Advanced Personal Finance

I’ve been interested recently in teaching my kids (well, really only my daughter since my son is four months old) about money. I’ve opened bank accounts for both of them now, but that hardly counts as a start. Some commenters, though, have correctly pointed out that by simply observing how my wife and I handle out financial affairs, they’re learning. Maybe we’re doing something right, because my little girl has shown her stuff already.

Like I said, I’ve been interested in how to teach my kids about money. Like any good nerd, I turned to books to help me. When I saw The First National Bank of Dad on our library’s shelf, I thought it might be worth a look. Boy was I right.

The First National Bank of Dad, written by David Owen, is a short, fast, and often funny read about a subject that’s not always short, fast, or very funny - personal finance. The best part of the book, though, is it’s about more than personal finance. It also touches on knowing what’s important in your life and how you can help your kids figure out what’s important in theirs.

The book has only nine chapters and Owen keeps them short. In fact, at only a 190 pages, I think I read the entire book in a day and a half. In the first four chapters, he goes over how he used his First National Bank of Dad to bring the idea of saving to his children’s minds in a way they could grasp. He then goes over basic investing terminology for when that comes up as the kids get older. Owen closes, surprisingly with two chapters that at first seem unrelated to the book - one about priorities and one about reading to your kids. He makes it all fit, though, and the results are excellent.

The bank in operation

The idea of the First National Bank of Dad is that kids think shorter term than many (but not all) grown-ups. As a consequence, learning about personal finance in general, and saving in particular, has to be put into a frame of reference they can understand. Owen’s method for doing that is to offer his kids a really attractive return on their money, payable by him, if they choose to save it. He offers such a good rate that his kids can actually see a difference in their ‘balance’ from month to month.

A key component to the proper functioning of the concept is that the kids must be allowed full responsibility and freedom over their own money. Once an allowance is given, it is theirs. They can spend it immediately and frivolously, they can save it, or they can give it away - their choice.

This is where I really learned something from this book. I’d always read that the way to teach kids about money was to give them an allowance (and there are two schools of thought as to whether that allowance should be tied to chores or not) and then prescribe for them a certain formula of where that money will go. In other words, even though the allowance is ‘theirs,’ they must save 20%, give away 10%, and the rest is theirs to spend.

What Owen writes, and I agree, is that this means that the allowance isn’t the kid’s at all - it’s still yours. You wouldn’t dream of telling someone else what to do with their paycheck, yet that’s precisely what people who use this technique are doing. The kids must be allowed to do whatever they want (that is safe and legal) with their money.

The objective in teaching kids about money, of course, is for them to learn. How are they going to learn if the rules of the game don’t allow any freedom to make and learn from their decisions?

The Dad stock exchange

As his kids got older, Owen wanted to introduce the concept of investing. He did that by shutting down the Bank of Dad and opening the Dad Stock Exchange. He put nearly all of their money into his version of a money market fund and ‘invested’ some of it in the new exchange. For simplicity, Owen based his exchange on real companies and stocks, dividing their real prices by 100.

It turns out that again his kids learned some valuable lessons on investing, but didn’t have to lose a fortune to do it. They discovered stocks, bonds, and mutual funds. And they did it on their own.

The First National Bank of Dad was just the book I was looking for when I set out to learn how to teach my kids about money. I likely won’t execute as perfectly as Owen describes, but the book gave me a lot to think about and changed my opinion about allowances and giving kids the freedom to spend them however they want. If you have kids and want to get great ideas for how to help them learn about personal finance, I strongly recommend The First National Bank of Dad.

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Capital One has rolled out a new service to try to get you to use their rewards credit card above all your others. It’s called Card Lab and it allows you to customize the credit card rewards to your specifications. After checking it out (though I didn’t apply for a card), I found the Card Lab to be a really cool idea, well executed.

Power to the people

I read about how credit card companies are trying to get people to use their reward cards rather than everybody else’s. They call it ‘getting to the top of your wallet.’ Anybody who uses rewards credit cards (and if you pay off your balance every month, there’s no reason you shouldn’t) knows that certain cards are superior to others in various situations. Some cards offer better rewards at gas stations, some give you rewards from buying from certain merchants.

Maximizing credit card rewards is almost a sport. Some very popular bloggers have explained how they maximize their rewards and make some pretty decent money doing it. But up until now, you had to play by the banks’ rules.

Not any more…

Without making any judgment about Capital One or their credit cards per se, I can say that their Card Lab concept is pretty cool. They present you with a list of categories (e.g. reward type, interest rate). Within each category, you find various choices.

You select which choice you prefer and as you do so, choices within other categories that are no longer possible grey out. It was easy for me to find my ideal Capital One card - no annual fee, cash rewards with a bonus kicker. I don’t care about interest rate on balance transfers, introductory interest rate, or what the APR actually is.

I’d like to see this catch on with other banks. I’m lazy and something like this could get me into the rewards game more than I am now. Right now, I have a really simple rewards program with USAA that I like. Keeping track of which card to use in which situation is way to much work for me.

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Like a lot of the stuff I read, I heard about a great new book, Your Money & Your Brain, from NPR. If there’s nothing else you get out of listening to NPR (and the Diane Rehm show especially), it’s the great books. But this isn’t about NPR, it’s about a really interesting alternative to the same stale ‘here’s how to invest’ books.

Your Money and Your Brain by Jason Zweig is an entertaining look at how neuroeconomics is being used to dissect the modern investor. Zweig’s subtitle is “How the new science of neuroeconomics can help make you rich,” which is a little bit much. However, I recommend this book to anyone even the slightest bit interested in why they do the things they do in personal finance.

Neuroeconomics is a new field that fuses…wait for it…neurology and economics. What that really boils down to is an area of study trying to find out why people continue to do knuckleheaded things with their money. If you’ve ever listened to how much money your friends were making in [fill in bubble here], then gone and invested a bunch of money at the top right before it crashed, you’ll be interested in this book.

Zweig is a writer for Money magazine and formerly of Forbes as their mutual funds editor. His writing is easy to read, not too technically dense for a subject like this, and sprinkled with just the right amount of personal anecdotes.

In Your Money & Your Brain, Zweig covers some key concepts in personal investing - greed, fear, risk, and confidence, among others. The format for each chapter is the same. First he introduces a regular person who provides an example of what the chapter is about. Then he gives the neuroeconomic background and explains how in manifests in people. At the end of each chapter, he gives a short list of ideas to counteract our investing biology.

My favorite chapter was on risk. Zweig explains that how a risk is framed or compared to others largely determines how a person sees the risk. He gives lots of examples, but my favorite is this one. If you invested 1% of your money in a single stock and it became absolutely worthless, you’d probably freak. But the effect is the same as if your entire portfolio went down by 1%, a practically everyday occurence on Wall Street.

Much of the book deals with how people invest in individual stocks and which mutual fund to choose. I don’t save and invest that way, so some of his ideas were lost on me (I just do index funds - I don’t believe in stock picking). But if you’ve ever done some of the stupid investing things I’ve done, you might enjoy finding out why, just like I did when I read Your Money & Your Brain.

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After mentioning the USAA Total Rewards credit card program I converted my card to a few weeks ago, I got a few comments and inquiries about the program. People seem to be wondering about the details and which one is better, so here’s my comparison of the programs.

USAA has two rewards programs for their cards - Cash Rewards and Total Rewards. Cash Rewards is pretty straight-forward. You get a small percentage of what you spend back at the end of the year. Total Rewards is USAA’s version of a ‘points’ reward system.

Cash Rewards

This program is simple. Each year, USAA tallies up what you’ve spent on the card and kicks you back cash. Here’s the accrual schedule

$1 - $2,000 spent returns 0.35%
$2,001 - $4,000 spent returns 0.75%
$4,001 - $15,000 spent returns 1%
$15,001 and up spent returns 1.25%

The ‘year’ runs from the February statement to the following January. The cash reward shows up as a credit to your January bill.

Total Rewards

This is USAA’s ‘points’ system similar to Citi’s Thank You Network. For every dollar spent, you get one point. You then spend those points to get gift certificates, merchandise, airline tickets, or cash sent to a charity of your choice. You can also redeem points, strangely, for cash.

The redemption formula is simple. For every 3,000 points, you get a $25 equivalent in gift certificates, cash, or charity. The airline value is on a slightly different schedule, and on a per-point basis, a slightly better deal.

Which is better?

The answer to the question ‘which is better’ really comes down to an analysis of how much you’re going to spend on the card in a year. The way it works out, if you spend anything less than $14,300 per year (that’s me), you’re better off with the Total Rewards system.  Total rewards is what I use. If you make purchases worth more than $14,300, it makes sense to use Cash Rewards.

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I just finished The 4-Hour Workweek by Tim Ferriss and I was decidedly underwhelmed. I was excited about the book and put a library hold on it before the local library even had its copies in. I’d read positive things about it elsewhere and was looking forward to reading it.

The 4-Hour Workweek Mantra

The book can be summarized in a sentence. The 4-Hour Workweek Mantra is: “Figure out a product to sell (preferably via the internet) that you can completely outsource, then go on extended foreign trips.”

Isn’t that easy?

Following the steps in this book, you can quit your job if you choose to live the life of what Ferriss calls the ‘New Rich.’ Now admittedly, he does actually provide steps for realizing his plan. At the end of key chapters, he provides resource lists for various products and services he advocates using.

The problem is that there’s a big gap in the ‘figure out a product to sell’ section. He lists three possibilities - resell a product, license a product, or create a product. Why didn’t I think of that? He recommends creating an information product and cites Carlton Sheets and Tony Robbins as people to emulate. Oh, ok, I’ll just do like Tony Robbins did.

The Other Sections of the Book

Other than the ‘mantra,’ there are actually some useful chapters in the book. He covers personal outsourcing - using virtual personal assistants to reduce work and personal chores - and that was pretty neat. There’s a section on getting your boss to agree to a remote work arrangement that I think could be used in the margins. He also has chapters on time management, information overload, and what to do with all your newly-found time.

Overall

The book has some strengths. Ferriss includes lots of specific resources for the things he talks about. His personal anecdotes are engaging and interesting. And some of his techniques are useful for everyday people. There’s a lot to like about his idea that instead of a 30-year retirement at the end of your life, you should take it in 1-2 year increments throughout your life.

My main problem with the book, though, is it smacks of ‘get rich quick’ to me. I don’t expect him to provide a list of untapped markets or products no one’s thought of that I can use, but some sort of process for product creation would be nice. You can’t advocate starting your own business and give the instruction, ‘go think up a product.’ At least not to me.

The writing also strikes me as ‘I’m so great. You should be like me.’ Ferriss tells us early and often about how cool and accomplished he is. How he’s been the overworked business owner and has seen the other side. It gets old fast.

Overall, some neat, but not very original, tips and a lot of bluster.

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