Wise Bread (Philip Brewer)

Can You Buy Your Way Out of the Rat Race?

Philip Brewer — Tue, 03 Nov 2009 14:00:01 +0000

If you're tracking your spending, you know how much money it takes to live on. If you're tracking your investments, you know about how much return you're getting from your capital. With those two numbers, you can get a pretty good estimate of how much money it takes to buy your way out of the rat race.

In its simplest form, the cost to buy your way out is just your annual spending divided by the return on your investments. I used to do that calculation a lot. When I got my first job interest rates were in double digits, so I could imagine getting $30,000 or even $40,000 a year — plenty of money to live on — from an investment as small as $300,000.

A simple theory

Of course, that model is over-simplified. For one thing, you have to account for the possibility that in some years spending will be higher. (What if you need a new car or a new roof or to send the kids to college?) I knew how to handle that one, though: The same way I was already dealing with it when my income came from a regular job — covering major expenses by cutting other spending.

More fundamentally though, the simple model doesn't account for inflation. And, at the time when interest rates were in double digits, inflation was similarly high. It wasn't a problem you could just handwave away.

I spent way more time than it was worth trying to construct a mathematical model for living off capital — a model that accounted for taxes, provided for reinvesting enough after-tax income to keep me even with inflation, and still paid out enough money for me to live on. All this, mind you, while my net worth (after a student loan) was probably negative.

Anyway, that was my first guess at my number: a capital sum of $300,000, properly invested, would yield enough that I wouldn't have to work. That's what it would have cost me to buy my way out of the rat race. Other people have done the same sort of thinking and written whole books about it, and come up with better-researched models for accounting for taxes and inflation. I've written reviews of a couple of good ones: Bob Clyat's Work Less, Live More and Joe Dominguez and Vicki Robin's Your Money or Your Life.

The less simple reality

In practice, though, for most people, buying your way out doesn't work out.

First of all, it's really expensive. Unless you're extraordinarily frugal, it's still going to cost you tens of thousands of dollars a year to support your household. And (as you can't really count on double-digit returns on your investments), it turns out that you need around a quarter million dollars to stand behind each $10,000 of annual income.

More fundamentally though, no amount of capital provides complete security. Your money can be lost any number of ways. The economy could turn down. Even if the economy goes up, your investments could go down. You could lose your money to theft, natural disaster, lawsuits, or government seizure (not to mention simple overspending). You can try to protect against any of those things through a combination of due care and proper insurance, but there's no such thing as perfect protection.

Your real protection against those things is your own productive ability — which is something that can't be stolen, taken in a lawsuit, or seized by the government.

Buying your way out of the rat race is a suboptimal strategy. It can work — people do it all the time, although not very many of them — but it's hard. It also doesn't leave you so very much better off than you were — you may be able to quit worrying about losing your job, but you have to start worrying about low interest rates.

Now, accumulating some capital is a great idea. In fact, I think everyone should have a medium term goal of accumulating enough capital that the income from their investments could cover their bare minimum expenses. Once you get beyond that, though, adding more capital starts yielding diminishing returns.

The real way to escape the rat race: Refuse to race with rats.

So, what do you do instead? Basically, invest in your own skills.

Improving your skill at the job you already have can help you earn more (important if you don't yet have that basic level of capital), but developing skills at entirely new things gives you a whole new layer of protection against economic downturns and incompetent managers.

Broaden the kinds of work you look for. Don't focus only on finding the highest pay — look for work that's interesting and that's useful. It's more fun. It's also more secure — there's only one job that pays the most.

Beyond that, learn how to do, make, grow, and find things for yourself. To the extent that you can directly provide the things your family needs, you're not dependent on either your capital or your job.

Each of these things improves your security. Taken together, they can give you as much security and freedom as a human being can achieve.

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A Society of Fear

Philip Brewer — Wed, 28 Oct 2009 13:00:02 +0000

By Philip Brewer

There are people out there whose livelihoods depend on the fact that most people go every day to some job or another. Business owners, investors, retired folks — capitalists in general — pay their expenses with profits that would be threatened if there weren't plenty of workers trading their life for a paycheck.

I don't mean to speak ill of capitalists — I'm one of them (in my own "eking out a meager existence" way). But as a group, they have a vested interest in most people choosing to get up and go to work every day. And, as a group, they're terrified that most people wouldn't do that unless they had to.

I think that's why society has been organized to make the wage slave/debt slave trap the default path for almost everyone.

It's a gentle trap: borrow a bit to go to college, a bit more to buy a car, a bit more to buy a house... You earn plenty of money and enjoy a comfortable life — and all you lose is your freedom to do anything else besides get up everyday and go to work.

When I wrote about it before, a lot of commenters chimed in to defend the wage slave/debt slave trap — on the grounds that it motivates people to "work;" that it teaches them how to "manage money;" that it keeps them "honest."

And I find that fascinating. Because, see, I can understand business owners feeling that way — their profits would drop if people managed to escape their debt traps, gaining options besides showing up at their job day after day. I can also understand managers feeling that way — their bonuses would be a lot smaller (and their jobs a lot harder) if their employees were in a position to choose the work that was the most fun or interesting or useful or important. I can understand the government feeling this way — income taxes could drop a lot if debt-free citizens could choose to earn less.

But I'm mystified by ordinary people feeling this way. It's bad enough that people put themselves into the position of having to go to work every day — and worse, having to go with whatever job pays the most because it's the only way to get all the bills paid — rather than being able to choose work because it's interesting or because it helps people. But that's only the beginning of the madness. Everyone in the debt slave/wage slave trap has to worry that any little mistake could cost them all their worldly goods and their entire future.

In a world where these sorts of debts are normal, an ordinary person with ordinary expenses has to be afraid all the time. An unexpected expense can put the whole household at risk — it means more debt, probably at a higher rate. Any little glitch in earnings can be ruinous — it means missed payments, late fees and penalty rates of interest.

Imagine if things were different — if most people had a comfortable emergency fund and little or no debt. A lost job would mean belt tightening, but not foreclosure. A sudden spike in fuel costs would mean turning down the thermostat and wearing a sweater, but not pawning the wedding rings for enough gas to get to work one more week. It would mean not living in fear.

As I said, there are a lot of people who think their livelihood depends on that fear. Those whose profits are higher and jobs are easier when there are plenty of frightened workers have a vested interest in things as they are. But I think we'd be better off if people were less afraid.

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Who has the time (or money) for deals?

Philip Brewer — Tue, 13 Oct 2009 13:00:03 +0000

By Philip Brewer

I pay almost no attention to "deals" sites. I scarcely even read the lists of deals here on Wise Bread. There are several reasons, but they pretty much come down to two things: I don't have the time, or the money, to pay attention to deals.

In the abstract, deals are great. And, of course, actual concrete deals that you can use are even better. My wife, who does most of our grocery shopping, gets the grocery store fliers and plans shopping trips around what's cheap at the nearby places where we're going to buy our groceries anyway. But I think that's key: deals only save you money if they let you pay less for stuff you were going to buy anyway.

Lists of random deals, though, don't provide that. In fact, I find a list of random deals is usually just a big waste of time — because it consists almost entirely of things that I had no plan to buy.

In practice, it's even worse than that: a list of random deals is (and is intended to be) a temptation to buy stuff I don't need. After all, that's the whole point of deals.

The only good result from spending time trawling through deal lists is the happy coincidence of finding exactly what you were going to buy at an especially good price. The usual result — finding nothing I need — means that it was a big waste of time. The other possible result — finding something that I wasn't going to buy, but that's so attractive I end up buying it anyway — is a big waste of money.

I do sometimes go the other way around — decide that I want to buy something and then look around for a great deal. The companies that offer deals, of course, try pretty hard to make that effort unsuccessful. After all, the point of the deal is not to save you money, it's to get you so spend money that you otherwise wouldn't have. Once you've decided to spend the money, there's no point in giving you a deal.

The internet is a useful tool for finding a good price, once you've decided to buy something. It's more useful for finding ordinary low prices, though, rather than great deals. Happily, that turns out to be more useful to me than lists of deals.

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Don't Go to College to Learn

Philip Brewer — Tue, 06 Oct 2009 13:00:08 +0000

By Philip Brewer

There are good reasons to go to college. And, if you do go to college, you will no doubt learn a lot. But you can learn anywhere — and probably learn more, better, and faster if you do so on your own. If you choose to go to college, make sure you know what you're paying for.

A really good teacher who moved the class along at just the right pace for you might let you learn faster than simply studying the topic on your own. But any large class will go too slowly for most of the students, while even so going too quickly for a few. There's also a community aspect to learning — other students will ask questions that you should have asked, except that you hadn't realized that you didn't understand — that you won't have if you study on your own. But you can get that other ways, such as with a study group.

College gives you two things that are harder to get on your own: a chance to network with your peers and a degree.

Networking

Working with other people is inherently valuable. Five people trying to solve the same problem can much more quickly think of and try out different solutions than one person working alone. Participating in such an activity can teach you things that you won't learn from a book, and teach you some of the things that you will learn from a book more quickly. Going to college isn't the only way to do that, but going to college does put you in the position of working with a lot of other people.

If you go to a prestigious college or university, the main thing that you're paying for is a chance to spend four years with the people of your generation who will be movers and shakers. Depending on how you want to spend your life, that may be hugely valuable.

If you want to be a politician, for example, or a CEO of a Fortune 500 company, it helps a lot to know the other people who are going to be politicians and CEOs. At a prestigious college, they're right there attending your classes and living in your dorm.

If that's why you're there, make the most of it. Pay attention to your classmates, with an eye to spotting the ones that are going places. Get to know them. Whenever possible, work with them. Especially then, but also when working on your own, do great work. The point here is not to get a good grade (although there's nothing wrong with that). The point is to make sure that your peers know that you do great work. Soon enough they're going to be hiring people. You want them to remember you as someone who'll make them look good.

Don't focus entirely on your fellow students — their parents and your professors will be hiring people even sooner than your peers will. But they'll also be retiring just when your career will be peaking, so make your fellow students your top priority.

Here's the key point: If you're going to an Ivy League or other prestigious college and you're not seriously applying yourself to the job of demonstrating to your fellow students that you're a can-do guy — the sort of guy that they'll want on their team when they're trying to get something done — you're just wasting your money.

Similarly, if your career path won't get much of a boost out of having made those contacts — if your plan is to come back to your home town and be a school teacher or a farmer — then, again, you're just wasting your money.

Certification

The other thing a college provides is certification in the form of a degree. For certain kinds of jobs, a certification from a top college can give you a big leg up. For most jobs, though, a degree from Podunk College is every bit as good.

A degree from a top college can also make it easier to get into grad school, but it isn't essential. Much more important will be good grades, good GRE scores, an impressive body of work, and networking with the professors at the grad schools that you're considering.

For certification purposes, it's really only the school that provides your last degree that matters, so you might as well go with the lowest-cost undergraduate option. A graduate degree from a top school is worth no more combined with an undergraduate degree from an Ivy League undergraduate degree then it is combined with an undergraduate degree from Northern Your-State-Name-Here University. This suggests that, once you know what your terminal degree will be, you should consider other factors than reputation — like cost and location — when choosing where to go for earlier degrees.

Exceptions

There are exceptions of course, which mostly boil down to opportunity and safety — two ideas that are often linked.

Learning how to defuse bombs, for example, would be hard to do on your own. First, because bombs to practice on are hard to come by, and second because you'd probably kill yourself before you developed the basic skills. Learning how to perform surgery is much the same, although you'd probably kill somebody else rather than yourself if you tried to learn that on your own. (Of course for surgery there's also the certification issue.)

If your studies depend on access to specialized equipment that you can't afford, or that would be illegal for you to own, or that simply would be difficult to arrange on your own (like a team and opponents for learning a sport), colleges and universities are one structure for getting access.

What else you get

I'm not saying that you get nothing out of attending a college besides certification and networking opportunities — far from it.

You get:

An educational path which has been designed by someone who's an expert in the field and has some understanding of pedagogy.
Some degree of supervision by people who will make an effort to keep you on track and learning at a reasonable pace.
Immersion in a community of people who are (to greater or lesser extents) focused on learning.
A position in society — student.
A structure for daily living and a protected environment within which to make mistakes — a dorm room and a meal plan are a welcome safety net for someone who has never had to pay bills and a good first step toward learning how to run your own household.

My point is that none of those things have much to do with learning the course material.

If you want to learn, as I said at the beginning, you can probably learn more, better, and faster on your own. Get a text book and work your way through it, doing the exercises. Look at the bibliography and read the books that the textbook author recommends. Go to a university library (or the internet) and get the latest papers by people doing cutting-edge work in your field. Plenty of universities have been putting lectures on the internet (in case you think you learn better from a lecture than from a book) and plenty are providing outlines for whole courses of study on-line.

A lot of people go to college simply because it's the next thing to do after graduating from high school. And I'm certainly not suggesting that you shouldn't go to college. I'm just suggesting that you understand what you're paying for if you do, especially if you choose an expensive school. If you pay all that money, be sure to get your money's worth.

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5 Ways to Live Better Without Spending More

Philip Brewer — Thu, 01 Oct 2009 13:00:04 +0000

By Philip Brewer

The most simple-minded measure of your standard of living is how much money you spend: spending more equals living better. Reality is more complex. There are a lot of ways to live better without spending more.

I'm not just talking about the "touchy-feely" ways of being happier that come from strong connections with friends or relatives or having a spiritual aspect to your life, although that's also important. I'm talking about the sort of standard-of-living stuff that you usually have to pay cash for.

1. Don't buy stuff you don't really want

It sounds obvious, but it's not so easy in practice. It's hard enough just to grasp the difference between needs and wants. It's all the harder to grasp the difference between the things you truly want and the things that are just a passing fancy — especially in the face of advertising, the expectations of your family, the consumption practices of your neighbors, and all the other influences on the way you think about what you want.

Still, this is the core principle of of frugal living. The less you spend on stuff you don't want (or don't want as much), the more you have to spend on the stuff you really care about. Get this right and the other pieces fall into place pretty easily.

So, how do you get it right? Here's what I've been able to come up with:

Probably the key tool for doing this well is a budget. Always remember, a budget is not a constraint. Those constraints that seem like they come from the budget are actually from the real world. Your budget is a tool for maximizing your joy in the face of those constraints.

2. Share with others

There is probably no more powerful tool for raising your standard of living than sharing. After all, if you can use something without having to buy your own, you get the benefits at zero cost.

People actually share all the time within the household — I knew very few kitchens where each person has their own pots and pans, let alone their own stove and refrigerator. In fact, a lot of people don't even think of it as "sharing" to have a common set of stuff in a household. Sharing between households, though, has become increasingly rare.

I talk about some of the reasons for that in a post called Why don't people share more. (That one picked up a bunch of good comments as well.) If that doesn't convince you to make sharing a fundamental tool for living large on a small budget, there are some less effective alternatives (that are still better than just buying everything yourself): Renting, substituting, and doing without.

Since sharing within households seems more normal, that's a place to start. And sharing stuff is only the beginning — it's also possible to share the work, both household work and work in the money economy. See my post: Strategies for households with more than one adult.

3. Have some capital

Too many people think of saving only in terms of a specific goal: Saving for a new car, saving for a new house, saving to send the kids to college, and (most especially) saving for retirement. The fact is, though, that just having some money — some capital — raises your standard of living.

Investments can earn a return — raising your income — but that's only part of the story:

Capital makes the household run more smoothly. Just like having adequate supplies in your pantry makes your kitchen run more smoothly, having adequate capital means you're not having to waste time "managing" your finances--shifting money from one account to another, keeping track of bills until payday.
Capital also means that you don't have to borrow. If you don't borrow you don't have to pay interest--and since you don't have to borrow, you can also negotiate a much better rate when you choose to borrow.
Capital sets you free to take bigger risks. This can can lead to all sorts of good things. It can save you money (for example, though higher deductibles on your insurance). It can let you pursue your true interests (for example, by letting you start a business or get a degree). It can earn you a better return.

Want more details? Here's some of what I've said about this before:

4. Don't borrow (so you don't have to pay interest)

There are good reasons to borrow. But however good your reason, it still costs money.

If you've been borrowing, then living within your means will initially lead to a drop in your standard of living. But it's a drop that doesn't last. As long as you don't rack up debts now that you have to pay off later, your standard of living tends to rise automatically.

5. Cook your own food

This is a fairly small item — the average household spends about 15% of its money on food. But the average household spends about 6% of its money on food away from home. If you spend more than that eating out (which half of you probably do), then just a little more home cooking can save you a lot of money. And even if you spend less than average on eating out, unless you're already a subsistence farmer you can almost certainly save money and eat better by cooking more.

Of course, someone in your household needs to be able to cook. Fortunately, it's pretty easy to teach yourself how to cook.

Once you're cooking (even a little), it's pretty straightforward to save money in the kitchen. There's lots of support for frugal, healthy eating, such as healthy recipes with cost data courtesy of the U.S. government.

Really, cooking your own food would be an increase in your standard of living even if it didn't save money, simply because stuff you make yourself can be better (i.e. more to your taste) than stuff that someone else cooks. The fact that it's cheaper is just a bonus. Plus, it's fun.

6. Spend money to save money

Finally, here's a bonus tip that doesn't quite match the headline, because it sometimes involves spending money, so I'm not counting it as one of the five.

There are lots of ways to spend money to save money. The most basic is simply to stock up on things when they're cheap. (This yields a return which can be huge in percentage terms and tax-free.) There's also just taking good care of your stuff.

More generally, though, there are lots of ways that small investments (of money, time, or both) can produce a permanent decline in your cost of living. There are obvious examples, like weatherstripping or insulating your house. Some, such as learning how to make or fix things yourself can be free (although sometimes you need to pay for classes or tools).

Non-financial investments — investments where either the investment itself or the return is in the form of something other than money — often yield a higher return than ordinary stocks or bonds.

I think this will turn out to be especially true of investments that either save or produce energy, because they're priced based on the current costs of energy, and I happen to think that energy is going to be more expensive in the future:

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Don't Despair Over Small Retirement Savings

Philip Brewer — Wed, 23 Sep 2009 13:00:03 +0000

By Philip Brewer

If you quit checking your 401(k) balance last year, because the market crash made it too depressing, now might be a good time to take a fresh look. It'll still be well down from the peak, but it's probably recovered quite a bit from the low. However small it may be compared to some imagined goal, don't underestimate the value of any amount of retirement savings.

My brother just told me about a colleague—a college professor approaching retirement age—who suffered so badly in the crash that his entire retirement savings were not much more than one year's pay. "Obviously," my brother observed, "He's not going to be retiring on that anytime soon."

The fact is, though, there's a big difference between "small" and "insignificant" when it comes to money. If you're earning, let's say, $80,000 a year (which a full professor approaching retirement might well be) and your savings are only $80,000, it's easy to imagine that your retirement savings are insignificant. It's not true, though.

A capital sum of $80,000 will support spending of $260 to $330 a month for the rest of your life (and probably forever—see my post How much can I spend in retirement for a description of the 5% and 4% rules).

Now, somebody who's been living on $80,000 a year is not going to support themselves on $300 a month—but that doesn't mean that $300 a month is insignificant. It might pay your property taxes, or your home maintenance expenses, or your utility bill. (If you have a small, well-insulated house in a low-tax community, it might pay all three.)

If you have nothing else to retire on, this is probably too little—but hopefully your retirement is not dependent on just your retirement savings, but instead gets a boost from other savings, physical capital (such as a house), pensions from previous employers, social security, intangible capital (such as a copyright on a book), and so on. Most especially, of course, your retirement is based on your ability to save more money at your regular job before you retire, and then your ability to continue to earn some money after retirement.

Finally, I'd like to point out that your expenses in retirement have only the most tenuous relationship to your pre-retirement income. Yes, those "can you retire" calculators all ask about your income and then assume that you need to replace a large fraction of it—but that's just stupid. In retirement you need to fund your expenses, not your income.

Someone approaching retirement ought to be about at the peak of their earnings—which to my mind ought to mean that their expenses are rather less than their income. It's one thing for a 20-something just out of college with a low income and a high student loan burden to be spending every cent of his or her take-home pay. For a 60-something college professor, expenses ought to be quite a bit less.

The difference, of course, is the money that's available for investment. But that's the less important part of the equation. More important is that a low cost of living means that you can retire without having to replace your entire income. And if that's true, even a modest amount of savings can support your retirement.

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Reject Variable Terms and Conditions

Philip Brewer — Sat, 12 Sep 2009 14:00:02 +0000

By Philip Brewer

Ordinary business transactions used to be governed by long-standing laws and customs that had been developed to make them fair to both sides. Over the last fifty years or so--basically, since credit cards became popular--those rules have been gradually pushed aside. Now, everything is governed by "terms and conditions" that the corporate party can change at any time. Do your best to avoid doing business on such terms.

Once in the 1970s and once in the 1980s, I "took out a loan" (as opposed to using a revolving credit agreement such as a credit card). In both cases, I borrowed money at a specific interest rate and had a fixed repayment schedule--which could not be changed by the bank, as long as I made the payments on time.

You can still borrow money that way, but most credit transactions are different now: they're done according to "terms and conditions" that let the banks change anything they want. (The new credit card law limits banks' ability to raise rates, but variable rates can still go up if the index goes up, and for most credit cards the index is the prime rate--which is a rate that is set by the banks themselves.)

What person in their right mind would agree to borrow money on terms that the lender can change at any time? Banks are corporations whose sole motivation is to maximize profits: They will always change the terms and conditions so as to suck the maximum amount of money out of their customers. It's what corporations do.

The only real limit on banks' terms and condition comes from competition. Although they make most of their money from their worst customers, the banks also make a tidy sum when people like me use credit cards for transactions, because the banks earn a fee on every transaction. A bank that changes its terms in ways that pinch those people (people like me) can lose profitable business--because people like me have other options. (I think the recent financial crisis has also reminded banks of the value of borrowers who actually pay back the money that's been lent to them.)

Competition has generally worked to help everybody, because institutions have historically had only one or a few broadly applicable sets of terms and conditions, each of which applied to a large numbers of customers. But institutions only did that because it was convenient for them. Now that the technology will support it, I expect that businesses will start to move toward individual terms and conditions.

Much the same way the airlines moved to having a different price for every seat on a plane, I expect that other businesses--eventually, all other businesses--will start to do the same. They'll try to lock you into their service, and then jack up the rates to whatever will suck the most money out of you.

It can get much worse, though--and I think it will.

Suppose a business wants to raise prices, but identifies you as a customer who will probably drop the service rather than pay more. Instead of raising its fee by just a few dollars, it raises its fee by tens or hundreds dollars, hoping that you'll fail to cancel before the new fee goes into effect. Sure it loses your business, but it would have lost that anyway. If you've agreed to terms and conditions that the business can change at any time, this is probably perfectly legal.

Business don't do this much, but just for practical reasons--they worry about bad publicity, they're doubtful that they'll be able to collect on that unconscionable last charge, they'd hate to lose a customer if they've guessed wrong about the maximum you'd be willing to pay, and because it's been difficult to manage unique terms for every customer. Technology means the last restriction no longer applies, and makes all the others weaker than they used to be.

You can't completely avoid variable terms. Many services are unavailable on fixed terms. But avoid them when you can--and always go into such a deal with your eyes open. Think:

What could the service provider change that would cost you the most money?
Can changes in terms affect you, even if you cancel immediately? (And if not, is the only reason they can't because of a provision in the terms of service that they could change?)
If you react as quickly as possible to a disadvantageous change, what's your worst-case loss?
How much time and effort will it take to track things closely enough that you can react in a timely fashion?
How much would it disrupt your life if you had to abruptly cancel a service whose terms and conditions became unacceptable?
Is there a better option--one that might cost a little more, but that would let you avoid a future disruption?

If you've agreed to terms and conditions that the business can change at any time, and you don't expect pretty much every business to change them to screw you in whatever way will be most profitable to them, then I think you simply don't understand what corporations are.

[Updated 21 September 2009: This post was featured in the 17th edition of the Best of Money Carnival.]

[Updated 5 October 2009: This post was featured in the The Best of the Best in Money and Personal Finance.]

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Learn good financial habits from your parents. Or not.

Philip Brewer — Tue, 08 Sep 2009 13:00:02 +0000

By Philip Brewer

One of the big advantages that children of the middle-class and wealthy have is that they grow up in a household where a huge amount of financial knowledge is embedded in its day-to-day functioning. Parents teach it, but it's also just there for the child to pick up, almost for free, like language and basic social skills. If you don't get this basic financial knowledge at home, it's possible to learn it other ways--but don't underestimate how much you need to pick up.

I talked a few days ago about getting your banking services for free. This is something that's routine for any household that's middle-class or higher, but hard for poor folks for several reasons--one of which is just that they don't know how to go about it. But that's just one example. There are so many ordinary good financial habits (like balancing your checkbook, checking your credit card statements, paying your bills on time, having an emergency fund, being careful with debt, challenging vendors who try to overcharge you, having a budget, tracking your spending, saving, investing, and living within your means) that middle-class folks pass on to their kids more or less automatically. It's hard for people who grow up in poor families to catch up.

Obviously I'm using "poor family" as shorthand. Many poor families have great household management skills to pass on to their kids. (After all, a poor family needs great household management skills lots more than a rich family does.) And there are plenty of other things besides poverty that produce the kind of generational ignorance that I'm lumping under the category of "poor family."

For example, immigrants from countries where the banking system is underdeveloped or unsound not only lack basic skills in how to use banks, they often don't even know that those skills are of value--and they're prone to pass those attitudes on to their children. Immigrants also may not speak the local language--and even people who do speak it may not read it well enough to make skillful use of things like bank fee-disclosure documents.

Still, a lot of it is just poverty--people who don't have enough money to meet the minimum balance to get free checking, people who live in poor neighborhoods where there aren't any banks (but are plenty of check-cashing and payday loan places), people who have no financial cushion against small glitches turning into major financial catastrophes. Growing up in such a household makes it tough to learn ordinary good financial habits.

In a middle-class household, the basics of middle-class financial life are being taught all the time in many different ways:

Conscious instruction

Some things are specifically taught. For example, when I was about twelve my grandfather (who was a banker) took me to the bank to make my first deposit. He showed me how to fill out a deposit slip, pointed out what the different lines were for, showed me where to sign the check on the back to endorse it--and explained what endorsing it meant.

Really affluent parents tend to do more of this conscious instruction--teaching their children the proper relationship between family members and the bankers, brokers, and trust officers who deal with their finances. But middle-class parents can and should teach their kids their basics, from how to write a check to how to know when you're being cheated.

Modeling correct behavior

Some things are not so much taught as demonstrated. My parents used debt carefully. I remember that they had a car loan when I was small. When I was a bit older they got a mortgage to build a house on some land they owned, and I remember my parents holding firm when the deal almost fell through over a quarter of a percentage point.

My dad was a college professor and only drew his salary nine months out of the year. During those nine months, he made sure to save enough money (saved out of each paycheck at the credit union) to support us over the summer when he wasn't getting paychecks.

My mom balanced the checkbook every month. It wasn't her favorite household chore, but she did it every month anyway--a habit which I continued until I got married. (Now my wife balances the checkbook.)

Everything parents do while their kids are around demonstrates their values--how much they tip, whether they decide to wait until payday to make a purchase, what they do when a clerk makes an error, which expenses stay in the budget when money gets tight and which get cut.

Letting kids help

I'm old enough that when I was a kid bank statements didn't come with your transactions all sorted by check number. They did, though, come with your canceled checks. So, step one of balancing your checkbook was taking the stack of canceled checks and sorting them into numerical order so that you could mark them off in your check register. When I was about middle-school age, I remember helping my mom by sorting the checks for her. (I remember it vividly, although I probably only did it a few times.)

When I was a bit older I remember paying the household bills a few times--I went through the stack of bills and wrote all the checks and gave them to my dad to sign.

As a small child I'd go grocery shopping with my mom and learned about things like comparing unit prices. I don't know that I was a lot of help, but I was there--not just watching, but participating.

Letting kids manage their own money

Small children will tend to make poor financial decisions for lots of reasons. Their arithmetic skills are still developing and they're still learning things like how to defer gratification. If they have some money of their own, they have a chance to learn this stuff when the consequences of poor decisions are reasonably small--no money for a comic book because they spent it on candy or vice versa.

It's hard to know how much to "help" children make the right choice. Part of the point is for children to feel the pangs of a foolish choice when both the sums and the stakes are small, so it's important to let them make their own mistakes. On the other hand, encouraging a child to save up a chunk of money to be spent on a something the child will enjoy for a long time can go a long way toward developing a life-time habit of thrift.

Casual conversation

Even when there's no actual instruction and when children aren't included by helping, they're still learning all the time. (Learning all the time is what children do. You can't stop it. All you can do is have modest influence on what they learn.)

If the parents are in basic accord, the children will tend to pick up their habits (modified to the extent that they thought things could have been done better). If the parents argue about money, their children still learn a bunch of stuff--that money is important enough to argue about, for one thing. But they also learn from the specific content of the argument. Are they arguing about luxuries versus necessities? Are they arguing about a higher standard of living versus saving? They learn something about each parent's perspective. And, since they have to live with the results, the lesson gets well and truly driven home.

Kids also learn from their friends, their friends' parents, older siblings, their neighbors, and anyone around who has money. They learn from watching and seeing what happens, but they learn in particular from what their parents say about what's happening. Casual comments about this neighbor's failed business or that neighbor having to depend on money from the in-laws make an impression. The kids will also soak up a certain amount of cause and effect from the sequence of events--when the family across the street loses its house in foreclosure, the kids will remember if it's the family that could somehow afford a new pool when no one else could and used to go on two fancy vacations every year.

Teaching yourself

There are lots of ways parents can do a poor job, from failing to do the actual instruction parts to modeling foolish or destructive behavior.

If your parents did a poor job, it falls to you to correct the errors and to fill the gaps. After all, you're the one who has to get by with whatever you know.

Yes, it's a daunting task to pick all this stuff up on your own--especially as an adult, where every mistake can have serious consequences for your family. The fact that it's going to be tough doesn't mean you should skip it, though. It just means that you need to apply yourself to learning all that stuff that luckier people learned when they were growing up.

If your parents did a good job, I hope you'll cut some slack for those whose parents didn't. And, even if your parents did a great job, there's always more stuff to learn about managing your finances.

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Avoid Bank Fees

Philip Brewer — Fri, 28 Aug 2009 20:00:01 +0000

By Philip Brewer

I don't pay any bank fees, except rental on my safe deposit box. That leaves me of two minds about the fees. On the one hand, I feel bad because the fees tend to fall hardest on the people who can afford them the least--the poor, the ignorant, the stupid, the careless, the lazy, and the unlucky. On the other hand, the fees other people pay help cover the costs of the many free services that I get from the bank.

Economic research firm Moebs Services just announced results from a survey that indicated that fees are now providing the bulk of bank profits. In fact, at almost half of all banks, overdraft fees alone exceed total bank profits.

Banks use a lot of tricks to maximize the fee income. In particular, they process the largest checks first. If one big check overdraws your account, the bank can then charge an overdraft fee on every check that clears. If they processed the checks in the opposite order, they might only be able to charge the overdraft fee on the last one. (Another trick is to add new fees with little fanfare, so that you don't know you're paying them until you check your bank statement.)

Most people are like me, paying little or nothing in the way of bank fees. For example, according to an FDIC report last year, less than 14% of all bank customers pay over 93% of the overdraft fees.

Although the poor tend to get hit most with fees, it isn't primarily the poverty that does it. The key to avoiding bank fees is keeping your finances under control. The only way that just being poor exposes you to fees is that the narrower the gap between your income and your expenses, the harder it is to keep your finances under control. You have less room for error and are more vulnerable to simple bad luck. But being poor tends to be associated with other things that make it tougher to avoid bank fees.

If you're poor, you can't afford to keep a large minimum balance. If your parents were poor, they may never have learned that it's not necessary to pay ATM fees and bank transfer fees and fees to check your balance and fees to talk to a teller. And whole categories of poor people are not only poor--they're poor and they don't speak English, or they're poor and they come from a cultural background that doesn't trust banks. These people easily fall victim to predatory firms that charge huge fees for services like check cashing and small loans.

So, poor or not, how do you avoid bank fees? After the obvious things--don't overdraw your account and don't go overlimit on your credit card--the most important step for avoiding bank fees is to read the stuff from your bank and understand what services are free and what services aren't. Because every bank makes many services available free to certain customers. You just need to make sure that you're one of those customers.

Common special deals

Bank fee structures are, of course, ridiculously complicated. Most banks have multiple fee structures, depending on things like what kinds of accounts you have, which services you use, minimum balance, and even age (seniors often get good specials; students often get crappy ones). There are a few practices that show up pretty often, even if they're not universal, so it's worth being aware of them.

High minimum balance

Lots of banks offer no-fee deals for people who keep a certain minimum balance. (At some banks there are several tiers of these.) With interest rates as low as they are now, it costs very little to leave some cash lying around in your checking account. It'd take a couple years for the lost interest from having $1000 sitting idle in your checking account instead of in an internet savings account to add up to as much as just one bounced check fee.

Packages of accounts

Lots of banks offer package deals, where certain fees are waived if you get a certain group of accounts (savings, checking, line of credit, etc.). The idea is that if they can pull in a certain critical mass of your financial activity, it'll increase the chance that you'll use them for other, high-profit services like your mortgage and your IRA.

Packages of services

Many banks have long waived some fees if you have your paycheck directly deposited into the bank. More recently, some banks have started offering higher rates to people who agree to some minimum number of debit card transactions. Others offer deals to people who use the bank's bill paying service.

Any of these can be a excellent deal if the packages or minimums happen to match how you were going to arrange your finances anyway. The banks are all a little different, so look around and see if you can't find one that's a good match.

This is another place where the poor tend to get nailed: If they live in a poor neighborhood, they probably don't have a dozen different local banks to choose from, reducing the chance that they can find one that offers a deal that matches their circumstances.

Other financial fees

Because there's so much money in fees for financial services, everybody is trying to get in on it--including states. Many states have started making cash assistance (unemployment, food stamps, etc.) available via a debit card--but a debit card that comes loaded up with fees: fees for using an ATM, fees for checking your balance, fees for trying to charge more than is left on your card. There are even fees for not using your card! (That probably doesn't deserve an exclamation point--lots of kinds of accounts have inactivity fees these days--but I still find it shocking.)

Like with other bank fees, most of these are avoidable if you understand the rules, and not too onerous as long as the cash assistance isn't your only source of income.

The easiest thing to do for things like unemployment insurance where you're allowed to get the money as cash, is to do just that. You typically get one free cash withdrawal per month at an in-network ATM. Use it to get all the money out and put it into your regular bank account. If you're not allowed to get the money as cash (as with debit cards for food stamp benefits), you can minimize fees by treating it like an ordinary debit card--track each transaction and keep a running balance so you don't have to pay a fee to check the balance. Then, use the card to pay for whatever's allowed until the money runs out.

Avoiding fees is pretty straightforward for people whose finances are under control. They know what services they need, so they can shop around and find out which banks offer those as free services (with which kinds of accounts). They pay attention to things like which ATMs they can use for free. They keep track of their balance and don't overdraw their account. If they need a service that isn't free, they shop around to find where they can get it cheapest.

It's not that much work to nail down all these details, and over time it can save a fortune in fees.

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Thrive as a Starving Writer--Lessons from the Experts

Philip Brewer — Tue, 25 Aug 2009 20:02:28 +0000

By Philip Brewer

The web is full of advice for starving writers. And why not? Any writer has heard the advice "Write what you know," and one thing many writers know is about being a starving writer. Oddly, most of their advice is on writing. A couple of truly great writers, though, have left us advice on the much more important topic of not starving.

One writer I'm thinking of in particular is Ernest Hemingway.

Hemingway is hardly the only person to have written about a year or two spent as a starving writer. Another is George Orwell, who wrote the masterful Down and Out in Paris and London. But although Orwell lived as a starving writer, the vivid descriptions in his book offer little in the way of practical advice for someone trying to carve out time and space to make a go of being a writer. Hemingway on the other hand, has plenty to say on just that topic.

There's a short piece by Hemingway available on-line: Living on $1000 a Year in Paris. The article describes how cheaply it was possible to live in Paris--a room for $30 a month, breakfast for $6 a month, subway rides for 4 cents--thanks to the exchange rate at the time.

At the present rate of exchange, a Canadian with an income of one thousand dollars a year can live comfortably and enjoyably in Paris. If exchange were normal, the same Canadian would starve to death. Exchange is a wonderful thing.

That was in 1921 and the dollar-franc (and now dollar-euro) exchange rate has long since reverted to something reasonable, but the central message is still valid: To thrive as a starving writer what you need is a very cheap cost structure for your home economy.

Living on $X a year

First of all, don't throw your hands up at the figure of $1,000 a year. Adjusted for inflation, $1,000 a year in 1921 comes to (according to the Bureau of Labor Statistics) $12,031 a year in 2009 dollars.

Getting by on $12,000 a year would be tight in the United States--especially so if, as Hemingway was, you're feeding two people. Tight, and yet not impossible. Hemingway's $30 room translates to $361, and rooms for that price can be found in many parts of the United States. There aren't many places where a subway ride could be had for an inflation-adjusted 48 cents, but where I live a bus ride can be had for less than a dollar. You can eat very cheaply if your room includes access to a kitchen and you're willing to eat mostly rice, beans, and whatever vegetables are cheap that day at the grocery store.

In A Moveable Feast, his memoir about those years, Hemingway mentions many little ways he economized. Gertrude Stein advised that he spend no money on clothes (although she thought he should spend the money saved thereby on art). He writes about saving money by not getting his hair cut--which had an added bonus for Hemingway:

I found out very quickly that the best way to avoid going over to the right bank and get involved in all the pleasant things that I could not afford and that left me with, at least, gastric remorse was not to get a haircut. You could not go over to the right bank with your hair cut like one of those wonderful looking Japanese noblemen painters who were friends of Ezra's.... "You mustn't let yourself go, Hem. It's none of my business of course. But you can't go native this way. For God's sake straighten out and get a proper haircut at least."

There are a lot of things that can be cut out of a budget--if you're a writer and if cutting them makes it possible to spend your time writing.

Live someplace cheap

The exchange rate no longer makes Paris a cheap place to live, but there are plenty of places around the world that are cheap. I'm sure in a couple of decades we'll be reading memoirs by a new generation of great writers who right now are living and writing in Malaysia or South Africa or Brazil. (Foreigners think it's funny that Americans worry about how dangerous it would be to live overseas, because they think of the United States as a violent place with dangerous cities and terrible health care.)

It's really not necessary to go overseas, though, in search of a cheap place to live. There are plenty of cheap places in the United States. Rather, the big stumbling block for most aspiring writers is debt. If you can dodge that--get through school with little or no student debt, or else get your student debt paid off before you imbed the expenses of a middle-class American standard of living into the cost structure of your household, then you can go down the starving writer path--and probably do it without starving.

And, if you can't avoid starving just a little bit, Hemingway managed to find an upside even to that:

You got very hungry when you did not eat enough in Paris because all the baker shops had such good things in the windows and people ate outside at tables on the sidewalk so that you saw and smelled the food. When you were skipping meals at a time when you had given up journalism and were writing nothing that anyone in America would buy, explaining at home that you were lunching out with someone, the best place to do it was the Luxembourg gardens where you saw and smelled nothing to eat all the way from the Place de l'Observatoire to the rue de Vaugirard. There you could always go into the Luxembourg museum and all the paintings were heightened and clearer and more beautiful if you were belly-empty, hollow-hungry. I learned to understand Cézanne much better and to see truly how he made landscapes when I was hungry.

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