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Wealth in Scripture

Interesting article about the subject of wealth in the Bible. The author discusses how some commands and admonitions regarding wealth in Scripture no longer strictly apply under our modern economic and monetary systems, though the underlying principles still apply. Written by a professor from my wife’s alma matter.

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A Few Favorite Personal Finance Books

Rich Dad, Poor Dad by Robert T. Kiyosaki

When I was about 19, this book changed my entire outlook on money and finances. Looking back, and reading through the book now, I see a lot that I disagree with, but it sparked my thinking about how to manage money, and what financial freedom truly means. Not a practical book, but definitely a good start if you have no “financial motivation.”
The Millionaire Next Door by Thomas J. Stanley

This book, which I read recently, is the result of years of research of America’s millionaires: how they live, what they wear, what cars they drive, how they made their money, etc. It was definitely inspiring to me, and also got me thinking about the impact of wealth on future generations, both good and bad.

Cashflow Quadrant by Robert T. Kiyosaki

This book builds on Rich Dad, Poor Dad and goes into detail about how to build multiple streams of income and gradually reduce your reliance on earned income. It contains overviews of the impact on personal finances and income of things like real estate investment, entrepreneurship, and investing in businesses.
The Richest Man in Babylon by George S. Clason

This is a deceptively simple book that contains a series of financial parables that teach the importance of always saving, the power of compound interest, investment, insurance, and other time-tested financial truths. Easy read and a good reminder of some very basic lessons. Again, good to read if you find yourself lacking that “financial motivation.”

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Can money buy happiness?

Everyone always says that money can’t buy happiness. I’ve always liked to say that money can’t buy happiness, but it can buy relief from certain types of misery. Perhaps an example will be helpful.

Every time I fly commercially, about the time I’m shuffling through security with my shoes in one hand and my recently-torn-apart bag in my other, I think about the indescribable joy that private air travel would be. My feeling escalates as I’m herded onto a plane that is probably older than I am, and sit down between two enormous women who both have toddlers that are vying for the title of the World’s Most Annoying Child. By the time the beverage cart creaks by at the express speed of .00756 mph and the Flight Attendant informs me that the last of the orange juice was just given to the grubby little urchin screaming his head off next to me, I’m ready to kidnap the little bugger and sell him on the black market to finance the purchase of my jet.

Relax, I’m not in the business of peddling children. Yet.

Anyway, the point is that flying commercially is miserable. Absolutely terrible. Could money buy relief from that? Certainly.

However, even I’m willing to admit that this is a rather unproductive example. Most people will never set foot on a private jet, so it’s not really a viable alternative to commercial travel.

A more representative type of misery that most people go through is financial slavery. In fact, to say that most people go through this is misleading, because the majority of us will spend most of our lives mired in financial slavery, “working jobs we hate so we can buy shit we don’t need.” (Fight Club)

Let me give you a few examples of more common types of misery that characterize financial slavery:

  • Not being able to spend time with your family because you have to work two jobs
  • Not being able to provide adequate food, shelter, clothing, medical care, etc for your family
  • Constantly being stressed about how you’ll pay the bills this month
  • Getting stuck in a job or city you hate because you can’t afford the risk of trying something new
  • Being a burden on someone else for financial care
  • Seeing your marriage torn apart by the stress and anxiety that money problems cause

The number one cause of divorce in America is money problems. Is divorce miserable? You betcha. It’s a special type of misery that almost always gets passed on to your kids and, if you’re lucky, your grandkids. If the number one cause of one of the most destructive forces in our society is money problems, how can people say that money can’t buy happiness?

I was pondering this today as I walked to work (yep, I walk to work. City living rocks.). In terms of deciding whether money itself buys relief from certain types of misery, the relevant question becomes this: For most of the people experiencing the types of financial misery that I described above, would more money really solve the problem? I think that in most cases the answer is no. Let me explain.

It’s always helped me to think about money not simply as as solution to problems, but as a multiplier of both problems and solutions. If you’re responsible and able effect positive changes with a little money, you’ll likely be responsible and able to effect even greater positive changes with more money. Conversely, if you’re unable to manage small amounts of money without getting in over your head, and you’re constantly thinking that if you just had more money, your problems would be solved, then the reality probably is that more money would only exacerbate your financial problems in the long term. We need only look at Lotto winners, a high percentage of which are bankrupt within a decade of their winnings. Here’s a great article from MSN Money about the subject.

The point is, if you’re not responsible with a little money, you aren’t going to suddenly become responsible with a lot. I think I’m going to have to revise my saying to be the following:

“Money can’t buy happiness, but it can buy temporary relief from certain types of financial misery. However, unless the root cause of that financial misery is dealt with properly, the end result of injecting money into the situation is often worse than the problem was to begin with. Ultimately, the only long-lasting paths to relief for financial misery are death, an infinite supply of cash, or learning proper financial stewardship. Your call.”

Hmmm…definitely not as catchy.

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Emergency Fund vs. Debt Paydown

So lately, I’ve been listening to a lot of personal finance podcasts. Many of these podcasts revolve around people digging themselves out of the debt-hole they’ve sunk into.

Side not: It’s amazing to me how ill-prepared most people are to deal with money, and how cavalier our society is towards excessive spending and debt. But that’s another story for another day.

Anyway, one of the people I’ve been listening to is Dave Ramsey, and while I don’t always agree with his advice from a purely financial standpoint, I do think that it often makes sense from a behavioral standpoint. For example, his method of paying down debts, called the Debt-Snowball method, has people arrange their debts from lowest to highest balance and pay them off that way. Mathematically, this is not optimal, and you end up ahead if you arrange them from highest interest rate to lowest interest rate. Over the long term, you’ll pay your debts off faster and pay less in interest than you will using the debt snowball method. However, Dave recognizes this and advocates his method instead because of the psychological effect of paying off a larger number of small debts and maintaining a feeling of progress. This is just one example of how he tends to take behavioral issues into effect as well.

One of the things that has always annoyed me with most financial advisers is that they all tend to make statements like “First, you’ll need to make sure you have 3 to 6 months worth of savings as an emergency fund. Next, you’ll arrange your debts from highest to lowest interest rates and pay them off in that order.” Bam! Apparently, these people do not live in the real world and think that sound financial advice means telling people who are barely scraping by as it is to somehow save 6 months worth of expenses before they begin attacking their debts. Let’s take a look at how this strategy plays out in the real world.

If you make $30k per year, 6 months of expenses is $15,000. If you can afford to somehow set aside 20% of your after-tax income towards that emergency fund, and you never touch it (because you definitely won’t have any emergencies), it’ll take you nearly 4 years of saving up, assuming that your after-tax income is $2000 / month. 4 years. THEN you get to start paying down your debts. Are these people crazy? It’s doubtful that most of the people who are deeply in debt could put 5% aside for 4 years, let alone 20%. If you put 5% aside long enough to build up 6 months of reserves, it’ll take you almost 18 years! (not counting any interest earned on that money)

Here’s a better idea. Get $1000 together, and then start attacking your debts. If you have a true emergency, you have $1000, plus you always have the credit that you just paid off. I know that sounds crazy, but if you’re really serious about this, you’ll do almost anything to avoid going into more debt, while spending a few dollars of that $18,000 might look pretty tempting when your car breaks down or you get a speeding ticket. You have to cultivate the attitude that debt (except for mortgages, perhaps) is a cancer and almost anything (within your ethical and moral boundaries, of course) is better than incurring debt. If you do that, you can usually find some other way to deal with emergencies than spending on credit. However, if you have $18,000 sitting in your emergency fund, it’ll be pretty tempting to use a little of that to pay this and a little to pay that, and you don’t have that same drive to be creative.