Like your eye color and your lifelong love of mint chip ice cream, chances are you picked up the money ideas that drive your spending and saving decisions from your parents. But in today's economy, those mom-and-pop philosophies can either be tried and true or totally out of date.
Are the money rules you've been living by for years still working for you, or do they need to go the way of the rotary phone? Here's what to throw out, what to keep, and what to tweak, so you can be financially secure for life.
Rule #1: Always live on less than what you earn.
Good thinking? Yes.
It's human nature: The more money you make, the more you're inclined to spend. But if those extra purchases are wants, not needs, you're better off banking that money for a future need — retirement or a down payment on a home — instead of spending it on things you won't even remember later.
Better thinking: Pretending you make less than you do for a short time (say, a month or two) is a great way to identify spending leaks and buying habits that you may not be aware of. That pretty $50 sweater you don't really need, but hey, why not? For a month, put the money you don't spend impulsively on things like that sweater in an envelope in your purse that you cannot dip into. Brown-bag your lunch (which costs around half the price of eating out) some of the time and put the difference in that envelope. At the end of the month, you'll be pleased with what you find. Sweater? What sweater?
Rule #2: Money can't buy happiness.
Good thinking? Yes, with caveats.
The big exception to this rule is that you need enough money to keep from stressing about your basic needs. According to a 2010 Princeton University study, people with incomes of about $75,000 a year are happier than those whose income is less. But that doesn't translate into "the richer, the happier." Above $75,000, the study subjects did not report any greater contentment.
Better thinking: Spend your money to max out your pleasure. A study in the Journal of Personality and Social Psychology found that people felt happier spending on shared experiences (a trip, a concert, a beauty treatment with a friend) than on things used alone (clothing, jewelry). And many happy-making experiences are cheap or even free. Have a picnic for your husband's birthday instead of going to a fancy restaurant, or spend an evening playing board games with friends instead of going out for drinks.
Anne-Marie Faiola, 37, of Bellingham, Washington, enjoys making bath salts as gifts: "Most people won't splurge on a bath fizzy in stores, but I can make one for 50 cents," she says. "People are always delighted and say, 'Really? You made this?'"
Rule #3: You can't take it with you when you go.
Good thinking? Nope.
Though technically this is true, the associated attitude can be dangerous because you don't know when you're going to "go" and you'll need to pay the bills until you do! Clearly, if you indulge your every wish because you might not live to enjoy it tomorrow, you could find yourself with big cash flow and debt problems.
Consider, too, that depending on which state you live in, your spouse or other family members could be left responsible for your debt, especially if they cosigned the loan or credit card. If state law requires your spouse to pay a particular type of debt (healthcare expenses are a common one), or you live in a community property state such as California, you could be sticking your loved ones with a large tab.
Tamecca Tillard, 40, of New York City, inherited her younger brother's college loan when he unexpectedly died six years ago at age 28. His government loans were forgiven, but not the private one, and Tamecca was cosigner. She's still paying it off. "I was surprised that I would be responsible for a student loan," she said.
Better thinking: Enjoy your life, but don't use your impending death to justify any purchase. With luck, it'll be many years away.
Rule #4: Neither a borrower nor a lender be.
Good thinking? Not these days.
Polonius's advice in Hamlet may have made sense 400 years ago, but nowadays you should borrow a reasonable amount to buy a home if you can afford it. A recent Harvard research analysis confirmed that even in a tough market, people who owned built more wealth than renters in the same income bracket.
You should also aim to be a lender, a.k.a. an investor: Buying U.S. Treasury notes (an interest-earning loan to the federal government) is one of the safest bets around. If you buy a 10-year Treasury note with a face value of $1,000 and an interest rate of 4.6%, in a decade you'll get your money back, plus $42.60 for each of those 10 years, or $462 total.
Better thinking: Be neither a borrower nor a lender to friends and family. If you must lend or borrow, write up an agreement. Approaching it as a business transaction with a contract will help all involved stick to the repayment plan.
Rule #5: Don't borrow from Peter to pay Paul.
Good thinking? Usually.
If Peter the credit card is charging you 3% interest but Paul the credit card offers you 8%, then yes, you do want to borrow from Peter to pay Paul by transferring your balance, which could save hundreds of dollars a year. (Visit SmartBalanceTransfers.com to see if a lower-interest-rate card will save you money, but don't forget to factor in transfer fees.) However, transferring balances is not a smart long-term strategy.
Better thinking: Forge a plan to get out of credit card debt completely or check out a peer-to-peer lending site, such as Lending Club or Prosper, that connects borrowers with small lenders as opposed to big banks. These sites offer formalized loans with rates that can be lower than credit cards. If you have decent credit, you can get a 36-month loan at 12% (the better your credit, the lower the rates). All this adds up to savings if you use it to pay off a higher-rate credit card.
NEXT: 6 Money-Saving Tricks That Actually Work »
This story originally appeared on WomansDay.com
More from Woman's Day:
• 20+ Ways to Spend Less and Save More
• 8 Sneaky Habits That Make It Impossible to Save
• How to Trick Yourself into Saving Money
Sources: Neal Frankle, certified wealth planner; WealthPilgrim.com. Sharon Laux, associate director, Center of Entrepreneurship & Economic Education, University of Missouri–St. Louis.
Photos: Getty Images
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