Issue time 6:49 am, by CTreit
Category:personal finance
How to get to know your financial self
May 28th, 2010If you read personal finance books and blogs you get lots of great ideas on how to handle your money. There are time-honored rules – like spend less than you earn – and there are tons of ideas how to comply with such rules. You will get or keep your finances in good order when you follow these rules and when you adopt some of these ideas.
Some ideas work very well, other ideas don’t work so well. Some ideas sound stupid to you, but when you apply them you actually get good results. Then again, the next person may have a totally different experience than you. The ideas that work for you, don’t work for her. How does that happen?
It happens because we are all individuals. We respond to different things differently. What works for one, is totally useless for another person. Sure, there are some general ideas that work for most, but even these generally ideas are not worth the time and effort for some. That is why the term personal finance has got “personal” in it.
You have to figure out what works for you as an individual. You have to do your part to figure this out, whether you try to figure it our on your own or with somebody else like a trusted person or a financial planner. There are a few ways to find out.
1. Trial and error. Try different things and see how that works. For example, when you want to track your expenses, sign up at mint.com where many of your expenses are tracked automatically. If you miss too many of the expenses that you would have to enter manually, enter all of your expenses manually and skip mint.com. You could be the person who thrives on exercising discipline 100% of the time. Then try a free budget planner like budgetpulse.com or our own free budget planner.
2. Gut. Get the feel for personal finances rules, ideas, and techniques. For example, inform yourself about the different ways you can save for retirement: 401k, traditional or Roth IRA, etc. Choose the option that feels right to you. It may not be the best option from an objective point of view, but if it feels right to you and if it works for you, follow it.
3. Introspection. Learn about yourself to find out how you respond to different ideas and techniques. For example, if you are a numbers person you will find many tools on the internet that help you make financial decisions. If you are not a numbers person you will have to work with somebody, who can translate the numbers that come up in personal finance for you. Then you can get into a position to make better financial decision yourself.
Whatever you do, your actions and decisions will be your own business. You are in the driving seat. You have to know yourself so that you can determine what is good for you.
How have you gotten to know yourself? What have you discovered?
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Issue time 6:42 am, by CT VBT
Category:personal finance
Statistics Schmamistics in Financial Planning
May 25th, 2010When we discussed some statistics in this blog a little while ago, we quoted the Economist on the Pew’s Economic Mobility Project: “In 2004 men in their 30s earned 12% less in real terms than their fathers did at a similar age.” So much for the data.
What does this mean for you and me? The short answer is quite simple. Not that much. Statistics Schmamistics.
Let me talk briefly about statistical data to give you the long answer. When they say that men in their 30s earn 12% less than their fathers did at the same age, it only means that the average for all men is less than the average a generation ago. That does not translate to “all men earn less than their fathers did.” There are some men who make a lot less, there are others who make a lot more, there are others who make about the same, and there are perhaps even some who make exactly 12% less. Each one of us as an individual has his or her own data. We might fall into any of the groups that go into calculating a statistical average. There is nothing that says that we all earn 12% less no matter what we try.
I can make the point even clearer by discussing some survival rates for cancer treatments. Say, that there is only a 20% chance of success that a cancer treatment works. What does that mean for any one patient? Again, it really does not mean that much. Every individual will either enjoy success or not – their chances are their chances, and that depends on a whole host of things, not the statistical average for an entire group. No single person will enjoy that exact 20% success. Overall, a few will enjoy 100% success, but (many) others likely will not.
So, when you read statistics you can more or less ignore them – at least in terms of planning for your own outcomes, and thinking about what’s possible for you. Sure, your individual success will be added to a bunch of others to calculate a group average, but you are most likely not actually at that average number that comes out at the end of the calculation. You are an individual.
I do not want to say that statistics are not meaningful at all. There are many good uses for them. For example, when it comes to policy making our politicians can use these numbers to establish policies that improves the averages knowing full well that these policies will not benefit all, but that these policies will benefit citizens “on average.”
Just know that as your life will not coincide with “the average,” on most things, it is the same with our economic wellbeing. Only some of us obtain the average for our group, many are around the average, but a good number of people are far away from the average. They are either very successful or not so much. It’s best to just give your life the best shot – make informed decisions using statistical data, and other knowledge, but don’t be surprised when you find yourself living a unique life.
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Issue time 1:54 pm, by CT VBT
Category:personal finance
Think BIG
May 20th, 2010A friend who lives in the same neighborhood where he grew up recently told me that he can barely hang on to living in his area. It is a shock, because as a boy, he lived there while his father worked and fed the family, and his mom cared for the household without leaving home to work for wages. They could afford their house in that neighborhood, which has really not changed that much as far as socio-economic numbers are concerned. What happened? How is it that my friend tells me that he is “barely hanging on?”
According to an article in the Economist, a large majority of Americans believes that hard work and personal skills pay off. They think that if we apply ourselves enough, success will follow. This optimistic belief in merit – the idea that we each get what we deserve – has been the driving force for America’s success in decades gone by. But it looks like that this optimistic belief is turning out to be more belief than fact.
This is what the Economist had to say on this subject:
“Between 1947 and 1973, the typical American family’s income roughly doubled in real terms. Between 1973 and 2007, however, it grew by only 22%—and this thanks to the rise of two-worker households. In 2004 men in their 30s earned 12% less in real terms than their fathers did at a similar age, according to Pew’s Economic Mobility Project.”
In other words, the typical American family has been losing out in relative terms during the last four decades, since this trend even worsened during the current recession. Not only that, people born into the middle class have an equal chance of rising or falling in class standing – except for black families, in which case the next generation is much more likely to fall than to rise! So, this means if you’re non-black you have a 50-50 chance of doing worse than your father, and if you’re black, your life chances look even worse than that.
The one fairly sure way to improve your life chances is to get an education. Alas, as college expenses rise higher and higher it becomes increasingly difficult for middle class parents – and certainly for lower class parents – to get their children an education.
Still, an optimistic belief in your own future should be your guiding light. Throwing up your hands in resignation will definitely not lead to success. Think big and keep this adage in mind that I learned when I was young. “He who attempts something big has to be admired even if he fails.” (Sorry, I don’t know who said this.) This saying has kept me going and even daring in my professional and personal life. It may not work out all the time, but it sure is better than giving up.
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