Being Smart With Money

One of the things I think we do REALLY poorly in this country is teaching our kids how money works. I didn’t get a course in economics until college, but most of the best lessons I learned about money were through various jobs. One was working as a customer service rep for Citibank Student Loans during college, as a summer job. Another was working for a law firm that did a large amount of collections. If you want to see what happens to people and the bad choices they make, look at someone who is getting a home foreclosed, evicted from an apartment, or having various possessions seized for not paying their bills.

Since I know many people starting small businesses, I thought I would lay out some of the basics of money and business I’ve learned over the years, hoping it can help you avoid learning some painful lessons.

1. If you can’t pay for it in cash, now or in the next month, don’t charge it.

People get into trouble with credit all the time, because whipping out a plastic card doesn’t “feel” like paying for something. This is why I make my kids pay for things in cash, or immediately on returning to the house, pay me in cash for whatever I have “fronted” for them at the store. Anything you don’t feel the pain for at the moment of purchase is likely to be forgotten, and then it’s easy to end up with a surprising and overwhelming credit card bill at the end of the month.

Secondly on this point, the interest charged by credit card companies is enormous. It would be usury, except most credit card companies have located themselves in states like Delaware and South Dakota where there are virtually no caps on the interest that can be charged on consumer loans.

If you need help getting this under control, remind yourself that taking anything from a store without paying for it would be stealing. Also consider how many months it would take you to pay off said item, add the interest you pay on your credit card to the purchase price, and decide then and there, whether that price is such a bargain.

2. Understand how Companies Calculate Interest, and How Your Payment is Applied.
When you send in a mortgage payment, loan payment, or credit card payment, the interest balance gets paid off first, and whatever is left over gets applied to the principal. So if you want to reduce you debt the fastest way possible, consider doubling up payments on that student loan, for example, or tossing a little more money towards your mortgage every month. All that extra money goes directly against the principal, meaning the interest charge is less in the long run (it’s being calculated against the principal owed each month) and you make faster progress paying off that loan.

We used this process to accelerate the pay off of our student loans. Between my husband and myself, we had about $40,000 worth of loans for college and graduate school. By doing this for one loan at a time, we gradually managed to have more monthly money to then pay down the next loan, with the process leading to paying off the loans within three years rather than 10. we are currently planning to start the same process to keep our mortgage balance decreasing at an expedited rate as well.

3. Understand What You Need and What You Want (and how to tell the difference).
I do like nice things, like Coach handbags. The leather ones are pretty attractive and very well made. But I frequently get items like these from consignment shops and ebay- gently used items in good condition. I can have the luxury goods I want at a fraction of the price. And spending $40 for a bag that may have originally cost someone $250 or more works for me- I get what I want, for a fraction of the price. And even if I want a “new one”, I make sure I save up for it- a few dollars each week in the “mad money” jar. Surprisingly, even when I reach the goal, I have a hard time converting that money into one item, and I rethink the purchase, avoiding buyer’s remorse in the meantime. When I do buy it, I feel it’s well earned and value the subsequent purchase more than I might have had I just whipped out the credit card at the time.

Do I need a fancy handbag? Maybe, but unlikely- it may help me feel polished at client meetings, but mostly it’s utilitarian. I may want one, but other bags can fill the need just as well. So if you can merge the want and need and find a cheaper alternative to the want part, you win on both fronts. You get a want and need satisfied.

4. Understanding Necessity.
People get this one wrong all the time. I once had to evict a college student out of an apartment when they were three months behind on the rent. Instead, they were paying credit card bills, the electric, etc. Well, the credit card company will not give you a roof over your head. Having paid the electric won’t help you much if you can’t live in the place where the electric is turned on. So you need to prioritize your spending, big and small. Priorities should be Food & shelter, then other items on the list.

a) Having a roof over your head. Pay the rent and mortgage first.
Without a roof over your head, then you have no where to put the other stuff you might want to buy. Owning a house or condo rather than renting means those monthly payments are giving you an ownership interest in your home, so to speak- it’s investing money you may get a return on in the future, as well as the privilege of living in a place. So when you get ready to move, you get money you can use towards buying your next place to live, rather than having to save up for first, last and security on a new rental somewhere.
b) Next, pay utilities. You need electric, gas, water, etc. they make your home livable. Not optional expenses.
c) Food and clothing. Buy reasonable groceries- you can eat at home for less than you can eat out. You need to be able to buy clothes for work, but consider things that don’t cost you after the purchase, such as things that you can launder at home versus dry cleaning, which is expensive.
d) health insurance. If you have kids, you need health insurance. No way around this one. That next snotty nose could cost you big time.
e) Cash flow and Income Stream.
Before you quit your comfy job because you are bored or want to try something new, make sure you have a way to afford health insurance. I would rather moonlight on a new project and be tired than give up something that is guaranteed to pay the bills. You have got to make sure all the basics are covered, month after month, before you can even consider moving to a job with a more speculative income stream. Being your own boss seems like a great thing, but if you get sick, you can’t work and there’s no money coming in. And bad things happen.

In addition, the escalating costs for fuel and its downstream effect on food and consumer goods means everyone’s budget is in flux. Your budget may not be constant now, and you need to have some “play” in your cash flow to be able to compensate for this moving target. Without a savings cushion, or enough room in your budget to allow for “cost over-runs”, you will quickly find yourself in deep doo-doo.

The deep, dark secret about money is that it is a tool. When you have more of it, it actually becomes harder to make financial errors- you get preferential treatment at the bank, over-draft protection, and the like. When you don’t, you get nailed for a ridiculous amount of added costs penalizing you for not handling your money well- bounced check fees, higher interest rates, etc.

You can’t afford not to understand how money works. Little mistakes will cost you financially, and put your road towards security in jeopardy. Understanding money, budget priorities, and how to get ahead will make it infinitely easier to do.

Take it from someone who used to have to collect money from people, or find legal ways to make them pay what they owed. You can’t avoid the debt collector forever- and if you manage things well, you’ll never have to talk to one of these people ever.

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