Money Management

Here's what I'd like to teach my kids about managing their money:

1. Don't spend what you don't have. It's a pretty simple rule that keeps you out of trouble. How badly do you really need to make that purchase that you can't possibly wait until you've earned enough to pay for it? There are exceptions of course, but I limit those to a home and car(s).

2. Buying on credit is a convenience, not a money-management strategy or a substitute for following rule #1. I prefer to carry one plastic card than to carry around a wallet-full of cash, but somewhere, in some account, I always HAVE the cash. I pay off my credit cards in full every single month, which means that whether my interest rate is 5% or 25%, it doesn't matter - I never ever pay that extra money just so I can make my regular purchases. If I ever had to do so (say, because of changing credit card rules), I'd switch back to cash or some other payment vehicle in a second.

3. Save. Save as much as you possibly can. Having money in an account, or invested somewhere, is what allows you to follow rules 1 and 2. It also means that when things don't work out like you planned - when that bright light at the end of your tunnel is, as Metallica says, a freight train heading your way - you don't find yourself living out of a cardboard box.

4. In support of rule #3, buy what you need, and a little of what you want, and then stop. You don't have to own every pretty thing you see. You don't have to have the latest and greatest. You don't have to keep up with the Joneses. Screw the Joneses - they're probably up to their eyeballs in debt.

5. In support of rules 3 and 4, get your money out of sight. Use direct deposit, use online banking, use whatever tools are available to turn your cold, hard cash into numbers on a computer screen or a monthly statement. TRACK THOSE NUMBERS CAREFULLY - out of sight and out of mind is a good technique for controlling spending, but it's not an excuse to be unaware of where your money is.

6. In support of rule 5, have a BUDGET. Know how much you earn, how much you MUST spend (on a mortgage, taxes, insurance, and other fixed costs), how much you WILL spend (on food, gas, clothes, repairs and other variable necessities) how much you'd LIKE to spend (on entertainment, dining out, gifts, travel, household goods, services, and such) and how much you SHOULD save. Make sure that last category covers everything from an emergency fund (for major repairs, unexpected job loss, and serious injury) to retirement, future expenses (your NEXT car, your NEXT computer, replacing major appliances, etc.), the kids' college, and so forth. This is vital - you can't (usually) change how much you earn on demand, but you can almost always change how much you spend. But you won't unless you know when you're running a deficit.

7. Pay off the debt you do have as soon as you can. Unless it's interest-free, you can guarantee yourself a healthy, no-risk return on your "investment" by paying down that debt early. Remember, anytime you incur interest-bearing debt, you're adding additional hard-earned money on top of what you borrowed in the form of that interest. And it works pretty simply - if you pay off the debt early, the lender gets less of your money.

8. Invest wisely. The stock market is a long-term vehicle for building wealth. The only people who try to "time the market" are experts and chumps. Experts get rich off the chumps and the chumps take a bath. I'm a poor excuse for an investor - I'm too risk-averse. So I've never gotten rich during the market's "up-cycles," but neither have I gone bust during the all-too-frequent downturns. Don't bet what you can't afford to lose. You've worked hard, following rules 1-7, and you've ended up with some money that you want to put to work. That's great - do it. But educate yourself of find a reputable adviser to help you (note: he or she will get a cut of your money, that's how it works, but it's better than losing a bigger chunk on a bad deal). Don't invest in the stock that's been "on fire" for years - it's probably about to fizzle. Likewise, don't yank your money out of an investment every time it drops a few points. You're in for the long haul - leave it alone.

That pretty well sums it up. My wife and I have lived by these principles our whole adult lives and so far, so good. We'll probably never be wealthy, but barring disaster we ought never be poor, either.