Saturday, September 4, 2010

Start Out Simply

Tip #271 - Start Out Simply. When thinking about our finances, it's easy to get overwhelmed - stocks, bonds, budgets, taxes, interest rates, IRAs, 401(k)s, 529s. It's understandable that many people just throw their hands in the air and ignore everything that has to do with money. There is A LOT to learn when it comes to finances. There's also a lot to learn when it comes to cooking. How many of us cook gourmet 5-course dinners with exotic ingredients using techniques such as braising, sauteing, poaching, and blanching? Very few. Instead, most of us learn how to bake, broil, and grill and mangage to keep our families fed well. And we call it good. So why do we think we have to understand everything in order to manage our finances? Does it matter if we don't fully understand the consequences of the Fed raising interest rates by 1/2 percent? Does it matter if we can't predict what Wall Street will do after a fall in foreign markets? Does it matter if we don't quite comprehend the difference between a tax deduction and a tax credit?

Of course it doesn't. We need to know how to live on less than we earn and to build up our savings. Just like the beginning cook needs to know how to boil water and put in some dry spaghetti to feed her family. Once we've done that, we can learn how to heat up jarred sauce to add to the spaghetti. And then maybe we can learn how make the sauce ourselves with freshly bought tomatoes. And then maybe we can learn how to grow our own tomatoes to make our own sauce. But even if we never learn to make homemade pasta, we still feed our family well by starting out simply with dried spaghetti and boiling water.

Why can't we apply that same logic to our finances? We can! Don't be overwhelmed if you don't understand what affects the direction of interest rates, if 529s and 401(k)s are just numbers to you, or if the thought of losing money in the stock market sends shivers up your spine. The important thing is to learn how to put away some money month after month. This can be as simple as creating a budget, putting your money in a savings account and CDs and calling it good. Once you have conquered that, you can start contributing to your company's 401(k) plan, even if is all in guaranteed investments. Then maybe you'll start investigating various investments for your daughter's college fund. And then you might start investing in mutual funds, and then stocks. Or maybe you won't. Maybe you will never invest in individual stocks. Maybe you won't ever understand the how Greece's economic crisis affects the US economy. But if you can at least start out simply with a budget including a line-item for savings, you are doing well. You can build up from there. Otherwise, it will be like making chateau briand when you haven't mastered grilling a hamburger, you won't be able to get it right.

In Real Life (IRL) - I got my first passbook savings account when I was a 7- or 8-year old kid. I understood that if I gave my bank $100 on January 1st that they would give me about $105 back on December 31. It sounded like a good deal to me then - better than sitting in my drawer, anyway. (And 5 percent on a savings account sounds like a great deal to me today!) I also learned that if I saved my allowance week after week, I could buy something very nice after a few months. And if I blew my allowance on gum and candy, I wouldn't have enough money for a nice toy several months later.

A few years after I had that knowledge, my dad taught me about money market accounts. If I put a larger amount of money in that, I could get a greater rate of return than in the passbook savings account. But I had to keep my balance above a certain amount, and I could only make large withdrawals at a time. My knowledge of finances was quite simple back then. But it served me well. I learned if I put money away I could make back more money. And the more and longer I put it away the more I got back.

When I first started out on my own after college, I continued to put money into banks, until my dad taught me about mutual funds. I, little by little, started to add money to that account. Then I began investing in my company's 401(k). Once I maxed out on that, my dad suggested IRAs. Then I joined an investment club and learned to invest in stocks. All the while, I continued to save my "allowance" (income) so I could buy a house one day. It wasn't until we bought one that I learned about tax deductions. And when I had kids, I read up on 529 Plans. It's been over 30 years of learning to get to the piont where I am today. And I still don't know squat about selling stocks short or don't read up or care about how the Nikkei market did yesterday. But I can make a darn good hamburger. And sometimes I can even add a few tasty sides. All because I started out my financial education simply.

1 comment:

Abi said...

It is true, it is so easy to be overwhelmed. You make it sound simple, and i am sure it is, but without that helpful guidance it is really hard to know even where to start!