Liz Weston, author of a new personal finance bible of sorts, issues this key point in as straightforward a way as possible: “Anybody with a high school education can figure out the basics of money.”
Even so, no matter if we’re talking sinners searching for the path to righteousness or spend-a-holics eager to rid themselves of credit card debt, a few guidelines—or commandments—can help. Liz Weston‘s new book, The Ten Commandments of Money: Survive and Thrive in the New Economy provides all the guidelines today’s consumers need.
So what are Weston’s commandments? Basic, straightforward, insightful, and practical rules such as Pay Off Debt the Right Way, Saving for Retirement Must Come First, and Defend Yourself in the War on Consumers. Each of the book’s chapters is a different commandment, and Weston explains why each is essential to getting oneself to a better place—financial speaking, that is. She answers my questions below.
I know that generalizing about different groups of people is sometimes problematic, but how are men and women different when it comes to spending, saving, and other personal finance issues? Do we tend to have different strengths, weaknesses, blind spots, issues to watch out for, etc.?
Liz Weston: There’s some pretty interesting research about how the brains of men and women differ. And there’s certainly a lot of behavioral research that shows differences in how we invest. Women tend to be more risk-averse, less likely to suffer from overconfidence, more likely to react to uncertainty with fear rather than anger, and we tend to trade less, as just some examples.
But I don’t recognize myself in that description of risk-averse, anxious women. And I know lots of men who don’t fit the stereotype of testosterone-fueled braggarts going for broke on split-second stock trades. Generalizations don’t help much when you’re trying to craft your own individual financial plan or figure out where your unique blind spots are.
On a purely anecdotal level, I regularly have smart, well-educated, successful women tell me they don’t understand money. Very few men with the same characteristics have told me anything similar. I don’t know if that says these women are more honest, or just more willing to be ignorant about the subject. Because it’s really not rocket science. Anybody with a high school education can figure out the basics of money.
I really don’t believe the folklore that women are more likely to be overspenders than men. Maybe we spend on different things, but credit card debt is not a gender issue.
(Read: Q&A with ‘Psych Yourself Rich’ Author Farnoosh Torabi.)
What are some of the newest fees confronting consumers nowadays, and what are the easiest ways to avoid them?
LW: Fees are like the arcade game Whac-a-Mole. Whack down one and two more pop up to take their place.
Right now, banks are testing out fees for what used to be free checking. They’re trying to replace the revenue they once raked in with their rightly-reviled bounce protection programs. But just because your bank wants to fee you to death doesn’t mean you have to let them. If it’s not convenient for you to change your behavior to avoid the fees—to keep a certain balance, make a certain number of transactions, whatever they’re asking—then explore your options. Most people can join a credit union, which are member-owned and a lot less fee happy than many banks.
And OMG don’t get me started on travel fees. I hate them, especially bag fees. They make comparing the cost of flights difficult, because every airline charges different amounts, plus they’re creating chaos on every flight as people fight for overhead bin space. I wish Congress would pass a law forcing the airlines to include one checked bag with each ticket, or that carriers would just switch their policy and charge only for wheeled carry-ons. That way those of us who travel a lot could pay for the convenience of keeping our rollaboard with us, and avoid the waits at the baggage carousel, while everybody else could just check their bags, get on the plane and sit the hell down so we can take off already.
(Read: Q&A with ‘The Real Cost of Living’ Author Carmen Wong Ulrich.)
For someone who has the money: Do you think it’s foolish or wise to buy a house with cash nowadays?
LW: I’ve never believed in getting a mortgage just for the tax break. Why in the world would you spend a buck just to get 15 to 35 cents back? That’s what you’re doing when you’re paying mortgage interest just to get a tax deduction.
But I also don’t believe in putting all or even most of your eggs in one basket. Tying up your cash in one not-very-liquid asset doesn’t make a lot of sense—you need diversification and liquid, accessible cash. Unless you also had a ton of money in your retirement accounts and emergency funds, I’d suggest taking a mortgage for at least a portion of the purchase price.
Other than buying a house, under what circumstances do you think it’s OK to borrow money? And in what situations do you think it’s absolutely a bad idea to borrow – via a loan, or a credit card you can’t pay off immediately, or some other means?
LW: It makes sense to take on a reasonable amount of federal student loan debt to get an affordable education. But there are lots of important adjectives in that last sentence.
“Reasonable” means no more debt, in total, than you expect to make your first year out of school. There are some exceptions, but that’s a pretty good rule of thumb. “Federal” because federal student loans have relatively low, fixed rates and come with plenty of consumer protections—unlike private student loans, which are kind of like paying for education with credit cards, except unlike credit cards the debt can’t be discharged in bankruptcy. And “affordable” means just that. If you have the cash to pay for it, or you take on no more debt than what I’ve described, you can afford the education. If you don’t, you can’t, and you need to start looking for alternatives.
Borrowing money also can make sense to expand an already-successful business. Funding a start-up with credit cards, not so much.
And it’s absolutely idiotic to borrow from a payday lender. The effective interest rate is in the triple digits, and can eat you alive.
What are some of the ways you see people spending their money that will never make sense to you personally? You know, the expenses or splurges that always leave you scratching your head?
LW: Warren Buffett famously disparaged the idea of having a private jet, until Charlie Munger finally talked him into it and Buffett totally changed his tune. So maybe I just need to actually own a Birkin bag or drive a $100,000 car to really get it, but from this vantage point, I can see soooo many things I’d rather do with that money.
A while back, the blog featured various frugality aficionados to name the things they were willing to pay good money for. Would you care to weigh in and tell us five or so things you see as worth paying extra to ensure quality? Be as specific as possible — we want brand names, if you have preferences.
LW: I am so not the cheapskate I used to be. As I’m sitting here at the airport answering
these questions, I’m wearing my Bose noise-cancelling headphones and charging my iPhone. I’ve had other, cheaper versions of each, and am sold on the difference in quality.
We finally upgraded to a Tempur-Pedic bed. I’m embarrassed to say that my husband had been bitching about our mattress for years and I’d ignored him until my own back started to ache. Suddenly, the expense seemed worthwhile.
Oh, and speaking of hubby, he knows that there’s nothing like a little gold box of Godiva chocolate to bring a smile to my face—and win forgiveness of whatever needs forgiving. (My offering on those same lines is Bisquick biscuits, which he totally loves and which are WAY cheaper.)
I also pay a premium for household help. I don’t have a full-time staff (yet), but we do have a part-time nanny and an every-other-week housekeeper. These women seriously enhance the quality of our lives, so we pay them a wage that reflects that. We also pay all the payroll taxes we’re supposed to, because it’s the right thing to do and because these women deserve to collect a decent Social Security benefit someday.