Women are bad with money
My first thought when approached to write this column was, “Great, how do I address the investments I believe most pertinent to women without appearing sexist?” The answer is I cannot, so I'll do my best and hope I do not get flamed too heavily. In truth, I'll be discussing the most important investment you can make as a man or a woman: your own financial willpower. Sound too tree-hugger pot-smoking hippy liberal chakra-aligning for you? A little too "motivational speaker" for you? It's not, read on.
If you take away nothing else from this article, take away this: your attitude towards spending and the execution thereupon will determine your financial success and stability throughout your life. Saving is actually pretty easy, you just need to stop spending. If you stop spending then you're automatically saving. Simple. In many cases, however, this can require some serious financial willpower.
I disagree with CNBC personal finance reporter Suze Orman, who wrote in her book Women & Money that women have a “totally dysfunctional” relationship with money. Despite a penchant for clothing, single women spend much less than single men (Bureau of Labor Statistics 2004-2005 Consumer Expenditure Survey). But don’t pat yourselves on the back, yet. Just because
you spend less money does not mean you are not still overspending, you are just overspending less than the men. Orman’s approach strokes the woman’s ego; she states “Lasting net worth comes from a healthy and strong sense of self-worth.” I believe high self-worth leads to selfish spending (new Manolos), and low self-worth leads to guilty spending (midnight Cherry Garcia binging). Striking a balance is the real key.
I’m not here to make you feel good about yourself. I’m here to help you pay for retirement, health care, diapers, clothes, insurance, kids and your eventual cryogenic suspension.
Holding back is harder for some than others
There was a study done years ago that focused on children and their willpower (I have been unable to find the original study, if you know where I can find it please contact me). A group of children ages 3-4 were studied. Each child was place alone in a room with a cookie. They were told that the cookie belonged to them and that they could eat it at anytime. However, if they waited until the adult returned and did not eat the cookie, they were promised more cookies. Some kids ate the cookie immediately, some waited as long as they could before giving in to their desire for cookie, and others sat patiently and got their multi-cookie reward. They tracked the kids, and those that resisted cookie temptation performed better in nearly every measurable aspect of their lives (grades, earning power, subjective happiness).
“So what? It’s a cookie.”
The cookie ain’t a cookie, it’s a dollar. It’s a new ring. It’s going out to eat. It’s a new car. It’s a pair of shoes. It’s the Baby Gap. It’s Pottery Barn. It’s Pier 1 Imports. Every time you spend money on material items that you don’t need you are giving up the ability to use that money towards something more productive. This is called an “opportunity cost”. That candle you bought at Pier 1 Imports might have been better spent on a coat of paint for the dining room. The meal you just ate out could have bought a week’s worth of gas (or a month depending on where you eat). That new car might have instead paid for a year of college for your kid, once invested wisely.
Financial willpower is the ability to look at a consumable – an item, a trip, a meal, a dress – and walk away. If you have strong financial willpower, you buy only what you need or have specifically saved for. When you can go to the mall and buy what you went in for and nothing else, you’ve got it. If you can buy only what you came in for in Home Depot, you’ve impressed this author.
You don’t save money by spending money
Buying an item that is on sale because it is a good deal does not save you money if you weren’t going to buy it in the first place. Buying an extra pair of shoes because you get a third one free does not save you money; you have just paid more money to buy another pair of shoes you were not going to get in the first place. The same goes for buying in bulk. I tell the
following story (from Duck Tales, of all places) a lot:
Scrooge McDuck is taking Huey, Duey, and Louis out for a soda. He buys one small soda and three straws for them all. One of them asks him,
"You're the richest duck in the world, why don't you buy us each a small soda?"
"Or at least a large soda to share?"
His reply? "How do you think I got that way?"
In other words, you don't become wealthy by spending your money on frivolities. If you want to “spend money to make money,” you need to do so intelligently by prioritizing your spending.
Not only are you not the center of the universe, neither is anyone else
Stop treating yourself to little things like candy bars and movie tickets because you think you deserve it every now and then. You don’t. Your kid deserves an education. If you can pay for that, then you deserve a treat. While we are on the subject, your kid does not deserve treats either, not for being cute, not for being young, not for being your daughter/son/niece/nephew, and especially not to stop whining/crying/complaining/etc. When your kid does something worth rewarding, like peeing in the toilet instead of on it or taking out the garbage, then they deserve to be compensated. A lack of negative behavior does not warrant reward, and encourages them to behave badly to get rewards. Stop it.
How our financial willpower is broken down
”It’s only a dollar”: Wal-Mart’s fiercest competitor is not Target, it isn’t specialty stores, and it isn’t grocery stores or big-box chains. Wal-Mart fears the dollar stores. That’s because people who shop there are in the frame of mind, “This is only a buck, I’ll pick it up.” Now think about the dollar store demographic: poor and lower-income shoppers. There is nothing wrong with being poor, the problem is that you don't want to stay poor. If you have a, “This only costs a (small amount of money),” you will join or remain in that demographic.
Gambling: If you play the lottery of buy scratch-off tickets, stop it. The state gets enough money from your taxes. Gambling is designed to break-down your financial willpower. The allure of making fast money offsets the rational side of the brain that says, “Little Lisa needs braces.” It has been proven that the emotional high created by winning a contest/poker
match/lottery/scratch-off ticket is inferior to the low created by losing. You will always feel worse losing than you will feel good winning. Quantitatively, if you feel 50% better by winning you’ll feel 75% worse when you lose. So stop gambling. Now.
Credit cards: Credit cards are designed to reduce your barriers to consumption. No money? No problem! Unfortunately, that is never, ever true. If you have no money, you have big problems, and spending more than you have is the fastest way to get nowhere. If you have a credit card, you may only use it if you pay off the full balance at the end of every month. Carrying any balance will have an adverse affect on your credit score. Carrying a balance will cost you more money in interest than is possible to earn with any mainstream investment. Before you do anything else financially, pay off your credit card. That being said, if you have high financial willpower and savings in the bank, credit cards do have their benefits, like insuring your purchases and deferring payment.
Some off-topic quicktips: Women are subject to some things men are not. You are more risk-averse and you feel bad for people in need. But there are times when you need to take some risk, and others when "people in need" are actually just needy people.
You’re burning money by putting it in the bank
If the only savings you have is through the bank, you are losing money. Inflation typically outpaces the interest you earn in a savings account, CD, and most savings bonds. Checking accounts are for paying bills, not saving money. Open a brokerage account with Fidelity, Charles Schwab, or another discount brokerage that will not charge you an annual fee and use their
money market accounts for cash savings, and low-risk short-term securities for near-term liquid assets. You’ll make a lot more money in interest using a brokerage account, and brokerages often offer a tax-free money market in your state (just ask).
Charity: Donate when you’re dead
As a part of the fairer sex, you are more giving than men due to greater empathy for others. You shouldn’t be. If you, your spouse, and your offspring are all financially secure, having saved enough for college, retirement, paid off the mortgage, and you have a surplus of income beyond your utilities and insurance, then I might consider recommending you donate to charity. Otherwise, concentrate on paying off debt, saving your money, and donating your estate in your Will to maximize the amount you can donate to a worthy cause. You will have reached your maximum net worth by the time you die if you’ve saved properly, and the funds will do more good.
Saving for college
One slightly off-topic parting note for you parents: Your child is unlikely to qualify for financial aid. There are too many people applying for college, stretching thin the pool of financial aid, grants, and scholarships. Your child is special to you, but to everyone else they’re just another applicant. They are not special. As a result, any money left over from paying off your debt, bills, and saving for retirement (in that order) should be plowed into saving for college, preferably in a low-cost 529 savings account. You can invest in any state’s plan, so pick carefully.
Links to additional information on topics discussed above:
Stop buying crap you don’t need
Prioritize your spending
Paying for college (yours or your kid’s)
Why you should stop donating (and when you should)
About the author
Boz lives in Boston with his wife in a small house on a hill. He is a financial professional of 5 years, and a graduate of Rensselaer Polytechnic Institute. Boz is Series 7 and 63 licensed. He has been quoted discussing 529 college savings plans in such publications as the Wall Street Journal, Barron's, SmartMoney, and Reuters, among others.