Dollars are Made Out of Pennies

I've talked a lot in previous posts about setting priorities, and teaching our children to set priorities or defer gratification. How does that translate into dollars and cents in every day life? How do you get a child (or even many adults) to grasp that skipping a Starbucks Frappuccino or a Snapple can pay for a PS3 game? Sometimes things are easier to understand if you break them into pieces. A big project seems undo-able until you break it down into tasks and milestones. The same is true about prioritizing and saving for an expenditure.

Let's start at the beginning. Dollars are made out of pennies. This is at the core of how money works, but to many it's intangible, especially if they usually pay with invisible money. How does saving 25 cents now translate into that $50 game later? The answer, of course, is to save a quarter here and a dollar there until, over time, you have the $50. Now we're starting to talk about math a child can understand. So, the Frappuccino vs. PS3 game choice isn't a one time trade off, it's a many times trade off. How many times? If the Frappuccino costs about $4, and the game costs about $50 then the answer is more than 10 times. That may sound like a lot of times, but it doesn't have to be the only trade off. More trade offs gets you to $50 faster. I know, this isn't rocket science. Still, I'm always surprised to learn how many people don't get it.

I once read a column in the Wall Street Journal where the author talked about playing "the soda game" with his kids. It's a great idea. Here's how it works. You're at a restaurant. You give your kids a choice: they can order soda or you'll give them whatever the soda costs. Suddenly that $3.00 investment in soda is theirs instead of yours. Most kids (but not all) will happily take the cash in hand. A good lesson, but doesn't work for everyone because there's still the element of "other people's money".

Here's a story my father told me when I was a kid that really makes the point about trade offs and deferred gratification. When he was a little boy, his Aunt and Uncle owned a Five and Dime Store a few towns away. His uncle told his Aunt that she could keep all the change in the drawer at the end of each day for whatever she wanted to buy. She saved the change, and bought a house. Like I said, dollars are made out of pennies.

Do you have examples of trade offs you make? I'd love to hear them.

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.

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.