Tuesday, June 19, 2012

Thank You to My Parents, for Letting Me Be Stupidly Naive with Money (Seriously)

For two years, I lived in a Brooklyn building built illegally on a commercially zoned block, wedged between two factories. Four of us lived in an apartment designed for two, with railroad-style bedrooms. We often barged in on each other while sleeping, reading, having sex. The post office refused to recognize our address or deliver mail. Crack deals sometimes took place on our stoop.

Ah, the glamor of New York City for the young, ambitious, and broke. For Lilit Marcus it was a crack-tastic Brooklyn share where she couldn't even get her mail. For me, it was a sixth-floor walk-up with no windows in the living room. But at least mine was in Chelsea.

I love this article about How I Made it in New York City Without Parental Help. I especially love how this is now a thing, I guess, in the era of Boomerang Kids and whole employment sectors dependent on unpaid interns. When I moved to New York in 1996 it wouldn't have occurred to either my parents or me that they should be financially supporting my choice of where to live. They didn't especially like that I wanted to move here after I graduated (like this writer, it was a wonderfully impulsive, capricious choice to be sure), but I was an adult and therefore I don't think that they considered it to be much of their business.

Lilit was much more conscious and disciplined about money than I was. For years I was baffled by my ever-growing credit card debt. It seemed like everyone here was effortlessly fabulous, and even though I was by no means extravagant I certainly spent more than I should have just trying to go with the economic flow.

When I eventually "hit bottom" financially, I actually did get crucial help from my parents. Some of that was monetary (they caught me up with my past-due bills totalling just under $2,000 as I recall), but the most important forms of help I received from them were instruction and support. My mother sat down with me and together we drew up a monthly budget, and over the next two years as I attacked and paid off $19,000 in credit card debt, my parents cheered me every step of the way.

We are all on a journey with our money. I don't regret a single step of mine, because each peak and valley has taught me something meaningful. In fact, the valleys have been -- if you'll pardon the pun -- the richest experiences of all. I was amazed to discover how safe and secure it felt to know where my money was going, and that I could say no to a purchase or proposed adventure without self-combusting.

I give my folks huge kudos for the constructive way in which they helped me. They did a parent's ultimate job: helping their child develop the skills and capacities to be a competent, independent adult. That's more valuable than paying my rent for a lifetime.

Tuesday, June 12, 2012

How to Spend Your Savings

It's time for Katie to liquidate her Moving Fund and head to her new place. The only problem? She fell in love:

This is not Katie.
Over the past few months, my aggressive savings has become a source of pride. I've watched the balance grow and I feel accomplished. Responsible. Safe.

But soon, I'll be back to zero. And even though that's way better than, you know, not having the cash at all, my inner Scrooge McDuck doesn't want to let go of all those pretty green bills. Ever.

Katie, I hear you. (Sidebar: I'm not stalking you. I know I blogged about your last piece, too, but that's because you have such great insight about this topic!)

People are well acquainted with the challenges of saving money, but we give short shrift to how hard it can be to appropriately use that savings. In other words, to spend it! In my Managing Cash Flow for Artists workshop (now in its sixth year), we have a whole session on operating a cushion, or Contingency Fund. This workshop is designed especially for people who have variable income and who often use credit cards for "lifestyle continuity" (also known as "eating and having a roof over your head even in months when your cash flow is negative"). Having a financial cushion is necessary for all of us, but for those who have particularly... dynamic... financial lives, being able to draw upon that Contingency Fund is a critical step toward breaking the cycle of debt.

But my advice on the topic has more to do with the difficulty of the behaviors associated with operating a Contingency Fund than with the concrete aspects of how much to put aside, when to take it out, and how to replenish it. Because the biggest obstacle to appropriately utilizing your Contingency Fund (or in Katie's case, her Moving Fund) is emotional.

We have a tendency to fall in looooooove with our money. The harder we've worked to put it aside, the longer we've held it and the bigger the balance, the more attached we get (the same is true for investments, by the way). It is always easier to spend someone else's money (i.e., credit), which is why we override our own natural aversion to debt in order to hold on to our precious saved pennies.

So in Cash Flow, I teach Contingency Fund 101 as a behavior instead of a desired balance. And it helps to learn to walk before you run. My advice is to start with $1,000 -- a significant amount but not enough to get head-over-heels about -- and practice using it to cover expenses that are not part of your regular monthly budget or to plug holes when your income dips. The more confident you get about your ability to take out money and replace it, the less bereft and anxious you'll feel when you part with it for its intended uses. In the mental health profession, we would say you'd developed a secure attachment to your Contingency Fund. You learned that "Mommy always comes back," (or in this case, Money always comes back). Once you get the hang of properly operating that $1,000, it becomes easier to build a more robust Contingency Fund, as well as saving for other meaningful short-term goals.

Katie is doing a great job of coaching herself through the tough goodbye to her Moving Fund. In this similar article today on LearnVest, Sadia does the same with her Vacation Fund. Today is a good day for ladies rocking the Save-to-Spend technique. Yay!

Friday, June 8, 2012

Yes to the Dress! (No to the Entrees, Flowers, and Fireworks.)

Weddings are wonderful, but not if they create a financial burden and start your married life out on the wrong track.

Even the most financially sane people can sway to the pressure of outside expectations and the desire to make everything perfect. Add to that the challenges inherent to the tasks of planning (How often do you spend thousands on a party? Negotiate with vendors?). Unfamiliar budget plus unfamiliar tasks, turned up to an emotional simmer... the whole thing can get very out of control.

Read this inspiring story of one couple who kept their focus on what was important: sharing an important milestone with the people they loved, and being financially authentic in the process. What a great way to express love and a commitment to a happy life together. I have a great feeling about Abigail and her DH!

Monday, June 4, 2012

Fixing Education Debt: Too Much of a "Good" Thing

I work with a lot of artists and freelancers, which makes me particularly sensitive to people's issues with educational debt. Unless you can afford to attend college without borrowing, it is increasingly difficult to pursue any field that doesn't offer immediate and sustained financial success. A writer or designer whose income swings wildly from month to month and year to year is going to be crippled trying to come up with $500/month to send to Sallie Mae. And with no hope of restructuring the loan or having it discharged in bankruptcy, for many folks there's a good chance they'll be paying until they die.

Listen, I get it. I totally understand the argument about fraud and why there should be a high bar preventing people from getting the education and then sticking taxpayers with the bill. But I also see how broken the system is. While I do want to talk solutions, I find it impossible to get to that without two minutes of diatribe first. Here, in no particular order, are the issues that make me get a little mouth-foamy when talking about student loans:

Available money today errodes value sensitivity.
You visit a campus and it's beautiful. All the students look so happy, and they're talking about such interesting things. You think, "This is where I belong." To a teenager about to leave his/her parents' house for the first time, that feeling of fit is supremely seductive. Or maybe the allure is a particular program (I hope it's Engineering) or the status and cache of the school. But whatever it is, on some level you think that if you just get there then the rest of it will all work out.  And because lenders are generally tripping over themselves to lend to you (there's very little risk to them, since discharge is difficult), it's just so easy to get the money to go to school. So you go with your gut. After all, repayment is so very far in the future...

It also obscures the skyrocketing price of education.
Depending on which data you use, the cost of a four-year college is going up somewhere between 7% and 8.3% a year. There are a number of contributing factors, as federal and state funding gets cut and institutions fight to attract students by offering more amenities, but the fact is that costs are going up like crazy and until recently nobody seemed to be too concerned about it.

Loans are given each semester, and not seen in their aggregated total until all the money has been borrowed.
Here $7,000, there $7,000, everywhere a $6- or $7,0000, so grows $100,000 of debt before you even know it. I have heard terrible stories of graduates having panic attacks when they FINALLY get presented with the entire amount of their debt right before graduation. To say nothing of the shock of seeing how fast that debt can grow when you put it in forbearance for a few years while you're trying to find your feet professionally. Oh, and remember: the private loan you took out the first semester has also been growing for the three and a half years you've been in school, too. Interest on interest on interest.

"Good debt."
This makes me insane. Yes, it's better to borrow money to get a Bachelor of Arts vs. spending the same amount on shoes and handbags -- no doubt about it. But for crying out loud, as if that's a real comparison! All debt should be considered carefully, deliberately, even gravely. To give it a blanket "good" moniker belies the seriousness of the situation. Getting a university degree can increase your earning power by a million dollars over the course of your lifetime. But saying that educational debt is "good" side-steps our natural conservativism about borrowing and errodes our ability to think critically about value. 

You're not playing with a full deck, so to speak.
Sorry, 18-year-olds. I know you're a National Merit Scholar and all, but the truth is that your brain isn't quite done forming yet. In fact, the "executive suite" that is your prefrontal cortex, whose functions include "calibration of risk and reward, problem-solving, prioritizing, thinking ahead, self-evaluation, long-term planning, and regulation of emotion" isn't fully formed until your mid-20s. You are an expert on Chaucer and you can recite Pi to 50 digits, I grant you, but you're making a permanent financial commitment that your future self is going to have to deliver on, and you don't even have the part of your brain that can do that yet!

Education debt has a ripple effect over the entire economy.
Young adults can't save for a down payment because that money is going toward their student loans, which means the housing market is slower to recover. Retirement savings starts later for the same reason. People delay having children, and struggle to save for their children's education, and the cycle is in danger of repeating ad infinitum.

Okay, now I'm freaking out and totally mad. What's next?
For the forseeable future, college is going to cost money -- a lot of money. We can spend forever gnashing our teeth and tearing out our hair about it, but at some point we need to take a deep breath and deal with the most important consequences, namely the pressure on borrowers and the drag on the economy.

There are several  groups working on constructive solutions from various angles. Some focus on making repayment more affordable, others on blanket forgiveness for a nation of debtors. I really liked this article that I saw today via LearnVest on Why Student Loan Forgiveness May Not Be as Helpful as You Think. The author suggests a compromise that would act as an economic stimulus: subsidizing existing student loan debt by paying the interest, combined with creating an economic incentive to universities to lower tuition and make school more affordable. This could conceivably enable young people past and future to pump money into the broader economy instead of to the banks.

I think this is a coherent and well-reasoned argument that doesn't get lost in emotion, moral outrage, or good-vs.-evil debates -- which I totally respect, since I had to get on a 500-word soapbox before I was even ready to talk about the article that was ostensibly my reason for this post! Oy vey...