Moneyball. My piggy bank, of course.
In most social situations, financial talk, especially of the personal variety, is strictly verboten. But on a blog that hinges on working (earning) and wearing (spending), I'd be remiss if I didn't talk about financial stability and responsibility. It's taken me a long time to work out how to address this sensitive topic, and as I do in many a situation, I've turned to my mother.
My mother is an accountant. She's worked with money nearly daily for decades. And she's given me a lot of advice. Some of it I've taken to heart, some of it I haven't. She lives what she preaches, and she and my dad raised my brother and I in a household where we always had plenty of food on the table and clothes on our backs, but we were told "no" regularly, not to take away the joy in life but to take the importance off of material goods. Like most of what my mother taught me, I didn't appreciate it then, but I certainly appreciate it now.
It is worth saying that this advice may not be right for you and your situation, and this post is not intended to pass judgment on anyone's financial decisions or situations. My hope is that this post opens up a discussion and that readers will share the lessons they've learned in the comments so that we can all benefit from the knowledge.
Here are some of the most valuable financial lessons I've learned from my mom.
The only things worth going into debt for are a house and an education. In my opinion, there are definitely some exceptions: a car if you don't have one that works, food for your family, health insurance and care, etc. I'm sure my mom would agree in those situations. Her point was that very few things are necessary to live a good life, and if you can't afford a newer car or nicer clothes, it's better to make do with what you have than go into debt for short-term satisfaction. Debt is not only difficult to get out of, but often has lasting consequences.
Along those same lines, interest is a waste of money. Unless you have no other way around it, why pay up to 20% or more on top of the value of what you're buying? For a bargain hunter like my mom, letting a charge sit on her credit card was undoing all the effort she'd put into finding a good deal.
Don't pay full price for clothes, shoes or accessories. Even as a child, we got new clothes only if they were on sale. I often wore hand-me-downs from my older cousins. It wasn't because we couldn't afford full-priced clothes, but because my mom didn't think it was worth it. Most things go on sale eventually if you're patient, and if they don't, you'll probably forget about them soon enough. I have definitely found this to be true.
Half of your paycheck should go into savings. Some context on this: my mom gave me this advice during my allowance-earning teenage days, before rent and before independence. In theory this would be great, but in practice it is nearly impossible to do if you have a regular job, pay rent or a mortgage, and still want to eat. Experts generally recommend that 10%-20% of your income go straight to your savings account, but you should figure out what works for you based on your income and expenses (for K and I, it varies by month but we aim for at least 15%).
Instead of raising your monthly debt payment to pay down debt faster, pay the minimum and put what extra you would have contributed into a savings account with an interest rate higher than that of your loan. My mom's reasoning was that a high-interest savings account (usually found online) will help your money go further, and when that savings account balance equals or exceeds your loan pay-off balance, then pay off the rest of it at once. I could never bring myself to pay just the minimum on my loans, but I did get a high-interest savings account. Based on my mom's advice and armed with a full-time job, I repaid over $20,000 in student loans in about three years.
Credit cards are not evil. They've gotten a bad rap over the years, but really, a piece of plastic is harmless. It's the abuse of the privileges that come with the plastic that can get you into trouble. My parents did not help their children sign up for a credit card, but encouraged us to make a habit of smart spending by keeping only a debit card first. I had a debit card only for five years before I finally signed up for a student credit card (as a 22-year-old grad student), and I use it basically the same way: spend money I have, pay off balance every month. I guess I could have lived without a credit card if I wanted to, but I was concerned about building credit and being able to get a home loan in the future. I actually got rejected for my first credit card application because I had no credit history.
Give freely and regularly. For all my parents' emphasis on saving, they are extremely generous. They give regularly to their church and other charities, have helped support their elderly parents for decades, and often help out friends and family in need without any expectation of repayment. To them, the ability to help others is one of the rewards of their frugal lifestyle. Personally, this is one of the most important parts of my own financial philosophy and gives me good perspective and incentive to stay financially healthy.
What is the best financial advice that you've been given (or that you've learned)? I'm always looking for more knowledge in this area.