Budgeting Lessons from an 18-Year-Old?

Recently we had the good fortune to travel overseas with our 18-year-old niece.  (See more at travel blog https://www.hollydonaldsonfinancialplanner.comsholidays.wordpress.com).  Aside from being totally cool hanging out with her middle-aged aunt and uncle, I was impressed by her budgeting skills.  The budget, however, was not her spending money, but her text messages.

Her mother gave her an allowance of 200 texts for a two-week trip. One morning over breakfast, she volunteered how she was doing on her budget – 100 texts remaining. We were halfway through the trip.  By the last day, at the departing airport, I asked how she was doing, and she reported she had 10 texts left.

It seems lately I get more questions about staying disciplined with spending and saving, even from those who have “enough.” Everyone seems to worry from time to time that they might not be spending prudently.  If you know even a little about teenagers and texting, you can appreciate how much discipline she exhibited to stay on track.   Perhaps there is some wisdom in her accomplishment we all can use.

I believe there were three main components to her texting success:

1) Tracking.  At any time, it was easy for her to check her text budget on her phone.  For many people, tracking is the only missing component to successfully staying disciplined with spending.  It is my belief that credit card companies know this, and that is why you cannot easily obtain spending-by-category information instantaneously on most credit cards.  Fortunately, there are mint.com and smartypig.com, two places devoted to tracking spending.

2) Accountability. After the trip, my niece would be accountable to her mother.  At 18, that might be sufficient, but for many working adults and pre-retirees, accountability to Mom ended with financial independence from her. Nevertheless, by making her goal public to us at breakfast that morning, she made herself accountable to someone she cared about.  If you want to get serious about sticking to a spending plan, who in your life can you enlist to keep you accountable?  Ideally this would be someone who will not be judgmental but whose opinion you care about, and will ask you out loud how you are doing on a regular basis.  An important aspect of the accountability was also that we all knew it was only for another week.  The accountability agreement should last a finite period of time – having it indefinitely isn’t advisable, nor fair, to either one of you.

3) Rewards and Consequences.  The benefit my niece received from her breakfast announcement was an instant reward – praise and recognition.  Of course we noted her success gleefully with atta-girls and good-hearted amusement. As we get older and have more responsibilities, though, rewards for doing a good job with spending, especially, are tricky.  The last thing you want to do is blow the budget with your reward for not spending.

What were my niece’s consequences if she went over her text budget?  If you only knew her mother (my sister)!  Suffice to say, after 18 years, my niece knew better, but more importantly, she is a conscientious young adult.  Once we are free of the bonds of parents (woohoo!), it is up to us to create our own consequences (oh, bummer).  If we don’t, they will be created for us.

Every person will have their own successful way to track and build accountability, rewards, and consequences for their money personality.  For some, these activities come naturally, while others need guidance.  Success depends on understanding early messages we receive about money from parents, teachers, and authority figures, combined with the way we grow up and adapt to both hardships and windfalls.  Knowing my niece helps, too.

Continue ReadingBudgeting Lessons from an 18-Year-Old?

Might As Well Face It We’re Addicted to Miles

“But I get miles with that card!”

This I have heard many times when I ask about consolidating plastic in someone’s wallet. I said it myself in the not-too-distant past. A few years ago, I attempted to quantify what I was actually getting, and what I was giving up, by stubbornly desiring to earn “free” trips with my frequent flier miles.

After all, who doesn’t want a freebie? Miles and points feel like freebies for spending on “stuff I was going to buy anyway” (Uh-huh. Really?) In my consultations, I frequently come across the all-too-familiar psychological pull of freebies, and a steadfast reluctance to give them up.

My conclusion from my analysis? We are better off with cards that earn cold, hard cash. And some of us are better off with no cards at all. Here are four reasons:

Reason 1) Miles are something we crave that is not in our best interest. Recently my sister, the mother of a 7-year-old, told me about the latest kids’ fad, Silly Bands. Evidently kids are so crazy about these colored rubber bands that they collect, trade, barter, and, of course fight over them. To me, frequent flier miles and “points” are adults’ version of Silly Bands. They are like foreign currencies you can only spend abroad, or Monopoly money that is only good on the game board. With frequent flyer miles, airlines run the printing press for their currency. They also run the cash register.

Conversely, cash, specifically the U.S. dollar, is boring, but is spendable almost anywhere. If I have a fee-less card that pays cash back (and I do), I get a discount on what I have already spent, rather than on something I might spend in the future.

(Of course I am assuming the card gets paid off every month. For anyone who does not do this, a discussion about miles is irrelevant. Comparing the cost of interest relative to the benefit of miles is like comparing the Empire State building to my house.)

Reason 2) Miles “Inflation.” Some say when they look at how many miles or how many points they get, compared with, say, 1% cash back, the miles and the points are worth more.

What if you can get a $500 ticket for 25,000 miles? That’s twice the cash back rate. However, my observation lately is that airlines are reducing available seats for frequent fliers, increasing fees, and increasing miles required per flight. Here is a personal example. I earn miles the old-fashioned way – by flying. In December 2009, I was looking at a January 2010 trip to Canada. Although the airline appeared to advertise my “miles” price would be 25,000, those seats did not happen to be available for the flights I wanted. But, voila, the seats magically appeared if I was willing to spend 50,000 miles. On top of the miles price, the airline charged a “booking fee” of somewhere between $20 and $50, each way. I would have paid between $40 and $100 for the sake of getting a “free” trip, and inflated away my miles value from a penny per mile to half a penny per mile. Overall, the airlines’ inflationary printing press is making sure that miles are worth less and less. (Additionally, for this reason, I use my miles as soon as possible. Tomorrow they could be worthless, and there would be no “airline FDIC” to save my miles. Is the miles program too-big-to-fail?)

Reason 3) Time Value of Money. Continuing the currency analogy, with my cash-back card, I get to use my cash right away, because my card applies it against my purchases. Miss Miles-Card has to wait until she spends $25,000 to get to use her Silly-Band-Monopoly-money miles, assuming she can get a ticket for 25,000 miles. How long does it take to spend $25,000? Is reaching the $25,000 mark something that should be rushed for the sake of accumulating miles?

Reason 4) If I meet someone with a spending or saving “problem,” (meaning anyone who has not saved enough to meet their goals but has had time and circumstances to do so), I look to the credit cards. Even if they have sufficient income or assets to pay off the cards every month, the problem with using credit cards, psychologically, is that they provide no limit or check on our spending. They encourage spending behavior, not saving behavior. Studies show that, on average, if we use credit, we spend 130% of our income.  Our society is filled with enough stimuli telling us what we “need,” or “should have,” or “have to have,” and not enough messages about how to get them responsibly. Credit card companies team up with airlines to bombard us with ads for earning miles and points. Miles and points! More miles and points! Even more miles and points! I am suspecting that miles-and-points must be wildly profitable to the ad-sponsoring enterprises, and not-so-wildly-profitable for me.

Miles addiction can be a tough habit to break. What if, instead of “banking” miles, we just “banked” 1% of our spending? Would we be as satisfied with watching that savings account balance grow as we are watching our miles account grow? I admit, like my 7–year-old niece and her Silly Bands, I get a thrill watching my collection grow. But even a .25% savings account pays better than miles.

Continue ReadingMight As Well Face It We’re Addicted to Miles