Wednesday, May 09, 2007

Guest Post: A Financial Guy's Perspective on a Woman's Money

The opinions expressed herein do not necessarily reflect those of the blog owner.

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

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

Credit Cards

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.


Jene said...

I agree with a lot of this, but I will also say that I know plenty of men who drink their money away and spend it on useless things! Also, I completely disagree with your thoughts on donating. I work for a non-profit and donations are essential to our ability to provide important programs and services to the community. I know many successful men who are large donors to our organization and others in the community. The key is to identify meaningful donation opportunities with accountable agencies.

Mary-LUE said...

This was an awesome guest post. Thanks Boz for being so straightforward and no nonsense. Thanks Binky for giving him the space.

I am so bad with money. We are doing some of what is recommended here, but could do much more to be wiser with our finances. (I won't stop giving money to charity, BUT I have long felt that I have to give less than I want because of the way my husband and I have NOT managed our money.)

Thanks for the kick in the pants.

(To Binky: Um, I know you were just talking about how agreeable, possibly sycophantic, we mommybloggers are, so I think I might be too gushing towards Boz, but, while I don't think I agree with every point he makes, it is such really good advice, I threw caution to the wind!)

Sarah said...

Holding the title of Mrs. Boz, I have a few comments on this post.

I think Boz was a bit too heavy handed with is stop spending money rant. Not all women are bad with money and I was rather irritated with this sweeping generalization.

The real tough choices are (once we start saving money) how should we best invest that money. Boz glossed over this whole investing part a bit too much, so I recommend you follow his links to his blog and check out his financial tips for some more advice.

I feel the real take home point once you start saving is to put your money in a money market account (4-5% interest) and not in a traditional savings account (0.5-2% interest. We have our savings account linked to our money market and transfer money into and out of it as we need. We try to only keep enough money in the savings account to cover 2 months of bills and the rest goes in the money market and on into our investments.

Sorry - looks like a whole post here!!

jen said...

i am trying not to view this as sexist....or perhaps i just don't fit the stereotype...i also read somewhere that men actually spend more than women...but's good advice for all of us. only we can control feeding the production and consumption machine that so craftily pulls us in.

we have done an excellent job of eradicating all our debt over the past two years...putting us in the position we want to be to go live in the jungle.

Boz said...

Well, since Binky has posted a new entry I guess it's safe for me to respond to the comments above.

Men suck
Jene and Jen, you must have missed paragraph three, where I disclosed that "Despite a penchant for clothing, single women spend much less than single men" as evidenced by your statements "I know plenty of men who drink their money away" and "i also read somewhere that men actually spend more than women." This was not an affront to the fairer sex, men spend way more money than women on cars, stereos, Blackberry's, big-screen TVs, computers, tools, gadgets, and lots of assorted crap. But I was not addressing men's issues, I was addressing women. The women I know have trouble not spending. At some point I'll address how men like me waste money upgrading to the latest and greatest of whatever new technology has come out, but not here. My apologies if you got the impression I thought women can't hold their spending and men are righteous savers, because we are not.

Charity was also an apparant sticking point. This was a failure on my part, as I should have stated more clearly that charitable donations need only be delayed until death, not discontinued entirely, so that you have achieved your maximum net worth. Charities are able to do significantly more good with more money at their disposal, and you can rest assured that once you are dead you will not need it any longer. When people who are in financial distress or who are not financially secure, such as Mary-Lue, donate to charity, they have fewer assets available for themselves and their dependents should an unforeseen event require a large outlay (medical, natural disaster, college, etc.). Further, if they retain their assets and are financially secure, they can grow their investment portfolio throughout their life and donate their estate to charity, when it is at its largest and can do the most good. If everyone did this today, it would choke a number of charities in the short-term, but would do more good in the long run as people passed away and their estates were rolled into charitable foundations. For examples, look no further than the Howard Hughes foundation, the Doris Duke Foundation, the Charles Stewart Mott foundation, or any number of the charitable institutions found here. I wouldn't be surprised if the charity jene works for was founded by a large, private estate. So believe me, charities are critical for this country - indeed the world - but my goal is to maximize the financial security of each individual so that they can then maximize their value to the world. Individuals that want to donate but are cash-strapped can still donate their time by volunteering at any number of local causes.

Americans overspend
If Binky is feeling charitable, I may have to follow up on my wife's comment that readers need help with what to do with their savings rather than focusing on the need to save, in general. At the time I was writing this America has a negative savings rate. This means the average American spends more than they earn. As a result, most Americans do not know how to get out from under the burden of debt beset upon themselves by a culture of spending, consumption, and poor financial education. So I focused on reducing spending to free up money to eliminate debt, because it applies to the broadest range of people. The articles I write are a little more "in your face" because, well, most people need a kick in the patoot in order to bring about real change.

Lawyer Mama said...

There is some useful info in there, Boz. But I can understand why people found it a bit insulting. So did I when I read the title "Women are bad with money." Kind of sets a tone for the whole thing.

I also don't agree with the don't donate proclamation. It may make more financial sense long term, but it's not very practical. As you pointed out, it would pretty much choke to death a lot of charities (and churches) *right now.* And it's not like there are a lot of social services and government money floating around to fall back on in this country.

I'll definitely check out your links though. We're in great financial shape (I'm a woman who's actually GOOD with money), but I always love to read more!

Chris said...

I thought the disclaimer at the top was very fitting.
I'm actually somewhat comfortable with our financial situation for the first time since we got married. This of course, will change when we soon buy a house that costs twice as much as our present one. But I figure that's good debt.

toyfoto said...

Interesting advice about saving.

I have pregnancy brain, so if I missed this in my initial reading, I appologize:

Although I think that LOTS of us have problems with the money burning a hole in our pockets theory, I don't think willpower is the answer.

The answer is automatic saving: take it out of your paycheck and put it into a IRA or 401K or whatever investments you've determined before you even see it.
Once you set it up, you won't miss the dough.

Binky said...

Boz, you are welcome to follow up any time with investment tips. Looking forward to it!

Paige said...

Regarding the cookie story, I haven't verified this, but I recently read that is was a study devised by Stanford U psychologist Walter Mischel in the 60s to measure "emotional intelligence." The cookies were actually marshmallows and the children who took part in the study were followed into their teens, when they continued to display the ability (or lack therof) to postpone gratification and resist temptation. Interesting!

Boz said...

Thank you! Now I remember where I read the original story. It was in Daniel Goleman's book Emotional Intelligence. Thank you very much!

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