@Randem

I’ve often thought about how much work I’ve had to put into learning about finance. I’ve read numerous books, spend endless hours researching online, and irritated numerous business school graduates with my questions. And there have been many occasions when I thought to myself that this is such an important part of life, and wondered why we don’t learn it in school.

I had a basic economics course in high school, and I remember thinking that I didn’t learn anything from it. It was dumbed down, as if we wouldn’t understand. Kids aren’t bored by economics because they don’t understand it, they’re bored because the curriculum is too easy.

When I see that a sixth-grade teacher wants to teach his student about finance, I find it encouraging. But at the same time, I find it equally scary that even this well-intentioned teacher doesn’t really know what they need to learn about. So this prompted me to ask myself, what do I wish I had learned about finance when I was in school?

Balance sheets
The first, most important thing to understand about finance is the balance sheet: assets and liabilities, income and expenses. It seems to me that too many Americans don’t understand the simple concept of the importance of spending less than you earn. Everyone seems to think this is obvious, common knowledge, but so few people actually follow it, and I believe that’s because too many consider their credit cards or their homes as assets.

I know that a lot of people have a lot of opinions about the book, but Rich Dad, Poor Dad seems like the perfect introduction to assets and liabilities at a sixth grade level. There is nothing complicated in that book, and it really drives home the simple concept of putting your money to work for you, and paying yourself first. I see no reason why a sixth-grader couldn’t learn a great deal from exposure to that book.

Rules of thumb
Rules of thumb are easy to remember, and they tend to serve us well. I can think of a few rules of thumb that used to be common knowledge, but seem mystical in today’s world.

For instance, the sub-prime crisis would never have happened if everyone knew the rule of thumb that your house payment should be no more than 25% of your monthly income. How many unemployment claims could be avoided if everyone kept an emergency fund equal to six months expenses? And nobody would be talking about a Social Security crisis if everyone remembered to put 10% of every paycheck into savings.

The magic of compound interest
Any sixth-grader can understand multiplication. There’s no reason they couldn’t grasp the concept of compound interest, if it was explained to them.

There are two sides to compound interest. On the positive side you have investment, where you make your money work for you, each year better than the last. On the negative side, you have inflation, where each year your money is worth even less than it was the previous year.

In both cases, earlier is better. If teachers could get students excited about compound interest as early as sixth grade, maybe those kids would be more diligent about saving and investing as early as possible, and we would no longer need things like Social Security in this country.

What else?
The last thing that really stands out to me is the intimidation factor. It is human nature to be afraid to try things you haven’t done before. If a teacher could show the kids how easy it is to open a savings account or a money market account, or how to invest in an index fund, it would take the intimidation out of the process. And maybe you’d have a bunch of sixth-graders running home and asking their parents to set them up now!

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” &mdash Will Smith

No, this isn’t a rave about how awesome money is. (Did I fool you with the title?) This is where I spell out my rules about money and its role in my life.

Everything needs to have its place in your life properly defined. We label the people we know — friend, acquaintance, best friend, significant other, spouse, brother, parent, boss, coworker — and allot appropriate importance and privilege to each according to their role. And we do the same for our car, television, power tools, pets, etc. So why do so few people define these limits for their money?

I might loan my car to my best friend, but I wouldn’t loan it to my neighbor. I would never drive a BMW on a construction site for fear of getting nails in the tires. I might miss the Super Bowl if my father was dying in the hospital, but not for much else. Isn’t it time to define similar limits to how I use my funds? And you too?

Rule #1: Don’t create debt
Borrowing money, whether it’s an auto loan or a credit card purchase, leashes me and my freedom to someone else. The more I owe, the less freedom I have to change jobs, take a vacation, or move somewhere new.

Rule #2: Buy quality
A cheap, flat-pack, pressed cardboard bookshelf will be wobbly before long and it will need to be replaced in a year or two, whereas a solid wood bookshelf might last the rest of my life, and will be attractive too. Cheap clothes with shrink, and won’t fit right, whereas nice clothes fit properly and last longer. The same goes for all purchases. Cheap things need to be replaced. And although they serve their purpose, they don’t make you happy, so you’ll end up wanting something better soon enough anyhow. Just get the good one right at the start.

Rule #3: Don’t buy crap
How much money does the average person simply throw away on trinkets and baubles and utter nonsense, only to create more clutter and chaos in their home? And absolutely no collections! I won’t be wasting my money on porcelain figurines, collector plates, or other nonsense that takes up space and adds stress without providing pleasure. And definitely no singing fish, no garden gnomes, no stuffed animals, no handheld electronic games, and no cute little frog-shaped glass figurines on the back of the toilet.

Rule #4: Loan as if it’s a gift
Making loans to other people is a good way to ruin your relationship with them. Yes, we always intend to pay back a loan, but when we ask for the loan we’re rarely thinking about how we’ll pay it back — the focus is on getting it in the first place. Loans often drag on for a long time, and many never get repaid. When making a loan, always silently consider it a gift. Then it will be a pleasant surprise when it is paid back.

Rule #5: Only two credit cards
I only need two credit cards: one department store card that qualifies me for discounts and provides free gift wrapping services, and one that gives me free airline miles for all my other purchases. These cards need to be paid in full at the end of every month.

Rule #6: Online account management
I will only use financial services that provide online access. The internet provides instant access to account information and the ability to make fast (often immediate) payments. At this point, any bank, creditor, or investment service that does not provide online service is either too disorganized, or else has something to hide.

Rule #7: Don’t fall for the upsell
Pay for the item you want, don’t get sucked into the accessories. I never buy the extended warranty plans. I buy the cell phone, but I skip the personalized case and goofy belt clip. I’ll buy the shoes, but I don’t need the protective leather spray. I’ll buy the camera, but I don’t want your lens wipes.

Rule #8: Invest in the future
Nobody else is going to take care of my future, so I have to do it myself. That means savings, investments, retirement plans, and anything else I can do to create a more secure future for myself.

Rule #9: Time is money
Wasting time is wasting money. If I can save $60 by fixing my clogged drain myself, but it will eat up most of my day off, it’s better to pay a professional so that I can spend my day doing what I had planned to do. This is especially true when the activity would require me to miss work. If it costs extra to have it done on the weekend, but won’t cost me a day’s pay, it’s worth the extra cost.

Rule #10: People aren’t impressed by money
People should be impressed by my personality, not my extravagance. Throwing money around is only a cover for insecurity. I will not overspend on Christmas, birthday, anniversary, or Valentine’s Day gifts. I will not buy things for show. And absolutely no bling! Money buys things, not people.

So there you have it: ten rules to define the role of money in my life. What about you? What are your thoughts? What boundaries have you set for money in your own life? Leave some comments and let me know.

I love reading about personal finance, simplifying life, and even being frugal — I’ve got dozens of related feeds in my Google Reader — but sometimes these people go a bit too far. And I’ve got a beef with Flexo’s 10 reasons not to go to the gym at Consumerism Commentary:

1. Most new memberships in January will cancel by April. That’s a lot of New Year’s Resolutions gone bad.
2. There is bacteria everywhere, including on the equipment and in the locker room towels.
3. Gyms aren’t equipped to handle health emergencies.
4. People don’t need any type of certification to become trainers, and they may not know much more than you.
5. They make it very difficult to quit membership. If you don’t pay, they may report you to credit reporting agencies even if you claim you canceled your membership.
6. There are catches in the fine print of the membership contract.
7. Gyms aren’t required to maintain their equipment, so there can be a danger in operating the equipment.
8. You can negotiate your membership rates by paying attention to specials offered throughout the year.
9. The lockers in which you leave your personal belongings can be robbed, and the gym is not held liable.
10. By joining or even entering a gym, you generally sign a waiver that relieves the company of any liability.

Seriously people? Are you honestly trying to make an argument to keep Americans out of the gym? We’re not fat enough already?

Let’s look at this bad logic item by item:

Bad reason #1: 1. Most new memberships in January will cancel by April. That’s a lot of New Year’s Resolutions gone bad.
Okay, and most new businesses fail within the first year. Should I not bother trying to start a business either? Hey… did you know that 65% of new marriages fail? By Flexo’s reasoning, that means nobody should get married, either.

I have a problem with people using generic terms like “most” and “a lot” in these arguments. How about some hard numbers?

Or how about a different perspective… some of these people do stick to their workout. If even one life is improved, what’s the problem?

Bad reason #2: There is bacteria everywhere, including on the equipment and in the locker room towels.
There’s bacteria on the door at the 7-Eleven, too. And what about the shopping carts where you buy your groceries? In fact, speaking of groceries, how many old ladies have picked up and handled that apple you’re about to put in your mouth? Good heavens… the germs are going to kill us all! Time to start wearing masks and gloves everywhere. Hey, and how about a nice tinfoil hat, too!

Look. You’re not going to the gym to lick the weight bench… you’re there to get a workout. And the nice thing about the gym is that there’s a shower there. With soap. You’ll leave there cleaner than you were when you arrived.

Bad reason #3: Gyms aren’t equipped to handle health emergencies.
Neither is the city bus you ride, but you manage to get by just fine. The park your kids are playing at doesn’t have a nurse on staff, yet if little Johnny falls off the slide and scrapes his arm, you manage to get it dealt with. And frankly, if a health emergency did occur at a gym, you’d be surrounded by people who would help you… which is much better than your odds at home!

Bad reason #4: People don’t need any type of certification to become trainers, and they may not know much more than you.
Yup. There are lots of jobs you can get that don’t require certification. (Remember that horse groomer who used to be the head of FEMA?)

The nice thing about trainers is that looks are everything. If a fat guy tells you how you should eat, are you going to listen? It’s just like the high school woodshop teacher who was missing a finger. If the trainer is in good shape and you’re not, odds are that he knows something you don’t.

Bad reason #5: They make it very difficult to quit membership. If you don’t pay, they may report you to credit reporting agencies even if you claim you canceled your membership.
To be honest, this sounds like Flexo had a bad experience, and he’s applying that as a prejudice against all gyms. Besides… if you don’t pay your bills, you shouldn’t be surprised if it gets reported to credit agencies.

Yes, I’ll admit that there is an overall sense that gyms don’t make it easy to quit. But this is a victim mentality. The membership representatives have an incentive to keep you, and they’re going to ask you the questions that any salesman would ask you: Why do you want to quit? Is there something we can do to keep you? Don’t you want to be healthy any more?

The reason people have a hard time quitting is because these questions play to the lies people tell themselves. Everyone wants to believe that they’re concerned about their health. Nobody wants to admit that they are too lazy to show up and work out. The only reason you want to cancel your membership is because you finally realized that purchasing a membership does not, by itself, get you into shape. You have to actually do work.

If you’re committed to being fat and lazy, just own up to it. Walk into the rep’s office, look him dead in the eye, and say, “I am a fat, lazy slob. I have learned that about myself, and I’m not going to change. Your policy requires 30 days notice on cancellation of membership, so this is my notice. Give me a document that proves you have acknowledged my desire to terminate my membership.”

Ironically, however, if you can man up enough to say that, you could probably man up enough to use the membership and actually get some benefit. The reason it’s hard to quit is the same reason the membership isn’t working: you don’t have any balls.

Bad reason #6: There are catches in the fine print of the membership contract.
Only an idiot signs his name to something he has not read. If there was something in there that you consider to be “a catch”, you shouldn’t have joined in the first place. See #5 above.

Bad reason #7: Gyms aren’t required to maintain their equipment, so there can be a danger in operating the equipment.
If a gym had poorly maintained equipment, you should have noticed that on your tour before you joined. If the equipment has gone bad over time, you should leave and find a new gym. This guy has a serious victim mentality, and he’s just making excuses now.

Anyway, what is there to maintain? There are no moving parts on barbells, dumbells, weight benches, or power racks. If you’re using the isolation exercise machines (like Nautilus) you’re already risking injury even on a brand new machine. And if it’s the stairmaster or the treadmill you’re complaining about, you’re just a whiner. Save the gym membership and just go climb some stairs. Or go for a walk. Anyway, how are you going to injure yourself on a treadmill? That would be a YouTube gem for sure!

Bad reason #8: You can negotiate your membership rates by paying attention to specials offered throughout the year.
This isn’t a reason to avoid the gym, it’s just an unrelated fact. And you can always negotiate your membership. Don’t believe me? Just go tell the rep that you want to quit. (See #5 above.) Let’s be honest here… this was just thrown in because he couldn’t think of anything to get his list to the nice round number 10.

Bad reason #9: The lockers in which you leave your personal belongings can be robbed, and the gym is not held liable.
Hello, McFly! They’re called LOCK-ers. You are supposed to LOCK them. Once locked in a locker, your property is every bit as safe as it would be in your car.

Let’s get real. I go to the gym every morning, five days a week, and I see what people do. They use the lockers without locking them. They take off their clothes (and iPods) and leave them in a pile on the floor while they hit the showers. Oh, and they also just have stupid moments and forget things.

If you’re putting your valuables into the locker, and locking it, they will be there when you are done.

Bad reason #10: By joining or even entering a gym, you generally sign a waiver that relieves the company of any liability.
As opposed to your home gym? Seriously? His final argument is that he wants someone to sue if he hurts himself? Am I understanding this correctly?

It is not the gym’s fault that you don’t pay attention to proper technique. It is not the gym’s fault that you and your friends want to impress each other with weights you have no business lifting. It is not the gym’s fault that you injured yourself on a treadmill (seriously… a YouTube gem).

Seriously. What’s with all the anti-gym rhetoric lately on all of the personal finance blogs?

[EDIT: I errantly attributed these opinions to Flexo, the author of the post I linked to. The list was actually copied out of SmartMoney. Still, we don’t repost things we disagree with.]

Today’s word is recession. Everybody is talking about it.

Recession is the natural next step to be expected on the financial ride this country is on. It would take a miraculous combination of insightful moves by our government and big businesses, coupled with a huge in-flux of foreign money, to make anything different happen.

Our President campaigned against a tax-and-spend economy, but in two terms what did he give us? A spend economy, without the taxation to generate the money. Add to that the bursting of the housing bubble — which he helped to create — and you’re facing a US economy that looks pretty poor. Suddenly the US isn’t the superpower we like to think we are. What a fantastic condition in which to leave the country for your successor!

Well, the realities of recession are this: we’re looking forward to face lower interest rates, lower mortgage rates, lower property values, and a bear market… all after Americans have run up sky-high personal debt with unrealistic mortgages on overpriced homes, and maxed-out credit cards. Oh, but Bush saw that coming too, so he changed the bankruptcy laws. You can’t get out of it. You’re stuck.

So what to do? What to do?
First things first. Stop wasting money. (Gee, I’ll bet you wish you hadn’t bought that Hummer H2 now, eh?) No more going to Starbucks every day. No more buying $80 designer Jeans for your ‘tween-ager to grow out of in a year. Use public transportation instead of burning gas at ever-climbing prices. Save, save, save.

Next, use the money you save wisely. Interest rates will go down on your savings and investments, but they’re going to stay high on your debt. Get it paid off. You don’t want to carry huge debt into a recession. Pay off the debt with the highest interest first, then the next, and so on. Call your creditors and try to negotiate lower interest rates. And while you’re paying down, don’t create more debt!

Once the debt is gone, create an emergency fund. Salaries stop increasing, companies stop hiring, and job security isn’t so glorious in a recession. You need a backup fund. Be smart. Save, save, save. You should accumulate the equivalent of 3-6 months salary into a money market (savings accounts are for idiots) as an emergency fund.

Okay, now what?
Well, here’s the good news. Once you’re in a solid position to weather a recession, you can leverage it to your advantage. Housing prices are going to drop dramatically in most areas. Stock prices are going to fall. This is a blue-light special for anyone with some money to invest!

I, for one, plan on buying houses at bargain-basement prices. Not only will there be plenty of people who are anxious to sell for whatever they can get, but there will be no shortage of foreclosures, too. While the nationwide frenzy was on, and coworkers busted my chops about not owning a home, I was banking money instead of buying overpriced homes and accumulating more debt. But soon it will be my turn. I’ll buy properties at half their asking price, and own them mortgage-free.

Stocks will be another excellent opportunity. As stock prices fall, there will be tremendous opportunities to get high dividends on low-priced shares. Reinvesting the dividend payments into more shares will only give you more vehicles to earn money when the recession ends. It’s long-term investing, but it’s smart. Stocks are going on sale soon, and you’ll be able to sell them down the road for huge money. Manufacturing and luxury is coming to a close… time to buy utilities!

If you’re smart, you can not only survive a recession, but profit from it.

I don’t believe in New Year’s resolutions. They’re counterproductive. You start something new on the first day of the year — lose weight, quit smoking, etc — and hope it will stick. In the majority of cases, the first time that new thing meets a setback, it gets marked as a complete failure, and the whole plan gets abandoned. Why waste the time?

It makes more sense to quantify progress and set target dates. For instance, instead of setting a vague goal of saying you want to “get in shape”, only to give up after you’ve had a week or two where you couldn’t get to the gym, why not set real, tangible goals with numbers and dates? Why not plan to lose 20 pounds by June 1? At least then, if you have a setback, there’s no reason to give up!

This year, I am setting real goals. Instead of imagining my life as I want it right now, and then giving up when I realize that’s impossible, I’ve put a lot of thought into where I expect to be in one year, and I will spend 2008 working toward reaching that place.

These are my goals for 2008:

1. Be 100% free of all credit card debt by November.
   After this year, I never want to carry another balance on any revolving credit account. Without debt, I will have financial freedom to do whatever I want. I have chosen November as my target because I also want to have a debt-free Christmas.
2. Move to the city by summer.
   I’m not a suburban kind of person. My heart is in the urban lifestyle. Living in the city will be better for my photography, as well as more convenient for commuting, traveling, and meeting new people. I have chosen summer as my target because there is so much happening in the city during summer.
3. Relocate my father by summer
   My father is one of the unfortunate victims of the high cost of medical care. His prescriptions alone cost more than his income. Without my help he would have to choose each month between a roof over his head, or being (somewhat) healthy, and eating isn’t much of an option. And this is in a poor, southern town in a $40,000 house! Bringing him to a city would give him access to better medical care as well as many aid programs that could reduce his costs and give him access to the care he needs, while also giving him the chance to spend his later years near family.
4. Form a corporation
   Making investments and building assets makes more sense when you have the protections of a corporation. I don’t have a specific target date for this goal because there are many other implications to consider, but I do know that I need to do it, rather than talk or think about it, so I’ve made it a goal for this year.
5. Add 100 lbs to my benchpress
   Specifically, I want to raise my benchpress 50 lbs by summer and another 50 lbs by Christmas, but these increases need to be marked by similar improvements in other strength training areas too, including squats, curls, deadlifts, etc. In other words, I want to increase all my weights, I have simply chosen the benchpress as the measure for reaching my goal.
6. Travel out of state at least once every month
   This is pretty self-explanatory. I want to travel out of the state, whether visiting friends I’ve left behind or going someplace I’ve never been, at least once every month this year. I also want at least one of those trips to be out of the country.

So there it is. Those are my goals for 2008. I look forward to writing about their completion!

Yesterday, someone tried to get under my skin by throwing in my face that facts that I don’t own a car, that I don’t own my own home, and that I live in a bad neighborhood in a spare room with family. This person thought that would really hurt my feelings, but they couldn’t have been more wrong. If you think that bothers me, you don’t know me at all.

Fitting, then, that after this happened, I went home and opened Google Reader to find the latest post from Trent Hamm at The Simple Dollar, talking about what it all means:

That luxury car and that sweet house in the suburbs are balms. They’re like putting calamine lotion on a very bad case of the chicken pox - you might lessen the itch, but the itch is still there and it will keep coming back no matter how much lotion you put on it.

What is the itch? That itch is your dreams, what your soul tells you that you should be doing with your time. That itch is the dream that you’re not chasing so you can drive that Lexus on your dreaded morning commute. That itch is the time you spend at meetings when you’d rather be your son’s Little League coach. That itch is the realization that you’ve just sold your dreams for a house full of consumer goods that are gathering dust while you sit in a hotel room watching sports on basic cable after a business meeting wondering what has happened to your life.

Exactamundo. Money comes and money goes, but time is in limited supply — once it’s gone you can’t get it back. I’m chasing my dreams, and they’re bigger than some mortgage or car payment. To quote Trent one more time, every time we make a purchase that doesn’t have real meaning for us, we’ve added another bar to our prison cell.

I’m growing rather fond of The Millionaire Mommy Next Door. Her views on personal finance are refreshingly useful, rather than the typical “diversify, budget, and save” advice you usually see in financial books, web sites, blogs, etc.

Today, she offers this list of debt reduction tips in answer to the question: If debt was an issue for you, what financial steps would you make — and in what order?

1. Separate my basic needs from my wants
2. Identify my priorities and visualize a debt-free life
3. Involve my family in the plan
4. Make a list of my debts
5. Remove temptation. Cut up my credit cards (but don’t close the accounts)
6. Minimize my spending
7. Maximize my income
8. Pay off “toxic debt” first (highest interest rates; balances that are closest to credit limits).
9. Once I’d paid off all debt balances with interest rates over 10%, I’d save at least 15% of every penny I earn to build an emergency fund equal to 6-9 months of my take home income.
10. Once my emergency fund was complete, I’d start investing at least 10% of my gross income in mutual funds held within retirement account(s)…
11. …and I’d get cracking on my remaining low-interest rate (<10%) debt balances.
12. If I had a mortgage, this would be the last debt on my list. Actually, if I had a home with a mortgage and I was seriously in debt, I’d sell my home to pay off my debt with the equity.

This list bears a remarkable resemblance to my own endeavors to live a debt-free life. Not only the items on the list, but the priorities assigned to each item. Around step 9 is where I really start to see the difference. She’s suggesting 6-9 months of take-home income as the amount to have in savings, whereas I’ve never kept more than 2-3 months worth.

Also interesting to me is that she places more importance on that (rather large, from my perspective) emergency fund than she does on paying off debts under 10%. It seems to me that the 10% figure is not so much about the number, but rather an indicator of the type of debt, since credit card interest tends to run higher than that, whereas mortgages and loans tend to run below it. If that’s the case, I completely agree with making the emergency fund first, but if you have a credit card at 9% interest, I think it’s still more important to pay it off than to start stashing cash.