Happy New Year- and Let's Keep it That Way

I thought I'd write a New Year's message while the ink on your resolutions is still wet. Setting goals regarding finances is a natural activity for today (Jan. 1), and from an informal poll, the success rate for these goals is similar to those we make annually regarding exercise and weight loss. Instead of trying to pass along a rambling list of things we should do to be more financially sound, I'll use this post as a launching pad for what will hopefully be a monthly series on various financial topics including: taxes, debt, homes and mortgages, basic investment vehicles, budgeting etc. You will notice I don't have 12 topics listed because I don't have 12 ideas yet.

This post will dissect some poignant yet 'roll your eyes' aphorisms on finances to get started for the new year:

1. A rich man is he who spends less than he earns
2. A penny saved is a penny earned
3. Love's just like a magic penny. Hold on tight and you won't have any. Lend it spend it and you'll have so many, they'll roll all over the floor...

Comments on aphorism #1 A rich man is he who spends less than he earns
This is actually true. Regardless of income if you spend less than you earn you will accumulate monetary wealth. Think of how many rich people (or businesses for that matter) go bankrupt. It is from failure to understand and implement this basic financial principle.

Comments on aphorism #2 A penny saved is a penny earned.
This may have been true when Ben Franklin uttered it over 200 years ago. While it's veracity in some senses has not been diminished, modern consumer culture has perverted it in such a way that this saying is almost more dangerous than valuable. It is true that if you save money, you will have more money. I suppose that is self evident. But, Franklin seemed to like getting involved in things that were self evident.

The problem that arises with this saying when applied in modern society is as follows. Grandma walks into Department Store A and sees a shirt with questionable fashion value that is marked 60% off. Her heart rate quickens and she finds herself salivating slightly. The nagging of her adult children that she spends too much money on 'junk' momentarily halts the flow of endorphins and in a daze she exits the store. It is cold outside and Department Store B is just down the corridor. She enters and finds a shirt with an even stranger concoction of colors, patters and fabrics...this time for 70% off. The lure is too great this time. The haze from the perfume counters she passed, combined with the irresistible price convinces her to extract her credit card and purchase. After all Christmas is less than 360 days away. Who knows if she'll find these prices again. This shirt will be a perfect present for any one of her male posterity...she gives in.

What has happened here? Aside from the basic fact that grandma's taste in clothes is tainted by decades of ever morphing fashion trends, and that a mall is a nice warm place in the winter and she's bound to purchase something if she hangs out there long enough, something much more sinister has occurred. This purchase is anything but harmless.

If we were to crack open grandma's brain...well, maybe just stick some electrodes to her forehead that translate thoughts into words on a computer screen, we would see the following phrase uttered over and over. "I just earned $28...I just earned $28....it would have taken me two weeks to earn that when I was younger...I just earned $28"

After seeing this message tapped out repeatedly on the computer screen as grandma's brain is scanned our first thought may be horror. "Oh No! Grandma has run out of money and has taken a job as a greeter at Wal-Mart!"

Upon further inspection you will note the bag clutched under her left arm. After carefully extracting the bag and examining the contents you will first grimace at the undesirable colors that greet you. Your grimace will turn to pain as you hold it up and realize this thing is a shirt...a male shirt. It will likely be given to your husband (or you if you're a guy reading this). After taking a moment to preemtively think of exactly what happy expression and kind words you will use upon receiving the gift, your eyes stray back to the computer screen which is still repeating the words 'I just earned $28...'

Even more curious that you were just minutes ago, you look at the tag on the shirt. Luckily for your middle-aged mental-math impaired brain, both the original and the sale price are written on the tag. $40 is printed on the tag. A red line is drawn through it and a hasty $12 is scribbled next to it. At first this is meaningless, but even those of us whose senses have been dulled by changing countless diapers and hearing Mary Had a Little Lamb screeched incessantly on the violin eventually make the connection. $40 original price less $12 sale price = $28 "savings". The dread covers you like a thick wool blanket. This is even worse than grandma being a Wal-Mart greeter.

To repose the question five paragraphs up: What has happened? She has mentally distorted Franklin's pithy phrase. Purchase by purchase, the words of a venerable Founding Father are now actually destroying America.

No matter how good the sale price if money leaves our wallet, bank account or is added to our credit card- we have spent not earned. Don't get me wrong, sales are a great tool that are incredibly useful if used wisely. But they never result in income.

You may scoff at this story...or just be mad that you read the whole thing and find my conclusion stupid. But, pay attention to how people talk about their sale purchases. Some will outright say 'I made 20 bucks at that sale' but more often it will be more subtle. Watch and learn from what people say. If a discussion of any purchase starts with 'I didn't really need it but...' then you know the true message their brain is conveying to them. "I just earned $28..."

Humans are rational creatures. If we don't need something our brain doesn't want it. You might argue that point and say people do all sorts of irrational things, but you are wrong. We create messages in our mind to make all our actions appear rational. We are very good at rationalizing.

If the message our brain produces regarding a sale can be distorted, then we will act contrary to what an outside would perceive as rational thought. If a sale on something we don't want or need is turned into a message of 'the savings from the sale is income'- then there is some chance we will buy it. Our brains have been taught that income is good- so if buying this sale item could give me income-perhaps this sale item is good.

That's all I have to say about Aphorism #2. Savings from a sale does not and never will equal income.

Comments on Aphorism #3 Love's just like a magic penny. Hold on tight and you won't have any. Lend it spend it and you'll have so many, they'll roll all over the floor...

As I think about it more, this is part of a song I learned in second grade. It is actually about being nice to people...not the fabulous qualities of magic pennies. Please disregard this as a credible aphorism regarding finances.

In summary
1. Spend less than you earn
2. Saving = earnings only if putting money in a bank is involved.
If JC Penny is anywhere in that equation, you have not earned a single penny.
3. Songs learned in elementary school are in part of the brain that apparently is not erased for at least 30 years. I'll let you know if that is still true in another 30.