Archive for June, 2009

The Rules of Personal Finance Have Changed

Posted By damien on June 28th, 2009

old-moneyAnother big idea from All Your Worth is that the rules of money have changed. The old money advice no longer applies. So what were the old rules?

Well, not too long ago, a middle-class family who made a decent income and lived normal lives pretty much had their finances in balance. An average, one-income family could afford a middle-class home without much strain.

Our parents’ parents didn’t need a fancy financial planner to help them determine what house they could afford, they just walked down to the local bank. If they tried to get a larger mortgage than they could afford, the lender turned them down. They didn’t have to worry about getting into too much trouble financially because it wasn’t possible to get over-leveraged.

The same held true for other aspects of debt: a car note, remodeling the kitchen, etc. (and car leases didn’t even exist). The lender met with them face to face, reviewed their finances, and if they couldn’t afford it, were turned down. As a result of these practices, it was almost impossible for our grandparents to get into too much debt. So, how have things changed? Here’s what the authors say:

“The old guarantees no longer exist. In today’s world, you can get a mortgage that is too big for you—and the banks will help you do it. You can get a car lease that chews up half your income. You can wind up with a student loan bigger than some home mortgages. And as sure as the sky is blue, you can rack up credit card debt without blinking an eye, even if you don’t have 50 cents to make your payments.”

I agree the rules have changed. And I found the first sentence to be pretty prophetic of today’s financial crisis (the book was published in 2005). So, how do we deal with the change in the rules? As the authors explain, you have to get your finances in balance, the subject which occupies the rest of the book.

Posted in Building Wealth, Selp Improvement
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Dollars are Worth More Than Cents

Posted By damien on June 15th, 2009

eyesSo, I’ve been stuck on personal finance books lately, probably because Natalya and I are finishing school soon and will be out in the real world. Just finished All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi. It was a good book, a great book for people new to personal finance, but most of the ideas I had heard before.

One idea that was new to me, and contradicted what I had been told by so many other personal finance books, was the idea of focusing on the dollars rather than the cents. (Actually, I have heard this idea before, from Ramit Sethi’s blog I Will Teach You to be Rich, can’t remember the exact post.)

Many personal finance books talk lots about eliminating a few dollars here and there. This approach could be called “The Latte Factor”, as David Bach puts it in The Automatic Millionaire and others of his books. Save a dollar here, 50 cents there, and in forty years you’ll be a millionaire. While I agree that this approach is beneficial and will help one become wealthy, I was interested by what the authors of All Your Worth had to say about timing. They tell us to focus more of our energy on reducing large expenses rather than small ones:

“When you add up all the time you spend making decisions about how to spend your money, what gets the most time? If you’re’ like most people, you spend hours every month thinking about the price of little stuff. A pair of shoes, a pound of tomatoes, a bottle of wine—you look at the price tag, you comparison shop. You weigh your options, thinking twice before you buy.

Now think about the big-ticket items. Your home or apartment. Your car. Your insurance. Sure, you probably thought hard about those purchases…once. But when was the last time you thought about them? You probably just write those checks, month in and month out, without thinking about whether you’re getting the most for your dollars.”

The authors advocate focusing your attention on lowering these large expenses before the small ones. They then devote a whole chapter to lowering these expenses. Check it out!

Posted in Building Wealth, Selp Improvement
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Rules for Affluent Parents

Posted By damien on June 8th, 2009

parentingIn order to keep your children from becoming dependent on your wealth, the authors of The Millionaire Next Door came up with rules for affluent parents and productive children. Here are some of them:

  • Never tell children that their parents are wealthy: If you do, they will grow up expecting the standard of living the media associates with wealth.
  • No matter how wealthy you are, teach your children discipline and frugality
  • Assure that your children won’t realize you’re affluent until after they have established a mature, disciplined, and adult lifestyle and profession: Many of the millionaires cited in the book with trust funds set up for their children did not release the funds until the child was 30, 35 or even 40 years old.
  • Don’t try to compete with your children: Accumulating money may be your overarching goal, but it may not be your child’s. Don’t boast about how much more money you had at their age.
  • Emphasize your child’s achievements, no matter how small, not their or your symbols of success: It is better to teach your children to achieve than to simply consume.

The authors believe that by following these rules, children of the affluent will grow up to be financially independent instead of requiring economic outpatient care.

Posted in Building Wealth
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