Climbing the Consumption Ladder Together

I just read a really interesting post by David at My Two Dollars. His post, “Which Jones family are you trying to keep up with?” struck a chord with me. I’ve been thinking and reading about consumption and psychology for a while now and I’m going to run with a bit of what David touched on.

Is TV making you spend?

David’s thesis as I read it is that people would be better off if, when comparing their lives to those around them, they did so with open eyes. He says that people are too susceptible to the effects of advertising and television. If they looked at their neighbors, they’d see people much like them in terms of lifestyle.

I have to disagree. I think that the media (e.g. advertising and TV) play a relatively small part in people’s consumption behavior. Certainly people do respond to advertising, but I don’t believe to the degree David seems to think.

Looking one rung up on the consumption ladder

No, I think the real cause of conspicuous consumption is that people do exactly what David advocates – look at those around them. The difference is that people compare themselves to others just one step higher on the consumption ladder. Instead of seeing the other Toyotas on their street (to take an analogy from David’s post), they see the one BMW. Instead of comparing their vacation to other people in their office who also went to Six Flags, they compare it to the one person who went to Italy.

It’s this kind of comparison that drives conspicuous consumption ever higher. When people look at their house, they don’t compare it to their old one bedroom apartment. They compare it to the 3,000 square foot McMansion they pass dropping their kid off at school. And the owner of the 3,000 square foot McMansion? He’s looking at the 4,000 square foot estate on 3 acres down the road.

I’m not going to make a judgment on whether a 3,000 square foot house is necessary. I’ll only mention that since the 1950s, the median U.S. home has doubled in size, while the median family has shrunk in size by close to 50%. Does a modern person take up that much more space? Yes, we’re fatter as a nation, but not that much fatter.

We’re all moving together

The real problem with this conspicuous consumption pattern of comparing ourselves to those just a little higher on the ladder is that we’re all moving up the ladder at more or less the same pace. The additional consumption isn’t getting anyone anywhere. People’s expectations have simply shifted. A perfectly good working refrigerator isn’t good enough anymore. It has to be a gigantic stainless steel one.

In the process of this expectation shift, though, we’ve spent a lot of money. Real money that could have been better used. Not only that, but people aren’t happier with their abundant lives.

So where does this leave us? I’d like to say that we can make a difference one person at a time. I’d like to say we’d be happier if we were all just thankful for what we have. I’d like to say you could just get off the consumption treadmill.

But the truth is, I can’t say those things because they’re not true. The plain fact is, what you do affects me. And when you spend half a million dollars to buy a four bedroom house in my town, that’s what I’ll also have to pay for a similar house. When you buy a two ton SUV, if I don’t want to lose badly in a crash with you, I also have to drive a two ton SUV.

To reduce conspicuous consumption, we have to do what economists like to say. We have to get the incentives right. I’m not sure of the details, but there’s a real need to limit consumption for its own sake. Making it worthwhile for all Americans to save would do us a world of good.

And it would reduce your mortgage payment, too.

Carnival of Personal Finance #116 – NSA Edition

Welcome to the 116th edition of the Carnival of Personal Finance.

The Carnival is a weekly collection of the best Personal Finance writing on the web.

Advanced Personal Finance is proud to host this week’s Carnival. While you’re here, please have a look around, and if you like what you see, come back again or subscribe to my RSS feed and get posts sent directly to you.

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Get the feeling you’re being watched? You’re right. You are. So turn off the cell phone, cut the lights, and check out this week’s submissions. And while you’re at it, within this page is a hidden message – first commenter to figure it out gets a 1 Gig USB memory stick. It’s pretty much free of policeware. I swear.

Even a paranoid can have enemies.” – Henry Kissinger

Editor’s favorites

Glblguy from Gather Little By Little encourages you to simply your finances. Dude, you manage to have a weekly budget meeting with your wife?!? That’s unreal. Now I’m not even so sure you’re real, Glblguy. If that is your real name. Wait. That’s probably not your real name.

FFB from the Family Finance Blog writes about making sure we both know where our money is. Now here’s a novel approach – FFB listens to his wife when they discuss money. And they both win. Who’d have thought?

Want to know how to select the best reward credit card for you? Follow these steps from FMF at Free Money Finance and find out.

Frugality and Spending

Nick at Punny Money tries to figure out which is better, Frugal friends or big spender buddies. Having frugal friends has lots of benefits, but so does having a few buddies who like to splurge. And any time someone can work ‘parsimonious‘ into a post, it’s worth a read.

Meredith from Saving Advice Blog gives us a humorous look at whether being a nudist would save you money. Any volunteers for the nudist parade stake-out?

The Prince of Thrift presents 30 ways to save money. Anybody with the title ‘Prince of Thrift’ is alright in my book.

Lynnae from Being Frugal explains that paying off debt is all about choices. Just don’t choose to not pay it. That hardly ever works out.

The Guru from Satellite TV Guru tells us how to save money on our satellite or cable TV bill. Watch those satellite gurus. Seriously, they can read a license plate from outer space.

Steve of Quest For a Million writes about budgeting for laid-back people. He says they’re meeting all of their obligations, working towards their goals, and still having fun.

Matthew at FinanceIsPersonal explains how to make unlimited VoIP call for $40 a year. Just remember, they’re listening to every one of those calls… Not really… Just some of them.

FrugalTrader from Million Dollar Journey talks about needs and wants in ‘When are you NOT frugal?

Fabulously Broke presents ‘Finding the money to do what you want.’

1MansMoney cooks up some delicious savings by working on not throwing food away.

Career

Paula from Queer Cents identifies the risks of identity theft during your job hunt. I guess the FBI isn’t the only one with a surveillance program.

Patrick from Cash Money Life continues his series on researching MBA options with Part 2 – Program Types-In Residence.

Art of Moment on Money asks what is a mommy to do?

BB from brip blap asks, “Raises – are they for suckers?” Yeah, you’re better off sticking it to the man and turning down that puny 3% raise. Plus, there’s usually very little corporate surveillance at a home office.

Mike of The Financial Blogger tells us about one of the best things he ever did – quit his job. Mike says sometimes you’re better off unemployed. I wish I could take Mike’s advice and quit working the minute I didn’t enjoy it…but I like eating too much.

Starving Artist at Indebted 2 You is facing the unhappy possibility of getting fired in November. Here’s ‘Head count reduction – or – my company might fire me Post 1.’ If that’s too depressing a topic, check out what Starving Artist has to say about Mastodons.

6-A

Credit

Jonathan at My Money Blog asks the eternal question, “Can having too many credit cards hurt your credit score?” Watch out for those credit bureaus, they know more about you than your mom does.4-Y

Frugal Babe gives us her thoughts on credit scores. It seems that something as important as a credit score should not have any mystery associated with it, yet as she explains, it very much does.

If you’re trying to make a good credit card first impression, Mr Credit Card has some advice about how poor credit cards can make a bad impression.

Melissa of A Penny Closer gives us 5 myths that can hurt your FICO score.

Millionaire Money Next Door says You Need To Know What People Are Saying About You: How to Order Your Free Credit Report. I couldn’t agree more – always know what people are saying about you.

Steve from Debt Free tells you to look before you leap and gives you all the debt consolidation loan secrets. Think you still have secrets?

Investing

AskDong explains why, despite all you may have heard to the contrary, cash is king.

Retirehappy from My Retirement Blog has a brief synopsis of IRA required minimum withdrawals.

Brian of Financial Reference refreshes our economics knowledge by explaining the opportunity cost of capital.

With possibly the second coolest name in personal finance blogging (Prince of Thrift still has the number one spot), Blain Reinkensmeyer of Stock Trading To Go gives 6 great books on investing.

Indexfundfan goes over cash management using municipal resets instead of money market funds.

Four Pillars gives you a market timing example. I don’t want to give away the ending, so I’ll just leave it at that.

Ben at Money Smart Life asks if you were given retirement advice from a retired corporate executive, would you be thankful or resent it? Me, I try not to listen to corporate executives about anything. 2-H But that’s just me.

Shadox at Money and Such tells IPO investors to beware and offers another endorsement of steady-as-she-goes index investing.

Lazy Man at Lazy Man and Money writes about keeping a level head in a down market and asks should you stay the course?

Graham from Saving With Me asks ‘How much risk tolerance can you handle?

FIRE Finance explains what you need to know about a secure retirement and at what rate you should save for it.

Money Management

Jim from Blueprint for Financial Prosperity gives 5 ways paperless personal finance saves you money. Less shredding and I save money? Where do I sign? Oh, yeah, paperless…I forgot.

MoneyNing explains the relationship of McDonald’s McChicken, personal finance, and me. I knew there was a connection all these years but I couldn’t figure it out.

King of Debt from We’re In Debt tells how to manage your finances on a Mac.

Teaspoon at Teaspoon Finance solves your savings issues with the no-budget budget.

Lauren from Savings Explained gives us 7 easy tips to keep your motivation for savings on track. And not one of them has anything to do with electric shocks. Nice.

Chica With Issues bears all and tells you her 7 money-related things she regrets doing. ___

Mariette of Boulevard to Retirement is her own knight in shining armor.

Rocketc from Rocket Finance explains how a newly married couple found extra money by balancing the checkbook. Ooooh. Magic checkbook.

David at Money Under 30 presents his back to school financial survival guide. Just remember kids, that nice man with the t-shirt and the credit card application in his hands is not your friend.

J at Home Finance Freedom tries to get you to simplify your bills and life. Shredder where I open mail. Hmmmm.

Golbguru from Money, Matter, and More Musings asks, “What are your money leaks?” Did somebody say ‘leak?’

CD of Canadian Dream tells you you’re poor from a lack of planning. That, and too little money. You gotta read this post, though. CD can mentally time travel.

Junger from Online Savings Blog tells you the 11 online banking features you want to have.

Jeanjeanie from Growing Up tries to find the balance between aggressively paying down debt and enjoying life in the present with her post, ‘When just enough is good enough.’

CJ at Coin Jar gives the truth about budgeting. Budgeting isn’t fun?!? Lies and propaganda.

Finance

Silicon Valley Blogger from The Digerati Life tells us blogging doesn’t cause marital problems, lack of financial sense does. That and your rampant cheating. Told you you’re being watched. 5-W

Money at Moneymonk writes about branching out into more complex investments in ‘When personal finance gets boring.’

Ashley of College of Cash asks, would you accept a loan from a friend? College of Cash?!? I went to a stupid state school. Why didn’t somebody tell me there was a college of cash. Dammit!

NCN at No Credit Needed presents the results of the reader savings poll. And the result is…you people have way too much money.

Sun at Sun’s Financial Diary explains in detail the credit card arbitrage game. I know Sun’s on top of it, but borrowing $100,000 doesn’t qualify as a ‘game’ to me.

Plonkee at Plonkee Money gives credit card arb a new name – stoozing – and discusses how it can make you money.

Pinyo from Moolanomy provides an introduction to CAGR. It’s a post chock full of numbers and multi-colored graphs and very thorough.

T. Pettinger of Mortgage Blog gives you the top 10 financial mistakes to avoid.

Cory at Personal Finance Math lives up to his name and shows you how to calculate future value.

Real Estate

Harrison of Journey to Financial Freedom tells us how to determine and keep track of the real estate bubble in your area.

As if that wasn’t enough, Jason of Smart Money Daily wants to know, is your realtor looking out for your best interests.

Matt from How I Will Be Rich presents a post that looks at the benefits of renting over purchasing a home with ‘Buying Vs. Renting: Is Homeownership Better for your Money?

Super Saver at My Wealth Builder is bracing for a possible housing crash or recession.

Submissions that defy categorization

Laura from CurrentyTrading.net submits what is likely one of the more time-consuming posts to produce this week. Her Top 100 Economics Blogs includes a stunning one hundred different blogs.

Veteran Military Wife tells you to opt out completely…it actually works!

Inswatch explains that your homeowners insurance covers your college bound child. Sweet! So if your college kid gets stolen or smoke damaged in a fire, you’re covered.

Cade of Write to Right examines 10 ways to get rid of debt and cost in business.

Amelia from Around the Sun gives us some tips for a successful garage sale.

Paidtwice of I’ve Paid For This Twice Already explains what ‘more stuff’ she knows.

Henry from InsureBlog passes on a hot insurance tale. His bad pun, not mine.

One Frugal Girl does an experiment to organize your home. Well, not your home specifically.

Mike at Clever Dude Personal Finance starts a new series entitled Examine Your Motives. Always somebody wanting to examine my motives. First the prosecutor now Mike.

The Happy Rock tells you 4 ways to win by quitting. Truly, sometimes admitting defeat and giving up is the best way to win.

A Radical Tax Idea I Love

I’m reading a book called More Sex Is Safer Sex: The Unconventional Wisdom of Economics [aff] that presents a really radical tax idea that I think would be great.

The idea is that the government should stop taking taxes (payroll and income) out of your paycheck. Then at the end of the year, the IRS mails everybody an itemized tax bill.

This would accomplish two things, in my estimation. First, it would force most Americans to get out their checkbooks and write a big, fat check to the government every year. I don’t know about you, but if I had to write a check for my tax liability, I’m not sure I could get my hand to do it. And that’s the idea. It would make people realize just how much they’re paying the federal government in taxes. I’d reckon the pressure to cut taxes would soon be overwhelming.

The second thing this plan would accomplish is it would force Americans to look at how their taxes are actually being spent. It’s one thing to know (and most Americans don’t) how the government spends your money. It’s quite another to have a bill staring you in the face that looks something like this:

Your $14,500 dollar tax bill goes to fund these things* –

$2,900 Social Security (20%)
$2,900 Defense (20%)
$2,755 Medicare & Medicaid (19%)
$1,305 Interest on national debt (9%)
$1,105 Income security (7%)
$870 Other entitlements (6%)
$580 Education (4%)
$290 Environment (2%)
$145 International Affairs (1%)
$1,740 Non-defense discretionary (i.e. everything else) (12%)

*Figures are actual percentages for fiscal year 2006 courtesy the Concord Coalition

I wonder how long it would take to align the bill with Americans’ true values. Or maybe these reflect Americans’ true values already. Now that would be depressing.

10 Ways to Save Money In Your Budget

Finding room in your budget for saving and investing isn’t always easy. Here are some painless ways to find that extra couple hundred dollars per month.

  1. Ask service providers like satellite TV companies and credit card companies to lower your rates. A simple call to DirecTV got me $10 off per month for a year. I just called and told them I could get such-and-such deal with Dish Network and would they lower my bill. Their response – sure; no problem. Took five minutes. If you have a credit card balance, the exact same technique can work. Call the issuing bank and simply ask them to lower your rate. Most times, they’ll do it. This technique works anywhere there’s good competition and/or customer acquisition costs are high.
  2. Get quotes on auto and life insurance. Though the phrase is cliche, fifteen minutes actually can save hundreds on car insurance. It’s really easy to compare with tools like Lowermybills.com. Life insurance premiums, too, have dropped significantly over the last several years. Getting a quote is free and can save several hundred dollars per year. And you won’t necessarily have to switch insurance companies. With a better offer in hand, you can use it in the same manner as tip #1 above with your current insurer.
  3. Cancel unused or underused subscriptions. Take a look at subscriptions you pay for – magazine, DVD, whatever. How much use do you really get out of them? If you’re not sure, just try living without them. Call the company and tell them to suspend your subscription for a month or two. If you don’t miss it, cancel, and don’t forget to get a refund for the remainder of your subscription. The same goes for pay TV channels like HBO.
  4. Use the library. If you read or watch movies at home a lot, get acquainted with your local library. The books are surprisingly new and DVD rentals are a buck or two.
  5. Review your auto insurance coverage. Check out what your deductible is, what add-ons like rental reimbursement you have, and your collision coverage. It doesn’t pay to pay for collision on older cars, so drop it and save a couple hundred bucks. Deductibles should be set as high as you feel comfortable. Check also to make sure you’re not paying for an add-on twice. By that I mean if you have AAA, it makes no sense to pay for towing through your insurance, for example.
  6. Eat out once less per month. Just eating out once less per month can save decent money. For the three of us at a ‘regular’ sit-down restaurant, we’re looking at $40.
  7. Pack your lunch. By eating yesterday’s leftovers for lunch every day at work, I figure I save in the neighborhood of $120 per month. Besides, it’s most likely healthier.
  8. Ask for discounts. Make the most of being a AAA member or a student – ask for a discount. What’s the worst that can happen? They say no.
  9. Compare prices on drugs. The legal kind. It’s shocking the variance in prices for prescription drugs from retailer to retailer. So before you fill that prescription, just call the pharmacies for a couple of different places.
  10. Consider consolidating investment accounts. It’s common for investment companies to charge a quarterly ‘account maintenance fee’ for balances under some amount. We used to be charged every quarter because our mutual fund account was under $10,000. Once I consolidated, we were over their minimum amount and the charge disappeared.

None of these ideas are going to pull you back from the brink of bankruptcy, but if you’re looking for a little bit of extra room in your budget, trying one or two might do the trick.
Photo credits: fief.org, cri-dove.org, maine.com

When Automatic 401(k) Enrollment Is Bad

One of the best 401(k) developments in recent years is the rule allowing companies to automatically enroll new employees in a 401(k). Unless the employee takes positive action and opts out, they’re automatically saving for retirement. But there’s a down side to automatic enrollment. Low contributions, no increases in contributions, and poor automatic investment choices all work to diminish the positive effect of this program. Make sure if you’re enrolled in your 401(k), you know what that means.

  • Low contributions

Typically, when a company institutes an automatic enrollment policy, it makes the 401(k) contribution level something anemic like 1% or 2%. Often, it’s not even high enough to get the full company match. Ugh. Sometimes you can’t save people from themselves. Always, always, always contribute in your 401(k) at least enough to get the employer match.

  • No increases in contributions

Automatic enrollment plans only enroll people; they don’t periodically increase contribution levels. There is a change to that in 2008 that allows companies to annually increase contributions unless employees opt out. However, I don’t see this being widely implemented. Increase your contribution by 1% per year and I guarantee you won’t even notice. That is, until you look at your 401(k) statement.

  • Poor investment choices

Even if companies overcome the barrier to enrollment, they face the sensitive subject of where to put those contributions. A company can’t foresee each employee’s individual financial situation, and what’s appropriate for one person isn’t for another. As a result, often the default investment in automatic enrollment plans is something stupid like a money market fund. Worse yet is company stock as the default investment. You should always check your investment choices to make sure they make sense for you and your situation.

What all this boils down to is that automatic enrollment in 401(k)s is a good idea, it just doesn’t go far enough. So if your company offers it, do yourself a favor and actively look into the program. Don’t just assume you’re all set because you’re “enrolled in your 401(k).”

6 Dumb 401(k) moves

1. Cashing out when changing jobs

Probably the worst thing you can do with a 401(k) is to take a distribution from it when you change jobs. There are negative tax consequences, you undo lots of good (and easy) work saving for retirement, and you probably don’t need the money anyway.

The major negative with taking a distribution from your 401(k) when you change jobs is the tax consequences. When you take a distribution before retirement (with some exceptions which are rigid in their requirements), you are immediately hit with a 10% penalty by the IRS. In addition, the distribution now becomes ordinary income, meaning you’re then taxed on the distribution.

The second reason not to take an early 401(k) distribution is because you’re undoing a lot of good work you’ve done for your retirement. When you had money taken out of your paycheck and put into a 401(k), you’ve already done the hard part. Any pain you may have felt in having a smaller paycheck has already passed. If you take a distribution, you’ve just undid all your work.

Finally, you probably don’t need the money anyway. Unless you’ve been involuntarily separated from your company, you either have another job lined up or plan on something else like going back to school. In either case, you most likely don’t need a lump sum of money right now. Can we all make use of a big deposit into our checking account? Of course, but you weren’t planning on it, so its absence won’t hurt.

2. Leaving your contributions in the default option.

Many people think their work is done when they elect to have money put into a 401(k). They give no thought to a very important next step – asset allocation. Your choices may be precious few or confusingly many, but leaving the money in a default money market account (or worse, company stock) is akin to giving away money. By doing so, you’re letting inflation eat up your hard earned money. Please don’t leave your contributions in a low-yield investment, but do be cognizant of your time horizon and invest appropriately.

3. Taking a loan against it.

Taking a loan against your 401(k) is touted as a good idea if you need money. It’s not – it’s dumb. According to the Employee Benefit Research Institute, 1 in 5 401(k) participants has an outstanding loan. People like to say that having one is a good idea because, “you’re paying the interest to yourself.” That’s misleading and here’s why. When you take a 401(k) loan, you pay interest but that interest, along with the principle, goes back into your 401(k) account. The problem is that while your loan is outstanding, your money isn’t working for you. It’s not invested in the markets, so you’re likely losing money.

The other reason taking a 401(k) loan is dumb is that if you leave your job for whatever reason, you typically have to pay that money back immediately. If you needed a loan, you didn’t have the money to begin with, so you’ll likely have to take the loan amount as a distribution with all the nasty consequences that go with it.

4. Not periodically rebalancing.

One of the principles of investment is periodic rebalancing of your portfolio. To rebalance is to sell winners and buy losers so that you return to your original asset allocation. If you don’t rebalance your 401(k), your asset allocation gets out of whack and your not investing as you intended. You don’t have to rebalance constantly, but once or twice a year is probably adequate.

5. Investing in company stock.

Another dumb 401(k) move is investing your contribution in company stock. If you work for a public company, the employer match you get is almost certainly invested in company stock so you have exposure there. Furthermore, you obviously work for that company, so your income already relies on its welfare. Further increasing your exposure by voluntarily buying company stock in your 401(k) is foolish.

6. Checking it obsessively.

Do yourself a favor and don’t check your 401(k) daily, or weekly for that matter. The purpose of your 401(k) is to invest for retirement, which is probably years away. There’s simply no need to know your balance on a constant basis. Research shows that people who check their investments very often trade often and people who trade often have lower returns than those who don’t.

A quick way to tell if you’re saving enough for retirement

I came across a study done published in the Journal of Financial Planning that provides a quick way to tell if you’re saving enough for retirement. The article, National Savings Rate Guidelines for Individuals, uses a more nuanced approach than many retirement calculators.

The authors calculate retirement income needs based on net pre-retirement income. Most calculators have you input your current gross income. This is important because in retirement, you’ll obviously not be saving for retirement. They also use Monte Carlo simulation and data from Ibbotson Associates in their calculations (one of the authors is Roger Ibbotson).

So here’s the quick method. The table below shows what you need to save now to replace 80% of your net income at retirement. Simply find your age and income. You can adjust the number for savings you already have.

For example, let’s say you’re 35 years old, make $60,000, and have saved $40,000 for retirement. Your base savings rate is 16.4% and you adjust it down by 0.55% x 4 = 2.2%. To replace 80% of your net income at retirement, you need to save 14.2% of your current gross income.

How easy is that?

Baby’s First Credit Card

Ugh. It was bound to happen. My 4-year old daughter got her first credit card application in the mail yesterday.

After we put the recycling out on the curb last night, I reached into the mailbox and grabbed what was in there. Coming inside with her, I said, “Hey! This letter’s for you.” (I saw it was from AirTran – we signed her up for their frequent flier program)

“Really?!?”

“Yep. Here’s your mail, ma’am,” I said, making a production of handing over the envelope.

She tore right into the letter while I moved on to the only other non-junkmail item. Honestly, I thought AirTran had sent her some plan-related form letter. Soon, however, the real contents were strewn about the kitchen floor.

“Daddy, look! I got a card,” she happily proclaimed. She meant like a birthday card. I look and she’s holding a return envelope. “I’m going to keep my card over here, ok Daddy?” she said as she proudly placed it on her little activity/art table.

“Sure, baby. That’s great,” I said as enthusiastically as possible. I bend down to recover the rest of the envelope contents and am soon slapped in the face with the absurdity of the situation.

Way to go, AirTran. You just sent a credit card application to a 4-year old. Congratulations.

I tore up the application, but thinking about it now, I should have kept it. [Sniff] My baby’s first credit card application. [Sniff]

Kids With Credit Cards

Here’s a by-product of the often recited ‘buy everything with a rewards credit card’ advice  – the effect on our children.

My three year old daughter has never known a time without POS terminals at every retailer. We rarely pay for anything with cash. I’m sure if we didn’t teach her otherwise, she’d think you can walk out of a store with anything you want if you just put your little plastic card in the machine.

One of my daughter’s earliest toys was a little cash register with a place where you could slide a fake credit card. We’d play grocery store and when she’d tell me to pay, I’d hand over the card. “Crrredit,” she’d say as she slid the card through the ‘reader.’

She’s since grown up to using the real ones. When we check out at Target, she always puts the card in for me. What’s most disturbing, perhaps, is that she knows exactly which buttons to push on the screen and then ’signs’ for me. I’m sure this is exactly what warms the shrunken hearts of credit card executives everywhere.

Before you think this is a ‘evil credit card company’ story, I’ll be the first to admit I’m completely in charge here. (Ok, as in-charge as the father of a cute little girl can be.) I could pay in cash. I could make sure I conduct the entire transaction myself. But this is the world we live in.

I guess this is why there are so many blog posts out there about teaching kids about money and articles about teaching smart credit card use or why a 1% return can be a good thing. Without a conscious effort on her parents’ part, this little girl could have a seriously warped image of money. More important, she could have a seriously warped image of money’s true worth.

Our Daughter’s First Savings Account

After discussing it for a while with my wife, we’ve decided to open a savings account in our daughter’s name. She’s almost four, and we’ve decided now is the right time to start formally teaching her about money. Up until now, most of her financial education has been informal or came from credit card companies.

To that end, I opened a First Start savings account through USAA. USAA continues to be the most awesome financial services company ever. This product is specifically targeted at kids and getting them to save. It is the best saving account for kids there is (And, no, they don’t pay me to write that. Attention USAA: I’d love to start being paid to write this stuff). Here’s why it’s so awesome:

  • No service fees whatsoever (for low balance, etc)
  • APY of 2.05%, so they actually earn some interest you can point to
  • Better-than-free ATM access (USAA not only doesn’t charge ATM fees, they actually refund the fees other banks charge you)

The plan

My wife and I have tentatively developed a plan for our daughter’s finances.

  • Her allowance will be $1 per year of age per week
  • She will have to put a portion away to donate to charity. My wife suggested we make giving tangible by having our daughter save her ‘charity’ money and purchase gifts that our church suggests for our sister parish and the local needy. I really like the idea.
  • The rest of her ‘pay check’ gets split between savings and spending. Which, in practice, means long term savings and short term, since the amounts we’re dealing with are so small.

I’m still figuring out how I want to do it, but I want to develop some sort of ‘matching’ contribution. The idea is to match her long term savings like an employer might match a 401(k) contribution. I’m thinking the best way to do it is in a lump sum at the end of the year. I figure the impact will be that much greater that way, since the match would be a sizeable amount of money. I’m thinking dollar for dollar is reasonable.

One key thing about this whole allowance business is I’m adamantly opposed to tying it to chores. From everything I’ve read on the subject, doing so is counterproductive. The theory behind not tying allowance to chores is that every member of the family has responsibilities to the family (e.g. setting the table or helping with laundry) independent of any allowance.

I never had an allowance as a kid, so I’m just guessing at this stuff. If anybody has suggestions regarding kids and allowances (what works, what doesn’t, did you have one) I’d love to here them.

(By the way, I opted not to get the ATM card with the account. At least not right now :) )