According to The Stats Man, between 1982 and 2001, 47% of Canadians spent more money than they earned. Imagine. Almost half of us were living on credit. This before the real ramp-up in credit offers and the subsequent crap that’s hit the fan. I shudder to think how many people are spending more than they are earning today.

Meet Dick. He’s married to a lovely lass named Debbie. Both are teachers. Debbie helped put Dick through school, earns more, and just had a baby. Dick thinks playing golf, gambling on-line, and having fun with the boys is the be-all of life.  Dick and Debbie are living well beyond their means. Debbie knows this. She’s distraught. Dick thinks Debbie is a tight-ass and wishes she’d loosen up.

I receive letters from the Dicks and Debbies of the world all the time.  Either Dick wants me to get Debbie to relax or Debbie wants me to knock some sense into Dick. I scratch my head.

Do people really know nothing about each other before they choose to marry? Do people honestly believe that if their partner is a Spendmeister before they marry, that they will become something other than a Spendmeister after marriage? Does anybody think that a conversation about goals, values and predispositions might be a good idea before you tie the knot, move in together, or in some other way make a major life commitment?

While we would like to blame credit cards and lines of credit as the culprits in the Oh-my-gawd-look-at-how-much-we-owe dilemma, the reality is that it is our own pre-disposition to spend that gets us in the hole. Yes, I think lenders have been both irresponsible and rapacious in their policies. But it is we, the consumers, who have allowed this to happen by accepting untruths like:

• you will always make more money, so you’ll be able to afford to pay it back,
•  you work hard, you deserve it
• credit is cheap, use it to get what you want and have a great life.

According to The Book of Gail, the number one rule is, “Don’t spend more money than you make.” Course, you’d have to actually know how much you bring home (not that “gross” number people like to banter about) to know how much you have to spend. You’d also have to know what your “nut” is: the basic monthly essential expenses it takes to keep body and soul together.  I’m astounded at the people who know neither.

It should be easy to bring the lesson home to Dick by telling him to make and live on a budget. But like many other Delusional Dicks, he’ll just leave important categories off or ignore expenses because they aren’t always present. “Medical costs, hey, we get those covered, we don’t need anything in this category.” “Home maintenance, hey, the house is practically new, we won’t have to spend a dime.”

The things Spendmeisters won’t give up are their personal pleasures. “Whaddaya mean I can’t go for beer with the boys after the game.” “Whaddaya mean I can’t buy that dress for the party.” “Whaddaya mean there’s no money.”

Delusional Dicks (regardless of their gender) cannot see the risks because they always believe the pie plate will land face up on the carpet. (While some people call this optimism, it’s delusion when it puts people at risk.) They can’t even conceive of anything bad happening, and they refuse to take any steps to protect themselves, never mind their families. Delusional Dicks wise-crack and rationalize their way through life until the two-by-four finally knocks ‘em flat, and then they blame something else, brush themselves off and move on.

So what do you do if you’ve partnered up with a Delusional Dick?

You could run screaming to the exits. A little money spent wisely with a divorce lawyer today could save you tons of debt.

Or you could say, “Hey, I’m taking control of this, you’re a moron.”  You’d assume the role of Mommy or Daddy, while your partner got to keep on being a child, creating problems you’d have to solve.

Or you could separate the money, each contributing to their own upkeep, each doing their own saving and investing. There would be no joint credit, no joint assets.  Delusional Dick would stumble eventually and – here’s the really hard part – you’d have to NOT bail him/her out.  It might not end well, but it might be enough to bring Delusional Dick into the real world. Only time will tell.

APPEARANCE ALERT: I will be speaking at the Sudbury Women’s Show on Sunday, June 14, 2009. For more information, click here.  Come on by and get a hug!

If there’s one thing I’ve learned over my experiences with people and their money it is that it doesn’t matter how much you make, you can be broke. I often get letters from people who are living on significantly reduced incomes because of illnesses, changes in life circumstances or job loss. (Hey, that’s why emergency funds were invented, right?) My heart goes out to them because they’re trying to do their best on very little income. But I get just as many letters from people who make gobs of money and are still up to their eyeballs in debt.

One of the reasons people making lots of money can’t seem to make it last is what I like to call We-Make-Lots-of-Money-So-We-Don’t-Have-to-Worry Syndrome! Clearly if we’re bringing home The Big Bucks, there’s no way we can spend it all. Really? And if we have way more money than it takes to cover our nut, then we can buy whatever we want whenever we want too. Hmmm.

Part of this stems from the fact that most people never bother to figure out what their essential expenses are, convinced they make “enough,” there’s no need to watch the money. Unaware of how much of their money is being eaten up by their overheads, they are willing to blithely whip out their cards and charge it whenever they see something they’d love to own because there will always be more money.

As one lass I worked with put it, “I know I can always make more money. There will always be more money.”

WMLOMSWDHTW Syndrome leads people to act like children, satisfying their desires for candy, unaware of the cumulative effect. Later, when the major tummy-ache sets in, they wonder what they did wrong and whimper as they suffer. As soon as the ache passes, back into the candy bag go those fingers, only to create another major tummy ache.

If you’re spending money without keeping track of where the money is going, if you whip out that credit or debit card for everything you see that you want, if you don’t think twice about the money, you’re a tummy-ache waiting to happen. And if after, once you’ve realized you can’t pay the balance off in full, you resign yourself to anything less than a full payment, but keep using the credit card anyway, you’re the kid who just won’t learn the lesson.

Children can come up with all kinds of reason why they should have just one more piece of candy. And most kids will make themselves sick if they feel they can get away with eating the whole bag. People who shop using credit are doing exactly the same thing.

It doesn’t matter how much money you make, if you don’t keep your eye on the bottom line, you’re suffering from WMLOMSWDHTW Syndrome. You can say you don’t have time. You can say you have more important things to do. You can say it’s because money isn’t important to you. Those are all just excuses that will allow you to stick your hand in the candy-bag unfettered by reason or the need to prioritize.

Money is a limited resource and we can run out of it. If we don’t choose wisely, we can find ourselves in deep doo doo without any reserves to help us dig ourselves out. And if there comes a time when the money supply runs a little low, we’ll be kicking ourselves in the butt for having “wasted” all that money when we had it.

According to a recent report called “Where Has the Money Gone: The State of Canadian Household Debt”, one in four of us is $5,000 away from financial disaster, and one in ten of us couldn’t deal with a $500 emergency. OMG!

Save yourself the butt-kicking. Decide today that, regardless of how much you make, you’re going to start watching where your money goes. Get yourself a notebook and every time you spend a penny, write it down. At the end of the money, add it up by category – coffee, lunches, utilities, communication, etc. – to see where your money went.

You might be surprised at just how much candy you’ve been eating!

Some people are rabid about paying off their mortgages. They turn themselves inside out to double-up their payments or to pay off a whopping amount of their principal each year. Hey, if you can do it and have a life, more power to you. But many people can’t. And so they end up stealing from Peter to pay Paul. Like this chick:

My husband and I are mortgage free, but owe a substantial amount on a line of credit and several credit cards. We can never seem to get ahead and I am wondering if a home equity loan to be used specifically for clearing off all of our debt would be a good idea. Are there any other alternatives for us to consider.

Mortgage free doesn’t mean sweet diddly-squat if you’re walking around with a ton of consumer debt. Yes, wanting to pay off your mortgage is an admirable goal, but not at the expense of your Life, and not if you’re just going to rack up the debt somewhere else.

So today, do a net worth statement and take a snapshot of how you’re doing financially.

Add up what you Own:

• Cash in your chequing/savings account(s)
• Cash in a money market fund, TFSA or government bonds/treasury bills
• Cash in a term deposit or GIC (non-registered)
• Cash value of your insurance policy (not the face-value, which is what the policy would pay out; the cash value, which is what you’ve built up in a permanent life policy, if you have one)
• Assets in your retirement account (including the value of your company pension plan)
• Unregistered assets such as mutual funds, stocks, bonds or anything else you may own
• Current value of your home
• Current value of any other property you owe
• Value of collectibles (Forget about your car, your jewelry or your other stuff. It’s just put on most people’s net worth lists to make them feel less like losers.)

Now add up what you Owe:

• Mortgage(s)
• Car loans
• Lines of credit
• Credit cards (all of them)
• Investment loans (like the RRSP catch-up loan)
• Student loans
• Other loans
• Whatever else you may owe to family and friends

Subtract what you Owe from what you Own. That’s your net worth. You should do a net worth statement at least once a year to measure your overall progress. If the chick from the note above had done one, she’d have seen that her mad dash to mortgage free was coming with some very real costs.

I’m not sure why we think we need to have our mortgage paid off in a nano-second. It’s dumb, particularly if we strap our cash flow so tight that we have no life, or we end up using more expensive forms of credit to get the things we need or want.

Yes, being mortgage free by the time you retire is a great idea because when you’re living on less having your housing costs reduced makes sense. But tying one hand behind your back financially for the sake of becoming mortgage free makes no sense at all.

Unscramble your priorities and make a plan that will improve your net worth instead.

Funny Money: When was the first credit card made, and who made it?

The first time most kids learn about credit is when they go off to university and the credit card companies start throwing cards at them. Hmmm. With no experience and very little understanding of the long-term negative ramifications, kids start to charge. And they charge, charge, charge until they’re in a hole. Did you ever take the time when you were using your credit card to purchase gas or pay for a new bathing suit to explain how credit cards worked? Did you take the time to show your children that you’re only putting on the card what you can afford to pay for when the bill arrives? Probably not.

Even relatively young kids can get in on this lesson. Issue your 10-year-old a credit card on The Bank of Mom & Dad. (Have her design it herself, if you like.) Draw up a cardholder’s agreement that both of you sign. Set a really low credit limit ($10 is lots), and a deadline for paying it off before interest charges apply.

Your child can now use her credit card when she goes shopping with you. If she sees something she wants to buy, she gives you her card and you make the purchase on her behalf using your money. You give her a charge receipt. Remind her that she’ll have to save her allowance (or babysitting money) to pay the bill when it arrives.

If she spends more than she can afford, or makes her payments late, you’ll have to charge her interest on the balance. Use 25 percent as your interest rate for this exercise, and don’t give in. When she sees that the $10 item actually costs $20 over the long run, she’ll know that credit cards should be used with caution.

Once you’re child is sixteen or so (you’ll have to gage his maturity), you should get him an actual credit card (it may be in your name) and start him using it and repaying it regularly. This is a habit, and one well worth the effort to form.

Don’t skip steps because you think they should be obvious to your teenager. Start by explaining how credit cards work. Emphasize the connection between charging one month and paying the next. Stress that credit is not “free money” unless the balance is paid in full before the grace period expires. Explain interest and how it compounds if a debt piles up. Read the fine print and review key terms such as late fees and over-balance charges. Talk about how to keep the card safe, and what to do if it’s stolen or lost.

Set limits and monitor your child’s use of the card. They must prove their ability to handle the low limit you’ve established — $100 is good to start – before you increase their responsibility.  When they are old enough and ready for a card in their own name, encourage them to shop around for low rates and fees.

Discuss the importance of a good credit history and how a bad one can get in the way of future borrowing, whether they need to buy a car, rent an apartment or get a mortgage for a house. Show them how to get a copy of their credit report.

The U.S. Treasure has created an online interactive game called “The Bad Credit Hotel.” http://www.controlyourcredit.gov

Next week is the final part of this series: The Messages You Send

Funny Money Answer: The first credit card came out in 1951, produced by American Express.

BTW, Thanks to all who completed the questionnaire yesterday. Lots of great info there. And clearly y’all feel there’s a need for some consolidated, focused effort in teaching kids about money. I’ll summarize next week. In the mean time, encourage friends and family to do the survey so we can get a great sampling. Purrrrhaps the media will pick up on this a bit more and we can have a national discussion. Hmmm.

Essential Money Skill #6: Credit is NOT disposable income.

Yup, I know it flies in the face of everything everyone else has been saying, but credit is NOT disposable income. Student loans should not be used to go pub-crawling. Credit cards aren’t an “entertainment fund.”  And a line of credit is not an emergency fund.

Debt has become so pervasive that it seems like everyone’s in it. You may think this is “normal.”  So might your children. But it’s not normal for someone who is financially healthy. And if you bought into the lie that making your minimum payment is good enough, rest assured that your kids did too. After all, if you can have a fab new laptop that cost $1100 for a mere $34 a month, it seems like an easy choice.

If you haven’t already done so, go and read Student Debt Legacy, and make sure your college or university bound kid reads it too. 

TO DO:

Once your child is 12 or older, teach her about credit, how it works and the costs  involved. Give a young child a credit card on the Bank of Mom so she can learn how to use it.

Older teenagers can apply for a credit card with your co-signature. Make sure the limit is low … no more than $300. Have your child learn to use and repay the credit card, keeping track of purchases and making payments on time until the habit is established.

Here’s the best way to keep track of money.

• In a small notebook, write the current balance in your bank account at the top of the page.
• Each time you use your credit or debit card, write a cheque, or take a cash withdrawal, write down the amount spent and subtract it from the balance. Don’t forget to debit the automatic withdrawals that come out of your account every month for things like car insurance or loans.
• Every time you make a deposit, add it to your balance.
• You now have a real-time balance that shows how much money is available to spend. And you can’t spend money you’ve already used elsewhere (like on a cheque that hasn’t cleared, or on a credit card transaction that hasn’t come due).
• When your credit card bill comes in, check the transactions against the list in your notebook. If there’s something on your statement that’s not your doing, call the credit card company right away and identify the wayward transaction.

Tell your young’un about his credit score, what it is, how it works and how to make it suck! Ask him what he thinks would happen if he got a bad credit rating and a low credit score. Explain that with a low score, interest rates go up and the likelihood of getting a loan you really need goes down.

Essential Money Skill #7:  Keep Money in Perspective

This is one of the most important lessons you can teach. I was at a small party a while ago when a teacher-artist-mom started telling me that her son was at university. He is a wonderful artist, but has decided to not follow his true love because he wants to be able to make lots of money. She was a little sad. 

I have to be honest, I’m of two minds on this: first, I commend the young lad for being practical and recognizing that the life of a starving artist isn’t easy. Second, like his mom, I’m a little sad for him. If he has to give up what feeds his soul so he can have loads of stuff, I wonder just how happy that stuff will make him.

He’s young yet and with a business degree may find a way to make both work together. Here’s hoping.

Money, in and of itself, doesn’t mean anything. It’s what you do with the money. Money is a tool, a means to an end. If you don’t know the end you want to achieve, you’re likely spinning your wheels.

People exhaust themselves trying to maintain lifestyles they can’t afford. Whether it is the social pressure to conform or our a sense of entitlement, so many people are willing to put their futures at risk so they can make the right impression. They MUST drive the right car, watch a high-definition television, eat out three or four times a week, drink the best Bourbon, take the right vacation. And many people are willing to spend money they haven’t yet earned to maintain the illusion. Keeping Up With The Joneses is a dangerous game. It will not only sap your bank accounts, it will sap your life’s energy.

One way to help your child gain some perspective is to talk about what it is she really wants in life. I often talk to my Alex about how important it is to live a worthwhile life: A life that brings challenge and love, that allows you to share, to laugh, and to be happy. So, what makes your life worthwhile? And what are the things that your child thinks will make her life worthwhile? And what is she doing to put more of those things into life?

It can’t just be about money, or more money. According to Dr. Tim Kasser, associate psychology professor at Knox College, and Dr. Richard Ryan, psychology professor at the University of Rochester, people who rate making money as a primary goal score lower for mental health. They are at a greater risk of depression, are more anxious and suffer lower self-esteem, and have more relationship problems.  

TO DO:

Talk with your kids, using questions like these as a spring-board (not all at once… over time):

• What jobs would you NOT do for money?
• If someone offered you $50,000 to do something that might end up being a bad thing (you’re not sure right now), would you do it? Why or why not?
• If a cashier gave you the wrong change, what would you do?
• A friend asks you to lend her $500 for a couple of days. You have $500 in the bank to pay your rent next month. Would you lend her the money?
• Your boss didn’t pay you last week. He was short the cash and said he’d make it up this week. When you show up for work, he’s not there. Neither is your pay. What would you do?
• What would happen if money grew on trees?
• How much money is “enough”?
• What makes you happy?
• How can you work at something you love while taking care of yourself financially?
   

If there are areas you think your kids are a little wobbly on when it comes to either their money or their life skills, it’s not too late.  It’s never too late. I got some of my most important money lessons from my mom long after I left home. It was at her urging that I took out disability insurance while I was young and healthy and could afford the premiums.

In December my 15-year-old Alex got notice of the auto-renewal of her GIC. The interest rate the bank had renewed at was a pathetic 1.5%. I coached her on what to say when she went in to negotiate a better rate.

“I’d like you to cancel this GIC and credit the money to my savings account,” said Alex with all the confidence she could muster. “If you’re only going to give me 1.5%, I’ll move the money somewhere I can earn more.”

The CIBC rep was respectful and brought up her file. “If you want to go for a longer term, I can offer you a better rate.”

Alex looked at me with huge question marks in her eyes. I stayed quiet. The rep continued, “If you’ll lock in for two years, I can offer you 4.25%.” I nodded slightly and smiled.

“I’ll take it,” said Alex.

And thus begins a young customer’s self-advocacy and lifelong focus on making things happen the way she wants them to.  Small steps, coaching and practice build skills. The next time, it will be easier.

Sometimes people keep on the same track because they simply can’t see the mess they are making. They only see what they want to see. The people around them who love them are panicking, but they’re blithely continuing to consume on credit.

I get a lot of letters from sisters, brothers, husbands, wives, mothers, fathers, even children, asking how to help their loved ones wake up and smell the coffee. It’s a tough call. You see how hard I sometimes have to be with people. That’s because they need a real kick in the pants to see what I see, instead of what they want to see. But I don’t have to sustain an on-going relationship with my couples so I am risking nothing; you, on the other hand, have real relationships that could be damaged if you kick too hard.

The other day I found the following and it made me stop and think:

Aoccdrnig to rscheearch at Cmabrigde Uinervtisy, it deosn’t mttaer in waht oredr the ltteers in a wrod are, the olny iprmoatnt tihng is taht the frist and lsat ltteer be at the rghit pclae. The rset can be a toatl mses and you can sitll raed it wouthit a porbelm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe.

If, like me, you had no problem reading that paragraph, it’s because your brain only requires the first and last letter of a word to be in the right place to recognize the word correctly. Pretty cool, eh?

We’re wired to fill in the gaps. This helps us read gobbledygook, but it also helps us to justify our actions no matter how stupid they may be. We see what we want to see, looking at a Complete Mess and seeing Normal.

Just as our brain views the paragraph above as normal, we see a life of debt, living on credit, and skipping payments as acceptable as okay, because… (fill in the blank with any lame excuse.)

Often I hear from people that it doesn’t seem all that odd to live on credit because everyone around them is doing it. Really? So, to quote my mom, if everyone around you were playing in traffic, you’d be out there too?

Instead of hanging out with others like you to justify the actions that will eventually bring you to your knees, take a look at those that are different to see what they are they doing. How are they managing to live on what they make? How do they say no to the impulse purchases? How do they save?

I love this definition of INSANITY: Doing the same thing over and over again and expecting a different result.

If you want to get out of debt, continuing to use your credit cards isn’t going to get you there. Transferring balances from one form of credit to another isn’t going to either. And spending more than you earn isn’t going to get you there. There is no magical moment where you’ll wake up and all the debt will be gone.

If you’re looking at your friends, families, neighbours and wondering where they get all the money to go on exotic holidays, drive a new car every two years or buy beautiful clothes, it may be that they earn more than you do. Or they may be doing it on credit. Regardless, if you don’t want to be in debt, you have to stop seeing what you want to see and See the Truth.

Truth #1: Money is an exhaustible resource. When you spend it, it’s gone. So spend it wisely.

Truth #2: Credit is NOT disposable income. If you can’t pay for it in cash today, how will you pay for it on credit, with INTEREST tomorrow?

Truth #3: Spending more money than you have is STUPID!

Truth #4: If you don’t have enough money, you have two choice: Slash your Spending OR Make More Money.

Truth #5: If you don’t Save, you will have Nothing when you most need MONEY.

Truth #6: If you don’t Plan, you’ll get nowhere.

Truth #7: You are the person in charge. You have the power to create the life you want. Stop whining and DO IT!

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