Simple Living is about identifying priorities in Life, and then planning your life around those priorities. Few people hold “work 40+ hours per week until I die” as a life priority. Instead, they’ll offer such things as time with family, volunteering, getting involved in community, travel, physical and mental health, and favorite hobbies. And yet many people’s lives do not reflect this ordering of priorities. Why not? I think two major culprits are consumerism and financial illiteracy. The former leads us to believe we need far more Stuff than we really do, and the second allows us to become so burdened with debt that we become slaves to our wages while being unable to save for a different future.
Niall Ferguson, a Harvard historian and author, believes it is “a well-established fact that a substantial proportion of the general public in the English-speaking world is ignorant of finance”, as reported in this week’s Economist. His upcoming book will produce a long list of evidence to support his claim. For example, one survey last year showed that 40% of American credit card holders do not pay off their balance each month, and one-third had no idea what interest rate they were being charged.
The subprime mortgage disasters that hit America and are now being felt across the pond in Britain have been held up as further evidence of this illiteracy. But who do we blame?
I think it’s safe to say that none of us learned about financial responsibility in school. Perhaps the last generation to truly grasp the importance of saving and not borrowing were those who lived through the Great Depression. These days a life of debt is considered a given. People don’t ask “how much?” they ask “what’s the monthly payment?”. They look at debt in terms of the percentage of monthly income, without considering the period of amortization: for how long do you have to maintain that level of income (40 year amortization? You’re going to work full time until you are 75?). The other fault we have is blind optimism: people honestly believe that when income goes up, or bonuses come in, that they will have the will-power to devote the difference to debt repayment. The sad reality is that many do not. They’ll keep their minimum monthly payments and discover several “needs” for that new money.
What role should regulators play in protecting consumers? In his new book Nudge: Improving decisions about health, wealth, and happiness author Richard Thaler, a behavioural economist, explains that “Being human, we all are susceptible to various biases that can lead us to blunder. Our mistakes make us poorer and less healthy; we often make bad decisions involving education, personal finance, health care, mortgages and credit cards, the family, and even the planet itself.” He argues that policymakers should therefore establish guidelines that “nudge” us in the right direction without restricting freedom. I do believe that government should limit the extent to which lenders can profit from the poor spending habits of consumers, particularly the predatory lending tactics used against the poorest and most vulnerable in our society.
So what can we do? First, educate yourself. Then educate your children. Here’s a list of resources and ideas:
1) If you are carrying consumer debt, plan to get out of it. Dave Ramsey offers simple, common-sense advice and practical information for changing your financial picture. He’s a bit of an evangelist, and he does sprinkle his Christian perspective throughout his work, but his advice is sound and easy-to-follow.
2) If you are carrying a mortgage, evaluate its effects on your family’s finances. Are you struggling to pay household related expenses like taxes and maintenance on top of your monthly mortgage? Do you have a hope in hell of ever paying it off in your lifetime? Do you have a plan for paying it off early? Do you forsee a time when you will not be a slave to your current wages, thus freeing up time for other pursuits? Do you really need “this much house”? Can you weather a substantial change in interest rates? Take a look at the TRUE cost of your mortgage – how much interest are you paying? What will you have paid by the time it’s all said and done? What could you have done with that interest had you invested it instead?
3) If you are renting and hope to buy some day, start budgeting now. Take time to save a responsible downpayment. Do not fall victim to “homeownership hysteria”: owning a home that robs you of a future is nothing to feel proud of. While it’s true that prices always go up over the long term (20+ years), in the short term prices fluctuate – there will always be dips in the market, however transient. Wait for those dips to maximize the value of your hard-earned savings. Study mortgage amortization charts until you are blue in the face. Take out a calculator and figure out how much interest you pay in the first three years of mortgage-payments, then ask yourself what that interest could earn for you if invested properly: perhaps waiting three years to buy will give you a bigger downpayment and save you significant interest money compared to buying now.
4) If your children are in school, get involved with promoting financial literacy programs. The Jump$tart program, which promotes financial literacy through child and youth education programs, offers downloadable lesson ideas for teachers and parents. Aflatoun is an international agency that originally sought to provide financial literacy to young children in the developing world, but soon realized that the need exists in the developed world as well. Operation HOPE offers programs for disadvantaged youth and children living with poverty.
5) Get your children involved in the family’s finances. Lewis Mandell, a US economist and educator, believes that financial literacy courses are not enough: he says learning these skills in the absense of any real life practical experience, such as buying a car or managing real income and expenses, is not enough. Hold regular family meetings, encourage the kids to participate in discussions about where money will be spent, how much will be saved, and towards what goals those savings are being accrued. Involving kids in the family budget can help develop habits that will still be ingrained when they are out on their own.