Charity. Contribute to a charity that’s meaningful to you and track what they are doing.  Learn to track these things for tax purposes and how to investigate/evaluate charities to make sure your money does the most good.
• Taxes.  Jobs bring taxes.  Although you likely won’t have to pay any, it helps to do your taxes yourself while they’re simple and learn how the system works.

That’s just a primer, but there’s enough good advice in there to get you started on the right path.

 

Live below your means

When you finally get out on your own and find yourself somewhat established, the temptation to acquire starts to set in.  It happens to the best of us – you look around with a sudden increase in income and things just start calling you.  All the little luxuries you couldn’t afford are laid out before you and you’re caught by the desire to have them all. Clothes, cars, homes.   A poshy club membership.  All the toys and gizmos you lusted over around every holiday.

I can admit to those weaknesses.  Right now I’m looking over a spread of about 15 guitars, when I only play 3 or 4 regularly.  I have a couple of crates of action figures I haven’t had the heart to get rid of yet.  And in times past, I had an extensive baseball card collection, Album/8-Track/Cassette/CD collection – even a decently sized computer collection at one time.

What you don’t realize when you dive into these extravagances:

• They don’t create happiness. When the novelty wears off, you’ll be looking for a new thrill.
• They only impress a small percentage of people, and those are generally the people whose opinion means little to you.
• More times than not, they just create more work.  Organizing, cleaning, storing, valuing, insuring, maintaining and displaying.
• When you buy into a material culture, you develop a sort of snobbishness that often causes you to devalue people who have something good to contribute to your life.
• When you  buy things you can’t pay for, you put yourself in a spiral that’s really difficult to come out from under.  Debt compounds, and so do your problems.

One idea that was firmly ingrained in my head by my parents was not to spend beyond what you have.  And although I can readily admit I’ve wasted quite a bit of the funds that came my way, I never overspent my means.  I never went into credit card debt. I never kept an outstanding loan outside of a mortgage loan that wasn’t running interest free.  And I saw to it that my long term debts were never beyond my means to pay them back in a reasonable timeframe without creating a lot of strain on my finances.

I want to encourage you to accept the same limits in your own life.  Enjoy the power of what you earn, but see to it that you’re not spending more than you’re making and you’re putting a reasonable amount of money away into savings or retirement accounts – 20% is a decent figure.

Live below your means.

 

Money matters

I’m hoping you’ll never need to read this post to learn something new. I’m doing my best to teach you from a young age about how finances make a difference in your life and plan to continue that practice. But I think it’s critical to state it in case you ever need a refresher, a reminder or something to pass on to a friend in need, because it’s a very serious lesson.

Money matters in the real world. It really does. It’s not the most important thing in life and I think it’s unhealthy to focus on it too intently. But there is no getting around the fact that you need money to have a life worth having in America.

As a teenager, you probably don’t thoroughly understand how much money it takes to make it in the world. Maybe you think finishing your schooling isn’t all that important or that the parents are so demanding that you’d be better off hitting the streets on your own. Or maybe you’re set on becoming an artist of sorts and don’t want to waste your time on business when you plan to be a rock star or famous author someday.

Let’s try a little hypothetical example. Suppose you’ve just had it with your parents and school and decided to drop out and run away from home, or you packed your guitar/notebooks and headed out to learn about fame and fortune. Let’s talk about what it takes to get started on your own (in 2007 figures, in your average medium size town – obviously the costs will be more in later years and larger cities):

• First you’ll need somewhere to sleep. An apartment will run you between $500-$1000 /month for a nice place comparable to your home. The cheapest you can go would be a $300-$500 range (if you can find it), and that’s for a place that’s ugly as sin, substandard or nonexistent heating/cooling, broken plumbing, dirty, smelly, pest-infested. In either place, you can count on putting down 2 months rent to get started – and since you’re young, probably a security deposit of about half your rent to make sure you don’t wreck the place and leave. You’ll need to turn on the power, for about a $20-$30 fee, and probably a security deposit of $100-$200 since you have no credit history.
• You’d probably like a phone – either around $60/month for a cellular or $25/month for a landline with no long distance. You can count on about $30 to install that landline and at least a $50 deposit, since you have no credit history.
• You’d probably like cable TV, which is about $60/month and $50 to install it. You also need a TV, but you can get by with a 13″ for around $100.
• You need to furnish the place – at least a bed, table, chair and sofa. You can’t afford new stuff, but you could probably find some used things in the classifieds for around $300-$400. If you don’t have transportation, you’ll have to get a friend to help pick it up or rent a truck for $150-$200 to go get it and pay some men to help you move it in.
• You’ll also need dishes, silverware, pots and pans. Most apartments will come with a stove, but if you haven’t a lot of cooking skills you’ll be looking for a microwave. You might get that with an upper end apartment, but more likely you’ll need to buy one. You also need towels, sheets, blankets, pillows, toilet paper, cleaning supplies, toiletries, etc. Don’t forget an alarm clock. And a bit of food basics to get started – milk, water, salt, sugar, condiments, etc. At least another $300, bargain basement.
• You’ll need transportation if you can’t use public transit. A new car is out of the question, but you might find a junker for under $1000. To drive that car off the lot, you need $35 for the title transfer, $150-$300 for the license plate, 8% of your purchase price for tax and $50 for your first tank of gas. You’ll have trouble getting insurance since you’re underage – most companies will simply refuse you. If you find one, it will cost $2000 a year to insure you and they’ll want at least $800 up front to activate it.

So far, that’s around $5000 up front to get started with a junky apartment, and a junky car. If you didn’t steal that much upon leaving or have a credit card to finance it on, you might as well check into the homeless shelter. But let’s assume you actually have a credit card with a large enough limit to get started and all these entities will actually take it instead of demanding cash. So let’s talk living expenses/month:

• Rent = $300-$500
• Heating/Cooling/Electric = around $150-$250
• Car Insurance = $100
• Gas = $50
• Basic food = $200
• Phone = $25-$60
• Cable = $60
• Car Repairs/Maint = $100 (a junker car is going to need repair fairly soon and if you aren’t saving, you’ll be sitting)
• Credit card bill = at least $100/mo just to pay off the minimum balance.

So, how are you going to pay for this bottom of the barrel lifestyle? You’re going to get a job. Since you don’t have a college education, you’re likely going to be working a minimum wage job, currently around $5/hr.

Doing a little calculating, you’re going to see that you need to work about 55 hrs/week in order to meet that $1100 monthly expense (best case scenario). No one is going to hire you to be paid regular overtime, and most places will limit your hours to 20 to avoid paying you benefits. That means you’re going to have to be resourceful enough to get 3 jobs with schedules that won’t conflict – probably day, night and weekend work. You’ll be working 11 hours a day, 5 days a week and go ahead and cross off a couple more hours for transit and the inevitable breaks in time between shifts.

So here’s the price of freedom and independance: You live in a dump with junky furniture and a junky car. 13 hours of your day are consumed with work and at least 3 hours eating and keeping yourself maintained. With 8 hours sleep, that’s your whole day. If you have a car accident, you’ll lose your work while arranging for the insurance to pay for it and you’re on the street. If you have health problems of any sort, you’re on the street. You have no money for clothes, dating, entertainment, music, parties. If anything goes wrong, you’re done for. Get a traffic ticket and your insurance goes up, get the flu and have to miss work for a week – you’re out on the street. Once you’re there, you lost all your startup costs and you’ll need to pull together another $5000 to get started again.

This is called poverty. This sort of no-future, working 60 hours a week, can’t make ends meet, no way out kind of existence. The cost of entry to an American life is extremely high. It’s just a fact of life.

A few things should be evident to you by now:

• An education or job training is a must. You have to invest in yourself so you can make more than minimum wage – you can’t survive with anything you’d want to call a life. You don’t mind making minimum when you’re a teenager because it’s just icing on the cake. Your parents have paid the cost of entry, pay the rent, probably pay your car, insurance, clothes and take care of the “what if” situations. It doesn’t cut it on it’s own. You’ve got to have a professional job to make it out there.
• You need that education up front, because it’s incredibly hard to go back to school when you’re working to support yourself. Especially a situation like I’ve described – without someone taking on your bills and expenses, you literally couldn’t work and school at the same time. The inspiring stories you see on TV are the exceptions, and they had to push themselves to the limit to make it work.
• You need your family to help you get started. Even if it’s just letting you take your furniture/stereo/tv/etc. and the mismatched dishes/silverware and a couple week’s groceries, that start makes things manageable for someone striking out on their first paycheck. Don’t burn your bridges there or feel a need to be “independent”. They can and want to help you – and you need it. Without their help, you start with an incredible load on your back.

Suppose I’ve convinced you that you do need an education and a good job to make it. Let’s take it to the next level.

Your parents worry about money for this reason too. Not only are they worrying about those same issues for themselves, they’re worrying about them for every member of your family. If they go under, your mom, sister and brother all come down too and get to live under the same conditions.

In addition, there are new money worries. Everyone has to be insured thoroughly. They want a good school, a good neighborhood and a good atmosphere for the family to live in, all of which means more money. Think about all the extras that come into play when you’re a parent – Christmas, birthdays, proms, soccer teams, vacations, eating out, movies, school pictures, yearbooks. And if they’re smart, they’re putting away a significant amount for retirement so they don’t call on you to move in your house when they get older.

Even in an environment where your parent make a good living, there’s always the unexpected. A hospitalization, someone gets downsized, a mother decides to stay home with the children or a sick parent. The dangers are the same as the first situation I described. Sure, there’s a little more padding between the sweet life and the street, but that makes the cost of re-entry greater also – in the $50000-$100000 range.

Believe me, your parents would love to be a little more flexible with their money. They’d love to take the family on a world vacation for a few months, buy the most expensive homes/cars/clothing/etc. just for the fun of it. They’d love to fund you in your every endeavor and send you off in style. You don’t believe it, but they’d like to send you off to college in a luxury car, the hottest designer clothes, an apartment in the most expensive complex in town and fully stock it for you with every cool thing you can imagine. Parents like to overspend on their children – it’s an artifact we learned from our parents. But because we have to “pay the rent” and we don’t want to all be enjoying our family love out on the street, we’re cautious, we save and we budget. Because as great as blowing our savings on fun sounds, it doesn’t near measure up to the fear of living on the street.

Someday, I imagine you’ll want a family as well. You’ll see similar situations and concerns. You’ll have a lot of stress on you as well.

So the big lessons…

• Even if you are frustrated with your life as a teenager and think your parents are stupid and school is stupid and you’ll go crazy if you don’t pack up and head out on your own, remember that the day you decide to do it, you will have to pay the rent.
• It is important to plan for a future in which you make a good amount of money because after you leave home, you will have to pay the rent.
• Your parents spend a lot of time worrying about money and giving you grief about overspending because they pay the rent for all of you.

Please understand – money is not the most important thing in life. But it’s a fact that without it you starve, and without enough of it, your life is not going to be the sort of life you’re used to. You go to school, get a good job or start a business to give you the ability to not stress over survival matters and apply your efforts to your passions.

 

Never discuss the money

Never disclose how much money you have, earn or spend to anyone but closest family members and financial professionals.

I can’t tell you how many times I see people do this and do harm in the process. There is zero good that comes out of disclosing your financial situation. One way or another, someone gets hurt. Share your salary with a co-worker and one of you is going to feel undervalued and discontent and a little bit angry. Share your income with your friends and one of you is going to be jealous. Share it with a used car salesman and you’ve just lost bargaining power. Mention how much you spent on an item and you either inspire jealousy.

This is not something you usually plan out, it just happens. You accidentally mention to someone the $2,000 desk you bought and then realize that the person you shared with is having financial problems and you just made them feel a little worse about their situation. You share a comment on salaries or perks with a friend and suddenly they’re jealous.

Make it a habit to never mention specifics. Never tell a friend you made a $5,000 commission – just say you made a “big commission”. What’s “big” to you and them stays flexible and feelings are spared. You didn’t buy a $2,000 desk, you bought a “really nice desk”. Even if someone asks “how much did you pay for those shoes”, respond with “well, I probably spent more than I should have on them, but I think they were worth it.” It just seems to work much better when actual amounts are left out. You don’t want to devalue someone by revealing that you receive bigger rewards than they do.  Though we know it’s not true, everyone wants to live under the assumption that we’re all operating on basically the same level.

Share it with your spouse. Share it with parents on a very limited basis. Keep things vague with siblings and even vaguer with everyone else.

There are some exceptions here and there, but they are few and far between. Trust me, things will be much better in the long run if everyone doesn’t know the specifics.