Dec. 31, 2012



                This tirade will take a slightly different tack than others.  I generally try to pick a controversial subject and pose an alternate point of view.  In this effort I am answering a request from one of my previous students to voice advice on a specific issue. I would remind everyone that; opinions are like breath, everyone has one but some really stink.

        First, we all have to realize that volumes of texts and how-to books have addressed these subjects so the information is readily available with a fantastic number of viewpoints.  Second, NO ONE can provide a magic bullet that will make you financially secure. Note: I said financially secure not wealthy or rich.  I always approach this topic in the vein of gaining financial security as I feel that objective is more realistic and will be more likely to attain.

        I was specifically asked to address saving vs. spending. In order to carefully examine our individual spending or saving habits we have to recognize that these two actions are the flip side of the same coin.  You cannot expect to save if you don’t control spending. In Economics we study the “marginal propensity to save” and the “marginal propensity to consume”. If we parse this concept to our personal life it makes our solutions much clearer.  These two terms refer to our tendencies or “habits” to use additional revenues as either savings or by consuming it.

        When the government says that a 3 Million expenditure to build a bridge will yield 1 Billion in benefits they are using this concept. Theoretically each dollar will be spent and re-spent and the government is using the tendency of the local economy to save vs. consume to develop this projection. The same concept is applicable to individuals. Most people will find that if they spent 95% of their income when they were younger and saved 5% that they are spending and saving exactly the same percentage now that they have grown older.  NOT, the same amount of dollars but the same (or very closely) percentage of their income. Why? Because they developed habits that established their “marginal propensities”.  This is one of the many reasons that people who grow up in poverty tend to remain in poverty or why the lottery winner winds up broke.  My wife used to work in a title four position tutoring underprivileged kindergarten and first grade children.  She built a cardboard “Bank” and each child served as teller for one day as other children “Banked” one penny each week.  On the holidays and in the spring she would add interest (usually a good chunk of change) so that each child could “get their savings”. Most times they each got a dollar. This was developing a habit of saving.  We tend to view people in poverty as having no self-discipline but think about the child who sees his/her mother and father always spending every penny. If a Christmas present of 50$ arrives they celebrate and spend all of it; what lesson and what habits are the children developing. Now, so that this doesn’t become a tome, let’s simply accept that savings/consumption are habits that are opposing tensions on our actions.

     I have read volume after volume telling how to save money. If we were in class you would see me stick out my tongue and go PFFFFT.  All of these “plans” fail to address the basic problem so that after you begin to save you suddenly blow all the savings because that is your ingrained “habit”.  Instead let’s begin a new habit.  I will address young, new members of the work force. When you get your first job you will get a pay raise of .50 or so cents an hour. You didn’t have it yesterday so let’s use this trivial amount to begin our habit forming. Take that .50 per hour and open a “savings account”. DO NOT bank into that account electronically. Each payday put that pittance into the savings account. As you make more money you can always increase the amount but you can NEVER fail to bank that small sum. This will establish a regular pattern of savings, it is likely to make you feel guilty and put “a little extra” into the account, and it will give you a sense of security because you know you are improving your situation. At this rate you will be saving $80 each month. More importantly you will be beginning the first key to financial security, developing a habit of saving. The key is to view this as non-optional. I have actually seen new students of this theory “borrow” from their family to meet their other obligations so that their “savings” continued to grow.

        Now, the other side of the coin, spending. Once again, this is a habit. Most people find their entire monthly allowance is gone by the 15th of the month.  Why, because they have a stronger propensity to consume than their propensity to save.  In order to combat this we need to develop new spending habits.  This is very difficult as we “like” spending or we would never have made it a habit.  Our first step has to be to recognize that a problem actually exists.  DO NOT say that because you are making ends meet that you do not have a problem.  Spending abuse exists at all levels of income and in every situation.  We “justify” our abuse with trite sayings such as: I can afford it; I should be able to splurge sometimes, etc.  Buying a new smart phone when you have a smart phone is money that could have been saved or spent on other necessary items.

        One of the keys to controlling spending is to make your spending more difficult.  This will force you to consider your spending. Considering what you spend each time will eventually encourage you to spend wisely.  I do not have an ATM card. Why, because every couple I have counseled on finances had one and all of them were broke by the 15th. You see, it is very easy to “swipe” the card and even worse is if it automatically converts to a charge card when you are out of funds. Instead, I either pay cash or write a check (except for credit card transactions which we will address). This makes me consider what I am doing. Secondly, I never carry more than $20 in my pocket, why? Because then I don’t have money readily available to spend and I can see my true financial status. Try this experiment. Fill five envelopes with money. $20,$30,$40,$50,and$60. Then go to your favorite haunt (Shenanigans) and each time randomly pick an envelope. Later examine your spending habits when that amount of money is in your pocket. Now, credit cards.  First, you should never own more than one credit card.   There is no reason to own two, three, or more cards when you aren’t going to use them. Credit cards are like any tool they have a purpose. What you have to do is define that purpose in your own situation. In my life a credit card is used for the following: Gas purchases to aid in tracking my costs, traveling so my cash is available for emergencies, necessary purchases that are within my budget allocations and are NEEDED immediately. Critically, my credit card is paid off each month precluding interest payments. (we’ll talk about interest later)

        Then, establish a budget. WARNING: forget everything your parents taught you about budgeting. The following budget process is designed to aid you in forming new habits that will serve you the rest of your life.  It is important that you begin by accepting that a budget is a “rearward” looking document it IS NOT a “forward” looking dictate. It is simply human nature to resent anyone or anything that constantly forces them to restrict their activities. A budget that is dictatorial and forward looking will inevitably be broken leading to a feeling of defeat and splurging. REMEMBER: our goal is to establish spending and saving HABITS that we can improve over time. It IS NOT to punish ourselves for being stupid.  Having accepted that premise I suggest a very simple budget, it looks like this:










2 days (Moms)





Road Trip





Mom’s B-day


This format allows us to view our spending, recognize our areas at issue, and plan for the following month. It should be put in the desk and not looked at during the month. It should be taken out at the end of the month to remind us of our problems and help us develop another projection. This budget should never be used to limit our spending, it should be used to reflect on our spending, see areas of error, revel in areas of responsibility, and revise our planned spending.  It should be kept in a folder for years.

Why, because it warns us of potential budget problems like: Heat in December, A/C in July, Moms birthday, etc. Over time this form of budget will slowly develop more and more responsible spending and saving habits without constantly feeling guilty.

        Interest, the best friend and worst enemy your finances can have. I’ll break it down to one sentence that you should repeat until it is firmly ingrained in your head. NEVER PAY SOMEONE ELSE TO SPEND YOUR OWN EARNINGS. Some of our more learned readers will start spouting about “leveraging” their investments. Shut up. If you are at that point you probably have already accepted the above statement.

        Interest is charged for the use of money by you or for the right to use your money. The bank pays you interest because they are using your money. You pay the credit card company because you were stupid enough to carry a balance and are now using their money. As you develop your financial plans interest will be a major concern to allow you to maximize the money others pay you but for now let’s look at the other side. I once told my class that anyone who went to a “payday” loan office should be arrested for “aggravated ignorance”. One of my young female students said,” My dad does that every week”. I told her to go home and tell him he was stupid. The next day she told me, in class, that her dad said he wouldn’t do that anymore.  He was PAYING TO SPEND HIS OWN MONEY. Anytime you make a loan or carry a credit card balance you are paying to use your own earnings. I love the ATM junkies. They will use an ATM outside their banks service ‘cause they needed the money and will wind up paying a charge to spend their own funds. If you get into such an emergency situation that you have to do this you need to remind yourself of how stupid it is, once again looking at our actions not preventing them.

        Other financial considerations: One of the greatest gifts you can give yourself is developing a strong sense of NEED versus WANT. Now, I don’t want you to think I’m advocating becoming a skinflint. I enjoy my life and buy pretty much whatever I want, but I don’t abuse credit and I don’t buy new if I can find used cheaper. One great example is your automobile. The average American will spend $55,000 more than any other nation’s citizens on automobiles in their life time.  Why, because we buy NEW automobiles and trade them in at an average of every 4 years. Let’s look at those two facts. Quickly, A new automobile will get over 200,000 miles today. Once it is licensed it loses several thousand dollars of value. So, a used vehicle begins by saving you several thousand dollars and if taken care of will most likely last you ten or more years. You will be spending less initially and not reinvesting every four years. True example: I bought a pickup truck with 12,000 miles on it and a full warranty several years ago for $22,000. The same truck new would have cost me $28,000. That is an immediate savings of $6,000 and I kept it for 11 years before I traded it in on ANOTHER used vehicle. I know “you bought someone else’s problems”. Folks, when your grandparents were buying cars that might have been true but I had a warranty AND for $6,000 I can replace an engine, a transmission, or have it repainted and buy new tires.

        Another example: I was a vulture when I was in the military. Divorces were my hunting ground. I still have a “top of the line” Basset dining room set and bedroom set that I purchased when a young couple divorced and sold the item their parents had gotten them. I paid less than $.10 on the dollar value. That was 30 years ago.

        Garage sales provide great value for the investment. I watched, at a lodge garage sale, young couple after young couple stick up their nose as they walked by the children’s clothes. They weren’t going to dress their darlings in “used clothes”. I then watched a set of grandparents carefully inspect every item and buy, literally dozens, of outfits for $.25 a piece. I will guarantee that that 1, 2, 3,4,5,6 year old is ecstatic over their “new” clothes.

        I could go on and on but, hopefully this will give you a starting point.