The One Week Rule

During my last year at college, we all talked about getting our first real apartments (as opposed to the ones we had while we were at school). The apartments we were going to pay for with the salary from our first real (translate as "career") job. We all knew you had to follow the one week rule. Looking back, I'm fascinated that we all knew this rule, but in retrospect we don't know where we learned it. It was just there. Passed along by word of mouth, and somehow taken in by osmosis. It's that actual teaching process that now interests me, as I'd like to make sure we restore it.

What is the one week rule? Basically, it's this: your monthly rent should not exceed one week's salary. That's it. If you make $500 a week, you can afford a $500 a month apartment. This is very simplistic, but for any good rule of thumb to work, it needs to be very simple.

The one week rule works equally well for determining how much house you can afford. Actually, the one week rule it turns out, is what lenders call the front-end ratio. The front-end ratio is the percentage of your income used to make mortgage payments. It's calculated by dividing your monthly housing expenses (principal, interest, taxes and insurance or "PITI") by your monthly gross income. So, going back to the one week rule, this should be about 25% of your monthly income.

This is all pretty simplistic. There are other factors out there, like car payments, credit card payments, etc. that have to be considered (these make up what lenders call the back-end ratio). Ever see the episode of the Cosby Show where Cliff pretends to be the landlord to teach Theo a lesson about money? In short, you can't spend your whole paycheck on rent. Anyway, simple as it is, I think the one week rule is a very good starting point for deciding how much you can afford to spend on housing.

Here's my question, how did we all magically learn the one week rule? When did people stop learning it? How do we get back on track, and start passing it on to our children? If you learned a rule of thumb similar to my one week rule, what was it, and where did you learn it? I'd to love to hear about it and share it.

A World of Invisible Money

I was raised by a very fiscally responsible family. I was taught the value of hard work, saving, and most importantly, deferred gratification. When I started raising my own family, I somehow assumed that my children would glean, by osmosis, the same money sense I had gleaned from my parents. But as they grew up, I realized that this wasn't happening. And it wasn't just my kids that had no concept of financial reality, it was other kids and younger colleagues, too. What happened? I pondered this for some time. I had set a good example for my children. I worked hard, saved, lived within my means, shopped frugally, and had no credit card debt. Then one day it hit me when my very bright 16 year old daughter asked me if she could deposit cash in the bank. I was dumbfounded! At first I couldn't even grasp what she was asking me. What's the bank for, if not for depositing cash? How could my bright, beautiful daughter who'd come to the office with me since she was small, who'd travelled with me on business trips to Europe, who knew there's always a breakfast buffet at a hotel and that you can call the concierge if you forget your toothbrush, not know that you could deposit cash at the bank? Then she told me. "Mommy, I've never seen you deposit cash". She was right. Why would I? My paycheck is direct deposited, and aside from depositing an occasional birthday check, I never go to the bank. Money has become invisible. It goes electronically to the bank from your employer, and comes out magically when you put your ATM card in the machine. Even better, now we all just pay with our debit cards, so we barely touch cash.

Before I go any further, let me make it very clear that I love technology and the convenience of direct deposit and debit cards. To me, the best part about debit cards is that I don't need to carry cash or write checks, and they are not credit cards (which I knew from an early age are bad, but that's another post).

When I was a little girl, I had a passbook savings account. I learned to deposit the 50 cents a week allowance I got, so I could save up to buy things. When I was 8, I started working in my father's clothing store for 25 cents and hour. I deposited my earnings in my savings account, and learned that every month you got a bonus entry in the passbook called interest. My father used to send me down the street to the bank with a green pouch to deposit money from the store in the bank (unbelievable in this day and age, but that was small town America in the late 60's and early 70's). Okay, this is all very nostalgic, but why does it matter? It matters, because I saw money being earned, counted, deposited in the bank, and earning interest. Money was real, tangible, and visible. You earned a finite amount, and you could spend a finite amount. The money you had in the bank was the money you put in the bank. A simple equation.

How did our economy get into so much trouble? While it makes good populist TV to blame greedy Wall Street fat cats (and there were some), the bottom line is that too many people lost sight of that simple equation. You can't spend more than you have. Invisible money is fine, and very efficient, as long as you learn that behind the scenes is real money that has to be counted and kept track of. The challenge now, is to teach an entire generation how to keep track of their money and determine what they can actually afford. But that's the stuff of future posts.

If you have stories about how you learned (or didn't learn) about money while you were growing up, I'd love to hear them.