Changing how you deal with your money is a little like picking apples. You can go for the fruit that’s high up in the tree – the big wins – or you can focus on the low-hanging fruit: the little things that make a difference over time.

Most people have the room to make positive changes in their money management. Some Spurts argue that cutting out your morning coffee fix is a small step that really isn’t worth what you gain financially. I disagree. While I would never call myself “frugal”, I do believe that picking that low hanging fruit can take you a long way towards your goals.

Pick an expense – any expense –and look for a way to make it lower. Whether you choose to brown bag it instead of eating lunch out every day of the week, or replace your premium cable with library movie nights, the savings can really add it. It is amazing how quickly small expenses start to erode our savings potential simply because we’ve gotten used to spending the money. We go to a movie once in a while, then once a month, then once a week because we’ve become immune to the cost – we’re not even thinking about it – and enamored with the experience.  Ditto buying a cuppa on the way to work: first we do it a little, then a little more, then a lot, and in no time at all we’re dropping $2,000 a year at Starbucks.

Hey, if you have $2,000 to spend on coffee and that’s the way you want to spend your $2,000, go straight ahead. But if you’re carrying any debt, if you aren’t saving diddly squat for the future, or if you’re completely unaware of how much you’re spending then it’s time to reach for that low-hanging apple.

The couples I’ve worked with are always astounded when I show them what they’ve been spending their money on. And sometimes I focus on how often they go shopping… y’know the “You went shopping on the first, the first, the first, the second, the third, the fourth, the fourth, the fourth…” and they’re stunned. That’s the low-hanging fruit I’m talking about.

There are likely lots of low-hanging fruit you can pick. Consider changing your savings account from a stupid account at your local bank that pays you next to nothing, to a higher rate savings account. Or moving your business from a credit card with an exorbitant interest rate to one with a lower rate.

Even taking the time to create a debt repayment plan that focuses on your most expensive debt first, and using snowballing to get to debt free faster is an example of a low-hanging fruit. It’s there for the picking. No ladder required. You just have to reach up and, there ya go, you’re saving. Eventually, once you’ve got that debt paid off, you’ll have money you can use to achieve your other goals.

Moderating your heating and cooling costs with a programmable thermostat is low hanging fruit. So is driving smart and inflating your tires properly to keep your gas use down. Get a better deal on your communications costs – your home phone and your cell phone, your cable and your internet. Consolidate your car and home insurance and find ways to save on your premiums. Challenge yourself to cut $10 a month from your grocery bill. Then $20 a month. Then $30 a month. You get the picture. The opportunities to pick low-hanging fruit abound.

While your quick wins may not pack as big a punch as some bigger wins – getting a raise at work, taking a second job, or changing jobs completely to make more money – each small win gives you a little more money you can squirrel away for a rainy day or to build your long-term savings. And since the low hanging fruit is easy to reach, there’s no excuse not to reach out and pluck. So what low hanging fruit will you pick today?

People are always wishin’ they had more money. It’s a funny thing really since it doesn’t matter how much money you make, a little more is always welcome. But most people don’t realize that the key to having money is simply not spending everything you make. It’s that simple. According the Gail’s Rule #1: You can’t spend more money than you make. If we could just get this one simple rule fixed in our consciousness we’d be well on the way to becoming wealthy.

It isn’t easy to spend less. While some Spurts would have you believe that spending less is easy – just don’t spend – it’s easy to say but a lot harder to do.  Temptation to spend is everywhere. From the chicken that goes on sale at half price pressing your Stock Up button, to the fabulous pair of shoes you are salivating over, there is always a good reason to spend.

You have to buy groceries, right? A body’s gotta eat. And the kids are growing like weeds, so it’s always the right time to buy them another pair of runners or new jeans or a warm sweater. The car needs repairs and even if you do it yourself, there are things you must buy to do it right. Yup, spending money is dead easy. Not spending… now that takes some planning and a serious serving of self-control.

Perhaps the toughest part of implementing a No Spending strategy is the fact that the spending itch brings physiological rewards when it is scratched, while the urge to save often feels like denial. But you can turn that around if you can turn Not Spending into a game that offers it’s own rewards.

Play the Can You Find a Better Deal game to cut your home phone bill, your cell phone bill, your cable or satellite bill, your home and car insurance bills, your bank fees.  People are often amazed at what they can save when they shop around and start negotiating with their service providers. And a savings of just a few buck over a bunch of budget categories can really add up. Put together a list of your regular expenses and figure out how to carve out savings by getting a better deal.

Tyler did. He wrote:

I have a story for you…my auto insurance was up for renewal, and came along with a $600/yr increase. I called the insurance company and within 10 minutes, they lowered my rate by $650…I actually came out paying less than I am now! Wish I had simply asked long ago!!
Turns out there’s a discount for where I work and I slightly increased my deductible – I have an emergency fund to cover that if I should ever need it. Now I’ve got the bug and want to take on the cable company next haha. Any tips?

Play the How Much Can I Save This Month game to see how you can cut back on a variable expenses category by investing a little time and effort into planning.  Save on your grocery money by:

• planning your meals,
• using up all that stuff in your cupboards and freezer before you buy anything else except perishables,
• buying on sale,
• creating a buying group with a couple of friends and buying in bulk,
• usng coupons.

Save on transportation costs by:

• Walking
• Riding your bike
• Car-pooling
• Planning your trips efficiently
• Having one no-drive day a week
• Learning how to drive smarter to save on gas

Play the Spending Holiday game. How many days can you go without spending money on anything but the most essential expenses? Keep a calendar handy and each time you have a Spend Nothing Day, give yourself a star. How many can you do in a week? In a month? Okay, next month can you get more stars?

Accumulating wealth really does boil down to the simple rule “Spend less than you make.” If, no matter how hard you try, you can’t spend less, it may be that you have to come up with ways to make more money.

The average Canadian family spends $7,305 on food a year, which works out to about $140 a week. The average American family spend $6,133 a year or $118 a week.

When I asked the question on in my poll (you have seen the new polls on the front of the blog, right?) “How much do you spend on groceries a month?” here’s what I got. Of the 537 people who answered

• 21% spend less than $300 a month
• 54% spend $300-600 a month
• 18% spend $600-900 a month
• 6% spend $900-1200 a month
• 1% spend more than $1200 a month

Of course, you won’t get out of a specialty grocery store with that small a grocery receipt, so if you do all your shopping in a high-end store you’re probably paying way more. I have a few Princesses that can’t imagine giving up their high-end grocery stores despite not having a cent saved in an emergency fund and no retirement plan. The mere mention of having to trim their veggies or deal with a bruised fruit sends them into spasms.

These chicks also don’t shop with a list, which is the number one way to keep your grocery shopping in check. I never go into the store without a list, and I don’t often shop off-list, although a particularly good sale can see me stocking up. Many people also prep for their shopping with menu plans and some even know when certain items go on sale at the grocery store. My girlfriend Linda is a squeeze-your-own-juice girl and like the discounted fruit section for her juicer.

Sometimes the biggest savings can be found on your receipts. Often scanner errors mean you end up paying more than you should for items. It’s been estimated that in the U.S. scanner errors cost consumers between $1 and $3 billion (yup!) a year. I know I’ve caught a number of errors including fruit codes that have been entered incorrectly.

Comparison shopping is another great way to save money. I grab the fliers and do a read through to see who has what I want at the best price. The flyers also alert me to things that I might want to stock up on for a future cook-fest.

One of the best ways to save money is not to over-buy. I’ve recently implemented the just-in-time shopping system, so my fridge is far less full but I’m also throwing away much less produce. Since I’m at the grocery store a couple of times a week (driving Alex to work), it’s easy to pick up what I need though the week as opposed to doing one big shop and then watch the uneaten cauliflower develop mold.

How much time you have to shop also has an impact on how you shop. Too much time and you wander the aisles, browsing and tossing stuff into your cart. Too little time and you’re all stressed out and less likely to miss best-by dates. And, of course, everyone knows not to go to the store hungry.

We don’t buy a lot of pre-prepared food. Veggie pizzas when they are on sale. And chocolate lava cakes that come in single serves. Pretty well everything else we make from scratch. The other day I bought Malcolm one of those birthday cakes as a treat and he was quite put out. He loves making his own cake, it turns out. The cake was dry so I took it back and used the refund to buy his ingredients, saving about 2/3 of the money I’d initially spent.

Watch the bigger-is-cheaper mindset that accompanies no-name brands and oversized offerings. Check the unit price to be sure you’re getting a deal, particularly on cleaning agents, which can be very expensive. And if you’re using a coupon, applying it against a smaller, lower cost items results in bigger percentage savings.

If you’re lucky enough to live in an area where there are lower cost stores – discount stores, local markets or ethnic supermarkets for example – you might want to hit those first. Also be adventurous about shopping off-brand labels. Share your info with friends and family and encourage them to share their great finds with you. Start an email club with local friends to keep each other abreast of special deals or coupons that will help you cut your grocery bills down and leave more money for other stuff.

At no time do our grocery bills go up more than during the holiday season when we’re spending more money on treats and meals to entertain family and friends. If we’re not careful, the family feast can throw the budget completely out of whack. I’ve been saving up my PC points so that I can get through the holidays with all the extra stuff without overly straining my budget. What have you been doing to prep for the hit your budget will take?

A quick reminder: Tonight is the 100th episode of Til Debt Do U$ Part on Slice @ 9:00 and the first airing of the show on CNBC in the U.S. @ 10:00 and 10:30. For new visitors joining us, welcome!

Here’s the 100th episode interview at TV Guide.

I talk about how important it is to teach our children about money a LOT.  And I practice what I preach. As we were on our way to the beach one day, Alex said, “I love these drives. I learn so much about money every time we head out to the beach! Funny, I didn’t realize the drives had turned into mini-lessons. But each time we’d start out, she’d ask some question that would set me on a roll.

You can teach your children about money in all types of situations: when you’re shopping, while you’re paying the bills, or even while you just out driving. It’s best when the kids’ ask a question that opens the door. But sometimes you can say something that gives your kids an “oh, really?” which they will follow with a question, and then you’re off to the races.

You may not always have a “lesson plan” at hand for what you want to teach, but if you have a good idea of how you want your kids to feel about, and deal with, their money, you always have a framework within which to work. And whether you’re talking to a child, a young adult, or some family member or friend who has yet to see the light, having a core set of messages makes it easier to avoid being distracted by the minutia. Here are mine:

1. It’s not how much you make, it’s how much you keep. I’m a saver by nature, and I’ve tried to instill the habit of saving in my kids from a really young age. If you always spend every red cent you make, it doesn’t matter how much you make, you’ll never have anything. And if you don’t have a something set aside, you have fewer options.

While it might be easy to save when times are good, the real test of your commitment will be to tighten your belt and do without something you really want so you can keep saving even when the money is thin. And since you can count on the fact that times won’t always be good, having something set aside for the leaner months or years can save your butt.

Saving is an investment in your future. Whether you’re saving for school, for an emergency, or for retirement, having money in the bank gives you choices. And there is nothing better in life to make you feel you are in control than having choices.

2. Credit is good. Debt is bad. It’s all well and good to go out and put a $120 dinner on a credit card, but if you don’t pay that balance off in full when the bill comes in, you’re just dumb. Why? Well, you had a nice dinner right? Then you went home and pooped! Dinner is gone. But the balance you’re carrying lives on.

Credit isn’t evil. It’s a tool that must be used carefully. Know the rules, and you can use credit to your advantage. Have no self-control and credit will turn into debt and eat your future. It’s easy to buy stuff on credit that we think we must have TODAY! But if you can’t afford to pay for it in full TODAY, then you’re simply indulging yourself. Unmanaged credit has a way of haunting you for eons. Look at all the people who miss a couple of payments and then watch their interest rates skyrocket because their credit score has gone into the tank. Do yourself a favour: outside of the things that will outlast the credit you may have to use, like a car or a house, don’t step into the quagmire of debt. Instead, use credit to your advantage – to build a good history, for example – so when there are things for which you must borrow you can do it on the best terms.

3. Keep talking, Keep learning. We aren’t shy about money in our house. We talk about how to use it. We talk about the mistakes we make. We learn from our mistakes. And all the while I try to impress on my kids that everybody has their own path to walk. Figuring out what’s important is the first step. The next step is doing something to make what’s important shine.

While I may do my best to teach my children about how money works, it will be up to them to pick up the reigns of their own financial education and keep learning. There are always new things to think about: new products are offered, new investment alternatives are created. If you aren’t constantly learning new and better ways to manage your money, then you’re just proving you don’t really care about it very much. There are tons of great books to read about finance.  And while they may decide that they do not want to be their own investment specialist, insurance specialist, estates specialist, they should at least learn about the choices they are making.

I hope that since it’s been okay to talk about money with me, my kids will also want to talk about money with their partners. Developing financial goals then laying out the plans for how to achieve them means you’re working together… and that’s really important if you want to stay married.

4. A good financial plan is balanced. If you prioritize home ownership over everything else – you don’t save for retirement, you don’t have enough insurance, you don’t have an emergency fund – it is only a matter of time before your plan falls apart. A sound financial plan has a firm foundation that covers all the bases. Putting all your eggs in one basket is a good way to see your plan scrambled if you stumble. (This applies just as much to your whole plan as it does to your investment portfolio.)

I know “financial freedom” is all the rage, but I’ve watch people sacrifice their present to try and achieve a financial goal without really ever understanding what they are giving up. If you’re just accumulating a crap-load of money in the bank, what’s that all about? I would much rather my children understand that balancing today’s needs and wants with tomorrow’s is the key to managing money well. Yes, they need to save so they have options. But if they prioritize more savings over having a life, then all they end up with in the end is lots of money. I’d rather have some money and some life, and I’d like to demonstrate how important that is to my children by showing them that you can save, spend sensibly, and have a great time too.

5. Be conscious about how you spend your money. I watch so many people blunder through their lives, spending money without thinking about it, and then crying about what they can’t have. If you’re operating without a plan – read “budget” – you’re at the whim of whatever you’re dealing with at the moment. Without a plan, it’s pretty tough to stay focused on the big picture. Sure you’re burnt out and would love a vacation, or you’ve been studying your nuts off and would love a night out with friends, but if you’re spending next week’s rent money, grocery money, or telephone bill money to do it, you’re going to be very sorry.

Having a budget means you’re making a conscious decision about how you really want to spend your money.  It is about being aware of how much you have, and prioritizing thoughtfully so you can cover the bases on the things that are important to you.  It isn’t about “doing without.” It’s about “living within” (your means).

Okay, your turn. What are your top five money lessons — the things that form the core of your financial philosophy?

Brent Dobson over at Moonjar.ca wanted me to let y’all know that they’ve just launched their Classroom Contest. A classroom kit is the prize, which includes the Moonjar Leader’s Lesson Plan, 25 Standard Moonjars, a Classic Moonjar, “How the Moonjar Was Made” picture book and a “Conversations to Go about Money” game. Entries may be submitted on behalf of classes/groups through their teachers or parents.

Sometimes we get so caught up in doing The Right Thing with our money – building our emergency fund, paying off debt, saving for the future – that we lose sight of the fact that money is for spending. Now I’m not telling y’all to go out and blow your dough willy-nilly. But if you’re so focused on your financial goals that you can’t let go of a penny for fun and frolic, you may have a whole other problem.

I’m a big believer in balance. It’s about doing the detail, taking care of the must-haves, and having a great life too. It doesn’t always have to cost a lot of money to have fun, but sometimes having fun does cost a buck or sixty and we need to be willing to play.

It’s easy to get trapped in the We-can’t-afford-it mindset when you’re struggling to get back to even. Comes a time, however, when baby’s been taken care of, house is tidied up, and the paperwork is in order to just have a great time.

It all very well to have financial goals, but I get letters from people who have swung so far to the side of frugality that they are positively miserable to live with. Here’s a letter I got from a young girl (you might be surprised at how many letters I get from kids). A wrote:

Dear Gail. I watch your show with my mom and I know you’re always telling people to find fun free things to do so they don’t have to spend their money. But is it ever okay just to go out and have fun without thinking about money. My mom and dad don’t ever go to a movie or out to eat. We always take our own food wherever we’re going. And every time someone gives me money for my birthday, my mom makes me put it in the bank for school. So what’s the point in working hard for money if  you never have any fun?

A, m’love, what is the point indeed? I don’t know how old you are but you sure sound pretty mature to me. And if I could have a conversation with your Mom, I would tell her that taking care of the future is important. So is planning for the emergencies – little and big – that life throws your way. But having fun is important too. A, you’ll notice that on my show every budget I create has some money set aside for “entertainment.” I think planning to have fun is part of having a balanced life. I suggest you sit down with your Mom and Dad and talk about what you can do as a family to free up some money for a Fun Jar.

One of the reasons people sometimes go overboard with their frugality is that they’re afraid. They can imagine a time when they will no longer be working and wonder how they will manage financially. Or they imagine their kids heading off to college or university and dread the thought of them graduating with a ton of debt.  But if all you focus on is the bad that can happen, if you take Plan Like a Pessimist to the extreme, you’ll be so busy covering your butt you won’t have experienced any of the joys that make for a great life. Live Like an Optimist is also part of the equation. And Living Like an Optimist means having faith in your ability to make more money so you can spend some of what you have  now to have some fun.

I’m not suggesting anyone spend money they haven’t yet earned: shop on credit. But I am reminding those of you with strong feelings about meeting your financial goals that life can sometimes be short, and if you’re not having a good time on the journey, the destination will, in the end, suck!

Oh, BTW, on the issue of putting birthday or other gift money in the bank, I’m constantly surprised at how parents treat their children’s “birthday money” as if it’s any different than the doll or truck it’s a substitute for. So, if your kid got a X-box for her birthday, would you make her take it back to the store for a refund so you could stick the money in the bank? If not, why do you treat “birthday money” as if it’s not for fun?Unless it’s been gifted with the explicit purpose of boosting savings — say for school — banking it is tantamount to Scrooging your child.

Do you understand the odds involved in winning a lottery? Lets take the 6/49 lottery that operates all over North America as an example. To win top dollar, you must have chosen the six numbers drawn. Your first number has a one in 49 chance of being right. The second number has a one in 48 chance – ooh the odds are getting better – since there is one less number (the one drawn) in the pool of potential numbers available. But wait a minute. To get both these numbers, the odds go down to one in 2352 (49 times 48 = 2352). Oops.  You have  a one in 110,544 chance to get three correct numbers (49 x 48 x 47 = 110,544), a one in 5,085,024 chance of getting four correct, a one in 228,826,080 chance of getting five correct, and a one in 10,068,347,520 chance of getting all six correct. That’s right, you have a one in 10 billion chance of winning the 6/49.

The lottery has been called “a tax on stupidity” for a good reason. With odds like one in ten billion, a half-wit knows better than to throw good money away on something less likely than getting hit by lightening… since the odds of being struck by lightening are only 1 in 56,439!

So why do we do it? If we are three times more likely to die in a car accident on the way to buying a lottery ticket, than to win the lottery, why do we routinely plunk down our dollars for the blue-moon opportunity to hit it big?

Even if we are aware that our chances are slim to non-existent, when we think about winning the lottery, a warm feeling of optimism surges through us. All the problems would go away. All that money would mean freedom from stress and worry. And hell, a vacation or twelve, maybe some new shoes, goshdangit, we could pay off the house!

There’s big money is selling the dream. According to the Stats Man almost sixty percent of the profits earned by government-owned business enterprise (called GBEs for short), came from lottery, gaming and liquor enterprises. In 2005, that added up to $10.7 billion. Holey Moley!

Naturally, as economic pessimism grabs us and ties us in knots, the need for optimistic relief only escalates. In February of this year, in just one week, $79.5 million worth of lottery tickets were sold across the country. OMG! That’s a whopping amount of optimism, don’t you think? Perhaps lottery as entertainment has morphed into lottery as last resort. Sad.

David Just, an associate professor of economics at Cornell University has been studying lottery sales in the U.S. over the last decade. He and his team found a strong correlation between poverty rates and lottery ticket sales. It seems lower-income earners buy almost twice as many tickets. And as people feel less in control of their own destinies, we are more willing to throw over good old fashion common sense in favour of luck and chance.

Lottery sellers and casino operators say they are in the business of “entertainment.” But the cost of this “entertainment” far exceeds most people’s budgets.  And if every one of those $79.5 million worth of tickets sold in one week last February was money that could be spared, I’d say, hey, it’s your money, dream on. But with record debt, savings lower than a snake’s belly, and unemployment on the rise, I warrant that some of that money came from people who could ill afford it.

I’m getting off my soap box now. I will leave you with this thought:

Spend $20 a week on lottery tickets from age 25 until you retire, and you’ll have blown $41,600 of money that could have been invested.

Put that money in an RRSP, earn just a 5% return on average, and you’ll have a total of $132,744.76.

So, do you want to dream away $41,600, or would you rather have more than three times that when the time comes to hang up your spurs?

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.

By the ages of 7 to 9, you can start focusing your “money lessons” on deferral of gratification. Most parents are all too aware of the “see it, want it, gotta have it now” attitude. Lots of parents are happy to demonstrate it for their kids, so it’s no wonder kids learn this lesson so well. And even if you are a planner, in all likelihood you haven’t take the time to explain this to your kids so they see, “What Mommy wants Mommy gets!”

Next time your child expresses an interest in buying a new doll or yet one more Lego kit, make a chart to help her see how long she has to save to get the money for the item. Find a picture that represents the item your child wishes to buy and paste it at the top of the chart. Draw boxes for the number of weeks she will have to save. So if the item costs $10 and she gets $2 allowance each week, you’ll draw five boxes. Also, staple an envelope to the chart. Then, each week when you give her the money, she’ll put it into the envelope and mark off one of the boxes. This will show her that she can’t always have what she wants right away. Sometimes it takes time to save up the money we need. Teaching her to save for small purchases now will prepare her for longer-term savings when she’s a bit older.

It’s important to teach kids to be discerning customers. Ask your child to make a list of all the things he would buy if he had $100. Then ask him to choose the three items he considers most desirable and answer the following questions: What do I like about it? What don’t I like about it? How long will I want to play with it? What’s the best price for it? How could I get it and spend less, or nothing at all? Tell him that sometimes it’s really easy to be attracted to an item because a friend has it, or because it looks great on TV, but you need to think about why you want it, and if it’ll do what you expect, before you buy it.

Make trimming household expenses a family affair and teach an important money lesson along the way. Assign your kids one or two responsibilities for meeting your household budget — turning off lights to save on electricity, coming up with lists of grocery items for their lunches so they waste less food, etc. Any money you save can go toward a family goal, such as a new computer or a vacation. This will show your kids that balancing today’s needs with tomorrow’s dreams sometimes means you have to find ways to waste less money.

 When kids are 10 to 12, it’s time to explode the myth of the bottomless wallet. To some children, parents with regular salaries seem rich. It doesn’t matter that we say we have no money, they don’t believe us. We have those credit cards. And then there are those cheques. To demonstrate just how little disposable income is left after expenses are met, ask your child to:

•  List all the things he thinks you have to pay for?
• Estimate how much each costs?
•  Estimate how much you earn

Now, go over the figures and fill in the gaps or correct the misperceptions. Wherever possible, show your child a bill to make the cost concrete. Total up the expenses. (You’ll also have to introduce the costs you pay less regularly, like insurance, dental bills and holidays.) Deduct it from your net income. Decide together what to do with what’s really left for entertainment — take in a movie or hit McDonald’s for lunch. (Really want to bring this lesson home? Consider using stacks of real money to show your children how the cash flows out, and just how quickly. Reserve your Brinks truck today.)

How are kids to understand why we can’t order pizza every night if they don’t understand how that would blow the budget? Assign your child one night of the week for dinner responsibilities, along with one-seventh of the dinner budget. She’ll have to come with you to the market and choose the items for dinner that night. She must plan a balanced and delicious meal. Dessert would be nice, too.

Choose an activity your child likes to do, such as piano, baseball or renting movies. Put the amount of money, divided by 52, into your child’s regular allowance and explain that he must set that amount aside each week for his lessons, Little League fees or video rentals. Tell him there are lots of things we have to plan for before we can pay for them, and that means setting aside a little money each week to cover the costs. You can use labelled containers or envelopes to store the money for future spending.

 Teenagers are old enough for lessons on RRSPs and investing. RRSPs can help teach kids the difference between short-term (I’m spending this money imminently) accumulation, which I like to call “Planned Spending”, and long-term (I’m not going to touch this money no matter what) savings. Another lucrative lesson children can learn from an RRSP is the one about compounding return.

Unlike saving, taxes aren’t intuitive so you have to explain why they’re necessary, how they’re calculated and how much less you have to live on after they are paid. While there’s no point in your child claiming a deduction when she has so little income, the deduction can be carried forward indefinitely. When she does start working full time, she’ll have all those saved-up deductions, which can be used to offset the tax on her income.

Whether your kids are walking dogs, shovelling snow or babysitting, as long as they get a social insurance number, keep their financial info straight and file a tax return in order to qualify their earned income, they can begin to contribute to an RRSP. Since they don’t have much in the way of taxable income, they can hold their deductions for later years when they are paying more tax and could use a break.

Next: Teaching Kids About Credit

Usually when we think about cutting back, we target stuff like coffee, lunches out and cable television. Wasteful, pointless things that simply bring us pleasure but no long-term payback. You probably get tired of hearing people say, “Skip lunch and you can save $10 a day, or $50 a week. That’s $2,600 a year.” Who wants to skip lunch every day? Besides if I skip lunch for a month and save $200, and then turn around and buy two tickets to see Jersey Boys, I’ll blow through my lunch savings in one sweep of the credit card…k’ching! Which is exactly the problem people have “saving” money.

Mentally, we perceive our various pots of money as having different values, and we react to them in different ways. The money we’ve committed to our Super-de-dooper cable package is “spent” money, even though with one quick call, we could cut our costs in half, and slam $50 a month more against our mortgage every month. The money we blow on our cell phone is “sunk” money… we’ve already spent it by the time we get the bill… even though a call to revamp our plan, and a commitment to using the phone only within the parameters of our plan could save us hundreds of dollars every month. We think switching banks is too much trouble. Gosh, just think of all the auto-debits you’ll have to change. We think of switching telephone providers as a major pain in the butt, even through we could reduce our long-distances charges significantly. We think of switching from Buying New to Buying Used as just plain yucky.

We have a saying in Jamaica: Every mickle makes a muckle. It’s much like the saying, “Take care of the pennies and the pounds will look after themselves.” If you even remember what a “pound” is.

Whenever I start telling people to find ways to save, they start finding ways to tell me why they can’t be bothered. “Sure, I can give up eating lunch out and save $25 a week,” they say, “but what’s that really going to get me?”

If I could show you a way to save $30,000 off your mortgage and cut three years off your repayment, would you be interested?

On a $250,000 mortgage at 6% amortized over 25 years, if you find a way to add an extra $100 to your monthly payment, you’ll save $32,640 off your mortgage and chop 3 years off your amortization. Want to see how you’d do on your own mortgage. Head to Citizens bank’s mortgage payoff calculator and let it do the math for you.

Most people never realize the gains they could make because when the do something to “save” money, they leave their “savings” in their wallet, where it eventually vanishes into a cup of coffee, a new magazine, or a DVD for the kids.

If you want to make your “savings” work as hard as you do, then you’ve got to apply them somewhere important quick, quick like a bunny. Let’s say you do decide to trim your lunch habit by $25 dollars a week, or $100 a month and use that money to pay down your credit card balance. Each time you don’t spend that money, take it home and put it in your Credit Card Jar. When you get to the end of the money, apply it to your balance, and watch your interest costs drop.

“Saving” doesn’t have to mean giving up everything you love to do. It just means looking for ways to take the money you may be spending unconsciously, and finding better uses for it. It’s moving from the routine spending we do habitually, to purposely deciding to buy that beautiful bunch of flowers, that warm, delicious muffin, or that cozy new pair of gloves. And if we decide we’re going to cut back on something so we can have something else – OMG, you mean prioritize?! – then we’ll apply those savings to our big goal before we have to chance to blow them.

I’ll bet there’s a bucket-load of ways you’re spending unconsciously… blowing money that could better be used to pay down credit cards, get rid of big, fat mortgages, build up emergency funds. I’ll bet you can find the $100 a month that’s gonna save you $30,000 off your mortgage. Why don’t you take a look?

The level of desperation in the letters I’ve been getting has ratcheted up quite a few notches over the past couple of months. People who haven’t been paying their taxes are watching their bank accounts being tapped by the Tax Man and having to explain to their mortgage lender why they can’t come up with a payment. Creditors are calling non-stop. Families are watching as their weaker links break; desperate as they are to help, they have little enough resources of their own.

I’ve done a fair amount of interviews with the media recently.  While doing The Motts on CFRB, I got one call from a man in his sixties who had lost 40% of his retirement portfolio and wanted to know what to do now. A little like trying to close the barn door after the horses are out, dontcha think?

If you are less than 10 years from retirement, you do NOT have a long-term investment time horizon, and you should not be heavily invested in stocks (which include stock-based mutual funds). I told this man he should have been more conservatively invested. He said he was. I replied that no conservative portfolio lost 40% in the recent shake-out, so he’d best have a word with his financial advisor.

People, if you’re going to be investors – if you’re buying mutual funds, bonds, stocks, anything other than boring GICs – you HAVE to know what you’re doing. You can’t just take someone else’s word for it.

As is typical, now that people are “scared of the markets” diversification is still NOT the name of the game. The solution to having been overly weighted in equities when the crash came is NOT to be overly weighted in fixed-income investments in the aftermath. The solution is to figure out what your asset mix should be, and then execute a plan and stick with it. Diversification is all about balancing your need for return with your time horizon and your risk personality. Running and hiding isn’t a solution.

For those of you who think this is a once-in-a-lifetime opportunity to get into the market, you may be right. But don’t just throw your money wherever… there are still a lot of downs to go. Create a plan, and then dollar-cost-average into the market. Think about where the world will be 10 or 15 or 20 years from now. Course, if you’re gonna need the money any time soon, the market’s not for you. But if you won’t, if you’re 20, 30 or 40 and putting this money away for retirement, create a plan NOW.

As for all the people whose knees are knocking together and who just want a safe place to park their money: Canada Savings Bonds, GICs (stay under the CDIC limits), and high interest savings accounts are all still here. Just don’t whine and complain about the current interest rates. With prime the lowest it has ever been, interest rates aren’t really at the top of their game right now.

If you’re tempted to take advantage of the miracle  investments springing up that guarantee a much higher rates of return, then you were the sucker born today. There’s no such thing “a great return guaranteed”… just ask all the people who got soaked in the ABC debacle. If it sounds too good to be true, it’s too good to be true.

People are doing all sorts of dumb things in reaction to the markets, and because they weren’t prepared for anything going wrong ever. People who are losing their jobs, losing their homes, losing their retirement nest eggs are panicking. But responding to the current economic turmoil emotionally isn’t going to get you where you want to be. So stop, breathe, and take rational, well-thought out steps to get to where you want to be next.

Pay down your debt. It doesn’t matter if you have to work three jobs, get the debt paid off. Give yourself a V8-Slap and swear you’ll never do it again! If you can’t do it on your own, head to a bank… it doesn’t have to be your bank… and get them to help you figure it out. Or find a friend who can help. And if you’re really desperate, go see a bankruptcy trustee to determine if that’s the only option left.

Don’t stop saving. If anything should prove to you the need for a pool of money for emergencies, this should be it. It may be tough to find $50 to stick away, but things can always get worse, so make like a boy scout and be prepared.

Look to the future. You’re still going to need money for retirement, so don’t stick your head in the sand on the investment front. NOW is the time to figure out how money works and what you can do to make it work for you.

Don’t stop saving for your kids’ education. Don’t take money out of your retirement plan to make ends meet (get a job!). Don’t use a line of credit as your emergency fund.

Do pull together with friends and family to figure out the best ways to weather this storm. Do keep on top of where your money is going every single day. Do make a plan for staying on budget, getting out of debt, and building a nest egg for the future.

There’s no magic to creating a sound financial foundation. I’ve been saying it for years, and you should be bored by now: spend less than you make, create an emergency fund, get your debt paid off, save some money. I know it doesn’t sound like rocket-science. It isn’t. But money management isn’t rocket-science, it’s discipline. The basics work, and if you’re not doing them, you’re never going to be anything but financially unbalanced… and miserable.

One of the most difficult parts of allowance-giving for most parents is establishing expectations for how that allowance will be managed. Does a child have the right to spend all her allowance on anything she wants every week? Actually, while it’s her money, the liberty to spend at will does nothing to teach good money management. In fact, it isn’t a liberty afforded to us as adults. Since we are required to spend a certain amount of our hard-earned money in fixed expenses, regardless of what we want to buy ourselves — we have to keep a roof over our head and our children fed — allowing kids to do as they will with their entire allowance isn’t a true representation of money management in the real world.

In learning how to manage money, children need to see that there are a variety of purposes for money, not just the immediate gratification of spending it. Spending is a part of the equation, but so too is saving and sharing with others less fortunate. 

Look at an allowance as having three components: (1) the part to be saved, (2) the part to be shared, and (3) the part to be spent. This third part of the allowance equation can itself be broken down into two parts: the spending kids want to be able to do on a whim (their mad money), and the spending they intend to do based on specific expenses and expressly stated goals (their planned spending). Spending on a whim comes naturally to most people. Saving, sharing and planned spending are all ideas that have to be introduced, practiced and reinforced.

One way to clearly differentiate between the different purposes for money is to set up money holders for each purpose. Believe it or not, this is where the idea for the Magic Jars came from. In my book, The Money Tree Myth, I recommended that parents use four containers, clearly labeled: Savings, Sharing, Mad Money, Planned Spending. When it came time to do TDDUP, those containers turned into jars, and the rest is history.

The reason the jars work for children (and apparently for adults too) is that they make the finite nature of money visual. There is only so much. If you spend it one one thing, you won’t have it to spend on another. When the money is gone, you have to stop spending. (As adults, we’ve lost touch with the idea that money is finite because we’ve fallen into the trap of using credit to fill the gap. Living on the Magic Jars puts people back into touch with the fact that money is a limited resource and you have to plan if you want to get to the end of the month before you get to the end of the money.)

The rule of thumb for saving is that you should save ten percent of your income. If your child gets five dollars a week, the first expectation to set is that 50¢ needs to be put in the Savings container. The rule of thumb for sharing is that you should put aside five to ten percent for charity, so if this is something that is important in your household then into the Sharing container should go 25 to 50¢.

Now comes the hard part. What percentage of the remaining money should be planned spending versus mad money? That depends on whether your child is expected to pay specific costs for herself, and what long-term spending goals she has.

Let’s say, for example, that as part of her allowance you provide your child with enough money to pay for her bus fare to and from school each week. That money should be set aside in the Planned Spending container to be used each day as needed. If you expect your child to buy gifts for special occasions from her allowance. together, you’ll have to figure out how many gifts are bought each year, and how much of her allowance needs to be set aside each week so the money will be there when the special occasions roll around. (You may also have to set up extra jars so your child can set the money aside visually.)

Your child might also have a special purchase in mind, like a new Ip-Od. Help her determine how much she needs to put aside each week so that dream can become a reality. And help her come up with a system for monitoring her progress so she stays motivated.

The rest of the money is mad money. She can spend it or she can put it towards her Planned Spending goal (the Ip-Od). She can do anything she wants with it!

Alex is about to head off on a European trip with her school chums. I paid for the trip, she had to come up with the spending money. We were talking about how much she had last night, and she was commenting on how her friends are scrambling to find money. “But they’ve been shopping,” she said. “Every time I wanted to buy something, I thought about the trip and then thought how badly I wanted the thing or the money for the trip.” See, it works. Finite resource. Infinate spending opportunities. And the opportunity to figure out what you really want!

Next Week: The Strings Attached

A lot of the language around money is incredibly confusing to people. I’m not just talking about things likes TIPS and TIGRS, I’m talking about things as straight-forward as saving and investing.

Let’s look at the word “saving.” If you go shopping and something usually costs $50, but you pay only $25, you’ve just saved 50% or $25. Really, that’s what you saved (the verb). Except you actually don’t have anything to show for it, because what you did was Not Spend $25. Now, if you took the $25 you did not spent and put it away to grow on your behalf, THAT would be “savings” (the noun.)

In fact, if you put that $25 you “saved” into an ING Account and started earning interest on it, that money would, in fact, be “invested.”

Investing means putting your money to work for you. If you stick it under your mattress and it earns you nothing, it’s not invested. If you stick it in a stupid account that pays you just 0.25% interest it’s invested, although you could probably do better.

And it’s in the desire to “do better” that people really screw up the idea of investing.

Most people aren’t happy with what they consider a paltry return, particularly when they read news of people earning far better rates of return. They want their money to work harder on their behalf. So they head off to find an investment that will generate more return. But, far too often, they crave the high return without understanding the risks associated.

Here’s one rule of investing Smart People accept as a reality: The higher the potential return on the investment, the high the level of risk you have to assume.

“Risk”, what risk? Well, it may be the risk that your money will vanish, buh-bye, because the investment you’ve chosen is a really bad one. Or maybe it’s the risk that the company you just bought, that has years of positive earnings, just suffered a major set-back (think Maple Leaf foods and the listeriosis outbreak). Or maybe it’s the risk that the investment has already gone through a rapid growth (which is what caught your attention) and is now settling into Not Much Happening for a few years. Hmmm.

There are loads of ways to invest. You can stick with the tried and true savings account, tie the money up a little longer in a certificate of deposit, or buy a bond. You can look to the stock market, and choose individual shares of companies you feel have promise. Or you can decide to diversify by using a mutual fund to spread your eggs over several baskets.

Each of these “investment options” or “investment vehicles” is just a different way to put your money to work. Each has positives and negatives. If you’re an “investor”, it’s all about finding ways to put your money to work so it earns you more money.

Here’s what investing is not. Investing is not gambling. When a gambler lays his money on the table, he’s betting on an outcome that is uncertain. He might win. He might lose.

Hang on a second. That sounds an awful lot like investing in some stocks. What about those penny stocks? Those high-risk ventures? There’s no way to know what the outcome will be.

And this is exactly the problem with how some people invest. If you buy based on a hot tip, you’re not an investor, you’re a gambler. If you buy based on what everyone else is doing, you‘re not an investor, you’re a gambler. And if you haven’t done your homework you aren’t an investor, you’re a gambler.

True investing isn’t an easy thing to do. It takes research, analysis and hard work. You only put your money down once you’re pretty sure (no, you’re not guessing or hoping or wishing) that there’s a reasonable expectation of profit. The risk isn’t completely gone, but you’ve done enough digging to know exactly what those risks are and what to watch for so you’ll know when it’s time to sell your investment.

Everybody wants to make money. And the stock market, the bond market, the commercial paper market all look like easy ways to take a dollar and turn it into ten. There’s no sweat. It seems to happen by magic. And everyone has a great story of easy money made in an up market.

I’m here to tell you that if you buy that, you’re a sucker. Investing isn’t easy. If it were, all the guys who are trying to convince you to become an active trader would have their own islands somewhere because they’d be rich! They could just make it big and spend the rest of their lives in Margaritaville, right?

No, investing takes hard work, constant research and discipline. It takes real smarts. Not every idiot can make money in the markets. And it takes a knack, which is why gurus like Warren Buffet become stars.

For most of us, the investment world is big and scary. But letting fear get the better of us and staying away from opportunity can be a mistake too. The answer to the investment dilemma is to:

• Know yourself, your time horizon and your objectives
• Find a body who can help to guide you through the investment maze, and
• Learn. Learn more. And keep learning so you become more comfortable with investing.

Next Wednesday I’ll talk about how to know yourself, your time horizon and objectives.

Gail Club News: I have people in Hamilton, London and Ajax/Pickering who want to hook up. If you would like me to put you in touch with them, email me at getgvo@gmail.com and I’ll put you together. 

I have a Happy New Year present for you. Y’all have been at me to make the budget worksheet a download so you can keep it on your computer. Some people have been creative and done up their own budget at home. One very determined woman created her own version of my budget for download. Hmmm. I guess you really want it, eh? Okay, then. You win. Now when you go to the worksheet, there’s a download button. Click that before you start making your budget if you think you’ll want to keep it.

I’ve been getting a lot of questions – at least 50 a week – from people who haven’t bothered to read the instructions that go with the budget. Really, people! Taking a shortcut just ends up taking longer.

People sometimes want to debate with me whether an expense category should be fixed or variable. I get long letters from people telling me why a budget category is in the wrong place. I don’t care. If you want to make the expense a “variable” expense, feel free. When I created the budget worksheet, these are the choices I made. But you should feel free to make your own.

People also want to debate the validity of something being in the LIFE category, as if LIFE isn’t a valid category. I get letters from people all the time objecting to the fact that “childcare” is a LIFE expense. They find that childcare drives their LIFE category out of the acceptable percentage so they want to put it somewhere else.

Do you want to put your childcare expenses under Housing? Transportation? Savings? Debt Repayment? Those are the other options. The percentages I give are guidelines. If you’re spending nothing on debt repayment – yeah! – that means you have another 15% to stick in any of the other four categories. But if you’re over the top in one category, it means you’ll have to cut back on the others. So what if LIFE is 50% of your spending. As long as your budget balances, you’re saving at least 10%, you’ve got no debt,  and you’re happy, you’re fine.

The other huge misconception seems to be around the debt repayment category. Yes, the guideline is 15% of your income. But what that means is if you are spending more than 15% of your income paying off your consumer debt you have far too much debt. IT DOES NOT MEAN you should only put 15% of your income to debt repayment. You need to put as much of your income into debt repayment as necessary to get all your consumer debt paid off in three years or less. And if that means your debt category is up to 25%, 30% even 40% of your income, so be it. Then you have to cut back elsewhere or make more money to have enough for the other categories. If you’ve dug yourself a deep hole, it’s time to grow up, suck it up, and pay it off!

Savings is another area people have questions. Yes, your company pension plan counts toward savings. If you want the savings number reflected on the budget, add the money going to your company pension in to your income, and then take it out again on the savings line.  Or just know that you’re setting aside 8% for savings (or whatever it is) and make up the difference on the savings line.

The 10% rule applies to long-term savings. Emergency savings is separate. So is saving for your kids’ education. And if you’re saving for a vacation, a downpayment on a home, a new car, those need their own lines on your budget and do NOT belong in the “savings” category because they are, in fact, “planned spending.”  Ditto that money you’re automatically deducting from your paycheque for savings bonds, when you plan to use those bonds to buy Christmas presents. That’s your Christmas fund, and it may need it’s own line on your budget. But it’s NOT savings.

“Savings” is the money you NEVER spend unless you are destitute or have so much money it doesn’t matter anymore.

If you’re accumulating money for any purpose, it’s “planned spending.” And the best way to keep your “planned spending” organized is to have a line on your budget and a savings account set up for each category.  That means you may have to customize the budget to your specific needs, which was why I never bothered to make the budget a download to begin with. I thought y’all would fill it in, print it, and then make your own version. I sorry I never allowed for the spreadsheet-challenged amongst us, of which there appear to be plenty. But now that you have the budget worksheet to work with, you can still make changes to make it work for you.

I recently received a mighty big question from  NM and thought I’d share it and my answer here since she is asking a lot of the same things many other people are asking and I can kill many birds with this one stone.  NM writes:

I recently bought your book and in it, you suggest Disability Insurance, Critical Illness Insurance and Life Insurance. I’ve made a spending plan and am trying to figure out how/when/where these insurance products would fit in. Now that you’ve convinced me insurance isn’t evil, I’m wondering… I’m 24 (about to turn 25), single, and I just started a new job in June grossing $33,000/year. I have about $6,500 owing on a line of credit at 8.5% interest and $2,000 on a credit card at 19.97% interest. My question is: do I need all three types of insurance? Should I get them now or wait until I pay off my debt? And how do I figure out how much disability or critical insurance I would need? I’m assuming that once I move out on my own or collect any assets I would need to look in to getting Critical Illness or Disability insurance?

NM, since you are single and young, you’re most important insurance step is to get disability insurance. Not any old disability insurance, but the very best disability insurance you can afford. (Tomorrow I will post a guest blog on disability insurance from a Guy In The Know, so read it.)  Life insurance is important when you have assets and dependants, and since you have neither, and are still very young, this doesn’t have to be a priority. Critical Illness insurance is also useful, but I often recommend it for those who can’t get disability insurance because they are old, and that’s not you. So, the best DI you can find, m’girl, that’s what you’re after.

NM went on to say:

Speaking of debt, I plan to pay off the 19.97% interest credit card debt and then start an emergency fund (meaning I will have a very small emergency fund until I pay off that high interest credit card). I was then going to put away about $300 per month for emergencies. 5% of my income goes in to my company’s pension plan; I was also thinking about increasing those contributions once I pay off the credit card. Should I save less and continue making huge debt repayments? Or should I work on boosting my savings even though it would take me longer to get out of debt?

Also, my company’s pension plan acts like an RRSP in that my income is taxed after the contributions are deducted. My company also matches my contributions. The plan is locked, meaning I can’t get to the money until I retire. Is there any downside to having this type of a pension plan (for ex. I can’t borrow against it to get a house, etc.)? I want to contribute the maximum to this plan, but I’m wondering if I should also get an RRSP?

Thank you for this book–I can hear your voice talking to me through the pages! I plan to use it to guide me in to being a Woman of Independent Means.

Good questions all, NM. Focusing on getting your debt repaid is the right thing to do, particularly since you are not ignoring either your long-term or emergency savings. When I work with my fams, I often start them off saving only $100 a month for each, just to get the habit established. You’re already doing this so go nuts on the debt repayment.

Since 5% of your income goes toward your company pension plan (which is fine, by the way) and they match your contributions, that means you’re saving 10% long term. Perfect. And $300 a month for emergencies until you get to the months’ worth of Essential Emergency Expenses is terrific. As for not being able to borrow against your retirement savings for a home, I’m not a huge fan of this strategy. Once you have all your consumer debt paid off, take the money you were using for debt repayment and start building a Home Downpayment Fund.

I’m glad you’re enjoying A Woman of Independent Means.  It’s always good to hear when people are using the book to make more sense of their money. I’m working on an outline for a new book, but if you stay this course you’re on, you won’t need it! Ha!

This is my final blog of the year, so I want to wish you all a very healthy and happy 2009. Last year I made a resolution that kept me sane through all my ups and downs. Being the stone in the river was one of the things that got me through the tough changes at the end of the year. (All your hugs and my emergency fund were the other two.)

We have been in our new home now for almost a month and things are settling down and developing a rhythm. I want to thank you all from the bottom of my heart for all your good wishes and kind words. I believe that it was being wrapped in your positive energy that made the last couple of months bearable. Now I can hardly wait to see what 2009 has in store for me!

The best to you all. I am so proud of so many of you for seeing the light and taking control of your money and your lives.

Hey, I’m almost out of success posts, so if any of you want to share your stories, please send them along so everyone else can be inspired by you, or can share their wisdom with you to help you along.

One more thing: Since we’ve covered a lot of ground in the past year, is there anything in particular you’d like more information about? I already know you want more on investing, so I’m going to work up some stuff on that. Anything else?

Cheers, with heaps of love, and great big hugs.

Have you ever hear the term “seed money”? Know where it comes from? In the farming world, you always had to hold back a certain number of “seeds” to start your next-year’s crop.

Imagine that you’re a farmer and have decided to grow corn. At the end of the season, you grind and eat all the corn you’ve grown. How will you start your next year’s crop? So you set aside some of your corn to use as seed to get your crop started after the winter. And you set aside a little more of your corn to take care of whatever other crap hits the side of the barn.

If each year you found a way to plant enough corn to live comfortably and start your next year’s crop, you would have reached what economist call a “state of equilibrium.”

Suppose that in spring, after you had planted all your seed,  a hail storm hit just as your corn was coming up, ruining your crop. You could starve, or you could go and borrow seed from another farmer. Or you could have had some extra corn set aside just in case.

If you did have that extra seed at the ready, you would have been prepared for the emergency. And if you planted a little extra corn each year, saving a little more seed each harvest, and increasing your production over time, you’d be growing your assets.

Without an emergency seed supply, you would have to borrow seed or starve. The farmer down the road might be very willing to lend you 100 seeds with the agreement that when you harvested, you would return 130 seeds to him, since he couldn’t plant those seeds to increase his own crop.  See how interest works?

Now you’d have to pray that you could make do on the crop you bring in, less the 30% you have to give to the other farmer for lending you seed. Or you have to find a way to make your crop produce a higher yield so that you offset the cost of borrowing. Complicated, isn’t it?

Imagine that instead of saving some of the seeds from your next crop, you decided to sell the whole shebang because you wanted to buy a shiny new truck. Without seed money to start your next crop, you’d be back to borrowing and paying interest. Course the truck’s not quite so shiny, but you’re still out-of-pocket all the seed you spent. Hmmm.

Even with the vast improvements in fertilizer and pest control, you just can’t bring in enough crop to pay back the seed and live through until the next harvest. So instead of borrowing 100 seeds, you borrow 200. Now you must return 60 seeds to your friendly farmer, putting you even further behind the interest harvester. I guess borrowing to pay off debt just doesn’t work, huh?

Of course, you could just cut your current consumption so that you could not only have the seed you needed to repay the friendly farmer, but set aside your own seed for the next crop. So, out of what you harvested from the borrowed 100 seeds, you’d have to give your friendly farmer 30%, and set aside an additional 30% for your own future, leaving you with a measly 40% to live on for the year! Yes, that might mean going without a lot of things, even some basic things, but it would set you straight. That might be the smart thing to do.

Of course, if the townsfolk convinced you that there’s no way they’d ever let your farm fail because they needed your corn and would also keep you in business, you might be convinced to take their bailout plan and continue consuming the products and services they were offering to keep them in business. Sound familiar?

But when your next crop came in, as did all the crops from the surrounding farms, and there was way more corn than the town’s people could eat, you might find them unwilling to pay the amount for your corn that you’d been banking on. Ooops. So now you have a surplus of seed, but no money to buy the other things you need like meat and ale. Guess your back to cutting back.

The principals for money management are simple. If you have 100 seeds and you use up 100 seeds for whatever reason, you’ll have nothing. If you have nothing, then you’re going to have to borrow to move forward. If you borrow, you’re going to have to pay to use someone else’s seed. And that’ll cut into how much seed you can keep. Or you can go to work for another farmer, busting your butt 18 hours a day to do two jobs, and finally re-establish a state of equilibrium.

Of course, if you want to have some seed for when you don’t have the poop to work that hard anymore, equilibrium won’t be enough. You’ll need to set aside extra for those latter years, or plan to die in the field.

The term “seed money” has come to mean the money you saved and used to establish something new. Whether you want to restyle for retirement, stop working for The Man, or take time off to ruminate with the cows, if you don’t have some money, you probably can’t grow your dreams.

p.s. I’ll comment on the case study tomorrow. g