Reading is Fundamental

My children love to tease me about discussing what I read in the Wall Street Journal at the dinner table, but guess what; the dinner table is one of the places I got key pieces of my education, so I'm paying it forward. This is just one example of reading and talking about what you read. The more you read, the more various pieces of what you've read start to interconnect. Reading isn't just about reading books, magazines and newspapers though. It's about reading labels, reading advertisements, reading the fine print, reading disclosures, reading the unit pricing at the supermarket, and thinking critically about what you've read. In order to make informed decisions in your daily life, Reading is Fundamental.

I remember watching television as a child, and commercials would come on advertising something as new and improved or 25% better or 20% bigger. My father would say "25% better than what?" Over and over he said this about claims on cereal boxes and laundry detergent, and as commercials came across the TV screen. He taught me that you had to read the label to find out, and that usually the answer was not what you were expecting.

The supermarket is chock full of reading material that is often surprising. Teaching your children how to read labels, how to read unit pricing and decipher the best deal, and how to read through marketing claims is a terrific life lesson. It prepares them for critical reading, thinking and decision making later in life.

My key point here is not that critical reading helps you be a good supermarket shopper (although this is a good life skill). My point is that taking the time to read the details is essential to making informed decisions, and informed decisions are at the heart of making economic sense in a world of seductive marketing and invisible money. Here are some other examples where reading is fundamental:

• Pre-approved Credit Card Solicitations
• Free Credit Report Offers
• Any Offer of "3 free months of membership"
• Mortgage Terms
• CD and Money Market Account Rates

These are only a few, but I think you get the point. Like my Dad used to tell me: "don't focus on the big print they want you to read, read the fine print next to the asterisk".

Note: Since I talk about commercials in this piece, I have to give credit where it's due. As these ideas came together I remembered the little voice from TV commercials of my childhood saying: "Reading, It's Fundamental".

Founded in 1966, RIF is the oldest and largest children's and family nonprofit literacy organization in the United States. RIF’s highest priority is reaching underserved children from birth to age 8. Through community volunteers in every state and U.S. territory, RIF provides 4.5 million children with 16 million new, free books and literacy resources each year.

In 1966, former teacher Margaret McNamara brought a bag of used books to four boys in Washington, D.C., whom she tutored in reading. When she told the children they could each pick out a book to keep, their astonishment and delight led her to discover that these children, and many of their classmates, had never owned any books.

By that summer, Mrs. McNamara had gathered a group of school volunteers, and on November 3, 1966, they launched the book distribution and reading motivation program they called Reading Is Fundamental.

From November 1966 through the early 1970s, RIF expanded from a pilot project at three elementary schools in Washington, D.C., to a program reaching children in 60 of the city's public schools. More about RIF...

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.

Enough is as Good as a Feast

This is my favorite line from "Mary Poppins". Sometimes we glean wisdom from the strangest places, but good economic sense rings true wherever we find it. How much is enough? From a career perspective, it's always current compensation + n. At least in my industry, but that's not the focus of this post.

At the heart of our current economic woes is leverage. Using leverage to spend more than we earn, and losing sight of the difference between what we want and what we need.

So, how much is enough? This question can be applied to so many aspects of our day to day life. How big should a restaurant portion be (seriously, does anyone need a half pound burger?)? How many game systems does a kid need? How many pairs of jeans? How big a house? How fancy or big a car?

I made my children wait a very long time before I finally bought them a PS2 a few years ago. They have a few games. Maybe they get one at Christmas, but that's about it. Until they were teenagers, I refused to buy anything rated "mature". No one became a gaming addict. I was shocked to learn from my boys, that a lot of their friends had all the systems. Why? No wonder they spent all their time playing video games! How much is enough? How can a child learn about making choices or deferred gratification if they've been taught that they can have one of every flavor?

How many pairs of jeans, or handbags, or shoes are enough, and what kind? Does a kid really need 5 pairs of jeans, one for every day of the school week? Will they suffer permanent social outcast status if, heaven forbid, they wear the same pair twice in the same week to school? My family owned a clothing store, so I never wanted for nice clothes. Still, my parents impressed upon me that they still had to pay wholesale to the business for our clothes, so I got what I needed rather than anything I wanted. My father grew up during the depression, and while the family owned a business and was in good financial shape for the times, he wore the faded clothes from the store window. I cringe when I hear about people charging clothes on credit cards, and paying them off over time. Much too much focus on who has what kind of clothes! Don't get me wrong, I love fashion as much as the next person, but I couldn't sleep at night if I was in debt for it. Like my mother used to say: "if it's clean and paid for, it's no body's business".

No discussion of today's economic troubles can skip the how big a house question. This question really has a few parts. How big? What needs to be in it? Is owning always better than renting? Again, how much is enough? A few decades ago, families were frequently larger than is typical today, but they often managed to live in much smaller houses. I've met people who were one of 8 or 9 kids who grew up in modest Cape Cod houses with one bathroom. They turned out fine, and I don't think anyone went dirty. They learned to share, and how to wait their turn. Both excellent attributes. Over the past decade, there has been an explosion of home decorating shows on TV. They've raised the bar to a whole new level in terms of what amenities a house should have. Granite countertops, stainless steel appliances, marble bathrooms, all "necessary" if you want to maintain your home's resale value. Do you need these things? Really? These things are nice, and you might enjoy living in your home with them, but if you can't afford to pay cash for them then you can't afford them. So then save up for them, right? Unfortunately, that's not what happened. Deferred gratification went out the window. Enter the Home Equity Line of Credit (HELOC), and the Mortgage Refinancing with Cash out. Take out a second mortgage on your house? Sounds scary, but that's essentially what a HELOC is, just sugar coated. Refinance your mortgage, and take out your equity to spend on home decorating? I refinanced my mortgage twice, once from 30 years to 20 at a lower rate, and then again from 20 to 15 years at an even lower rate (always fixed rates!). It never occurred to me to sign up to pay more for longer! This of course explains why there are now so many people who once upon a time bought houses they could afford, but now have much bigger (now underwater) mortgages and are in deep trouble. They do, however, in many cases, now have granite counter-tops, wall mounted flat panel TV's, and restaurant grade appliances. None of these will be much consolation if they lose their house. I'll save "should everyone own?" for a future post.

I'll return to my basic premise that you can't spend more than you earn. HELOC's and Refi/Cash-outs are just another example of invisible money. Money, whether visible or invisible, still has to be counted. Borrowing more than you can afford to pay back on a bet that the collateral you put up will keep rapidly increasing in value is just what it sounds like: gambling. This makes a lot of Main Street an awful lot like many on Wall Street. Think about it.

Bottom line, Mary Poppins had it right. Enough is as good as a feast.

Postscript: I had to come back to this article and post this link to an article in today's New York Times entitled "Losing Its Cool at the Mall" http://tinyurl.com/c7wblw, a very interesting piece on the changing spending habits of teens (reported to be down 14%). Although this is bad news for some retailers, particularly Abercrombie & Fitch which is featured in the article, it's good news in terms of growing economic common sense in the teenage population. Is it fleeting?