Money
Money doesn’t talk it swears.
Bob Dylan

One of my favorite exchanges in It’s A Wonderful Life is when George Bailey and Clarence the angel are warming up in the bridge-keeper’s shed and Clarence is trying to explain to the ever sardonic Bailey that he was sent to help him.

“You wouldn’t happen to have three thousand dollars on you, would ya?” asks Bailey.

“Oh no, there’s no need for money in heaven,” replies Clarence.

“Yeah, well it comes in pretty handy down here Bub,” retorts Bailey.

It does. Money is a necessary evil. It allows you to move in this world, either easily or in fits and starts of desperation. It is essentially a tool. But just like fire, which can either comfort you or burn your house down, it must be managed. My father has a saying (which I will attribute to him although I’m sure someone probably said it way before he did); either manage money or money will manage you.

This is not a post lamenting those who have money. Like Melville said, what are the greatest riches of a wicked man but a fast fish? There are people who make six figure salaries who don’t have the proverbial pot to piss in and there are people making far less who can do just about whatever they please. The difference is the latter group manages their money. Remember, if you make $500,000.00 a year but spend $600,000.00, you’ve got a problem.

Managing your money also allows you to employ it to do good works, donating to the poor, helping you fellow man or community. I give money to the public radio station here in town, my church, and political candidates—but fill in your own causes. How good is it to know you have the means to fund those efforts? If you don’t, who will?

So how do you manage money? I read a great book several years ago(recommended by my father) called The Richest Man in Babylon, by George S. Clason. I highly recommend it to anyone interested in taking charge of their financial well-being. It’s entertaining and funny while delivering sound financial advice that has been true since money was employed. Here are some points it made.

Pay Yourself First. I can hear you now, I don’t have enough money to pay my bills; I can’t be saving any of it. Yes you can; and it’s easier now than ever. Get direct deposit. Instruct your bank to take part of your paycheck and put it into a savings account. Start with five percent—start with ten dollars, but start with something. You can live off what remains. As a matter of fact, you’ll quickly become used to it and your savings will grow in spite of you. This advice also applies to a modern invention: the 401k. If you’re not at least contributing to your company’s match, you’re leaving money on the table*. There are tax breaks too to contributing to a retirement savings plan. No 401k? Open a Roth IRA. In any event, set aside regularly a portion of your pay for yourself. Do it first! If you wait until the end of the month and try to put into savings whatever is left, you will always spend it rather than save it. Direct deposit and defined contribution plans make you save.

Recognize the time value of money. Compound interest is a marvelous thing. The book, The Richest Man in Babylon, describes it as your golden soldiers working for you. But the soldiers need time. You can earn more money but you can never earn more time. Start early.

Diversify. Risk is a necessary part of investing. Diversification has been consistently shown to account for approximately 60% of a portfolio’s performance. Mutual funds can do part of this for you but they must be chosen well. In other words, a mutual fund that concentrated on technology stocks in March 2000 may have seemed diversified until the entire sector went south. Index funds are ideal diversification tools and they don’t have management costs. They simply buy enough stocks to mimic the broader index’s performance. The risk is spread around. Consider also bonds and foreign investments. A good, diversified portfolio keeps your golden soldiers marching and growing stronger.

Watch Your Credit. Pay off your credit cards. Don’t carry a balance in revolving accounts, you just get killed with the interest charges and wither the ranks from which your golden soldiers must be recruited. Do you know what credit card companies call people who pay their balances off every month? Deadbeats. That’s how perverse our consumer society has become, the responsible act of handling your credit and retiring your debt is degraded because the credit card company isn’t making any money off you. In fact, if you pay your balance off every month, you’re stickin’ it to the man! You get an interest-free thirty day float of money. Every dollar you pay in interest is a dollar you could be putting to use for you, adding to you golden army. This applies to installment loans too. If you can, pay a little extra on your mortgage, your school loans, or your car loan. This extra attack on the principal reduces the interest you pay (lost soldiers) and hastens the retirement of the loan.

As our society completes its shift from defined benefit plans to defined contribution plans, saving becomes even more crucial. It used to be you worked for a company for forty years and retired with a pension. It was the company’s responsibility to take a portion of your wages and invest it to create the wealth which would later be used to pay your pension. SOme companies have failed in that responsibility and turned to the business friendly Congress to bail them out, ensuring higher deficits to cover a private sector responsibility.** In short, we the taxpayers are going to be funding the private retirement plans of Delta, American Airlines, and other companies that squandered sums of capital which should have been set aside to pay the employees of those companies.

Now, with defined contribution plans (like SEP and 401k plans) you become responsible for those investments and your own retirement funding. Our President even wanted to extend that to Social Security but the collective country told him to stay away from the last real defined benefit plan for the majority of Americans. Such is the desire of those who advocate an “ownership society.” Incidentally, one of the last remaining (and most generous) pensions plans? Congress’. Go figure.

Wealth is not a zero sum game. Just because I accumulate wealth doesn't mean my neighbor suffers. Especially in a global marketplace, our saving habits can bring prosperity to others. The money invested by frugal savers represents capital for aspiring entrepenuers to develop businesses, products and other inventions which in turn improve our lives and our society. It also ensures that the government is funded through its citizens and not the governments of other countries. Right now, many economists are lamenting this country's deficit and the financing--namely through purchases of Treasuries by countries like China and Japan. This indebtedness leaves us politically vulnerable to the agendas of other countries. This administration, for all its bluster about security, is ignoring the finacial security of the country by spending irresponsibly. And again, having wealth also creates the wherewithal to affect your community through donations.

Throughout the blogosphere there is great wailing and gnashing of teeth over money issues. I believe we as a country are uneducated regarding how to manage our financial affairs. Oddly, at the same time, we are bombarded by media messages emploring us to spend every available (and sometimes unavailable) dime on merchandise to keep up with the Jones' or imitate famous lifestyles. Yet, as we continue to go further into hock to foreign interests, is anyone still claiming that possession of worldy goods brings happiness? I for one take greater pleasure in assuring my child's college education is paid for before she even takes an SAT.I'm not a rich man, but I won't have to worry about whether a check from Uncle Sam will make my retirement possible or not. That Social Security will be cut back in one form or another is a given for just about everyone who reads this--it's a mathematical problem that no amount of political doubletalk can cover. Make sure you have your own plans.
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*A sizable minority of eligible workers - 30 percent - do not participate in company plans, 401(k) specialists note. NY Times, November 15, 2005.

**The Senate passed a bill yesterday aimed at strengthening the nation's troubled system of company pension plans. NY Times, November 17, 2005