Michael Rubin, author of Beyond Paycheck to Paycheck, urges people to embrace activities that cost nothing, like exercise or playing with kids, and to connect "emotionally" with our money by using cash, not plastic, to make purchases. He recently responded to my questions about his book and overall approach to money. Excerpts:
Why did you write this book—what inspired you?
Generally, people never learn about money, either from school or from parents. Then, once you get into the real world, your sources for financial education are extremely limited. Because of monetary incentives, the large majority of financial advisers target affluent clients. They're not trying to work with regular folks who have credit card debts, student loans, and a couple of grand in their 401(k). Unfortunately, this leaves 99 percent of the population without an unbiased source of financial education. After starting Total Candor, a financial planning education company, to help that 99 percent, we quickly discovered that there was a hole in the financial planning bookshelf. We felt most existing financial planning books were inherently boring. There are some notable exceptions, of course, and many of those are in the form of a parable and have sold millions of copies. The challenge of a parable is that it's hard to come back to it as a resource later, since the book isn't structured to make it easy for you to quickly research "IRA investing," for instance, when you're ready for that step.
Beyond Paycheck to Paycheck, as its subtitle ("A Conversation About Income, Wealth, and the Steps in Between") suggests, is entirely in the form of a conversation between you, a time-strapped but curious reader, and me. There's also Gary, a commission-obsessed financial salesperson who represents the worst that's out there from that field. (Better for you to meet him in a book than at a social event.)
You recommend connecting with money emotionally—what does that mean, exactly?
That's the first of the Top 10 Saving Strategies. When you're emotionally separated from your money—from your cash—you spend more. That's human nature. I suspect less than 1 percent of Alpha Consumer readers, come payday, are paid in cash. Few people even get a real paycheck anymore, but rather rely on direct deposit. Our spending is the same way: We hardly ever use cash, since almost all purchases are made with credit cards. The average person has no idea how much cash she has in her wallet until she finds herself at a place that mysteriously doesn't accept credit cards. This matters because when you're not emotionally connected to your money, you spend more of it. Spending cash hurts—right away. Using credit cards is painless—that is, until you get the bill.
Not to worry, though: The solution is not to get rid of your credit cards! Rather, you've got to consciously recognize that an emotional separation from your money through credit cards means you will spend more. (Doubt me? Think about casinos.) So try this: Next time you go shopping, leave the credit cards at home. Take cash with you and benefit from how your spending habits change. When there are two decent options for something you need—one for $59 that is "good enough" and another for $89 which is "better"—spending cash means you'll more likely take the one for $59. Handing over three twenties, while admittedly somewhat difficult for some, is still much easier than saying goodbye to five of them at once.
You also talk about "free stuff." Where do you find that?
"Free stuff" is everywhere, and you don't need a newspaper, iPhone, or even an Internet connection to find out about it. The myth that we must be spending money to have a good time is exactly that—a myth. It's something we learned only as adults. Observe a child for a week; note which days were his best. Did he spend more money on his happier days than those in which he was in a foul mood? Of course not. Money has nothing to do with having a good time when you're young. Kids understand the "free stuff" concept much better than adults—because they never have any money. What's your "free stuff"? That depends. For some, it's exercising, like going for a run or a hike. For others, it's genuine relaxing, like reading or going to the beach. But there are probably readers out there who are still struggling to recall what it was that they did when they were younger that made them happy, yet still cost very little or no money. If that's you, here's a hint: These activities had a name—hobbies. Get reconnected to your hobbies, and you'll have more great days and spend less in the process.
Personally, my favorite "free stuff" by far is family time. Sure, kids can be expensive, but now that I have two little girls, I have far more days where I can truly enjoy my "free stuff." Be it going to the playground with my 3-year-old or making silly faces (back and forth, mind you) with my infant, there's never a charge for such immense enjoyment, and it's almost always more pleasurable than the things I could be doing which cost more.
Note that this isn't about creating a life of austerity! By focusing on reducing spending on the areas of your life that you don't genuinely value, you'll find more money for the things you genuinely enjoy. Amazingly, you can wind up able to do things you previously thought were unaffordable simply by cutting back on the bigger things that, when you really thought about it, weren't worth it to you.
What are the biggest mistakes you think people make with their money?
People fall into two different groups: those in denial and those not. There's been plenty written about those in denial, and, let's be honest, they're not reading financial blogs. Still, their biggest mistake is ignoring the importance of addressing their financial futures and instead totally relying on the philosophy that it will all work out. It just may, but, even so, it's unlikely to be a comfortable process. Those in denial need to get the motivation and the realization that financial planning is really simple. Too many people fear dealing with their money issues will be so complicated they're scared to even begin. They procrastinate for so long that suddenly they're 10 or 20 years older than when they first started having doubts. You can nearly always recover from a delayed start, but it gets harder every year. The second group is those who are paying attention to their finances. The mistake I see most commonly with this group is an over-focus on small expenses. It seems like a lot of people (including many financial experts) feel that the great majority of the world's financial problems would be solved if only people, especially young people, would stop going to Starbucks. I think that's nonsense. If you're going there three or four times a day, you've got problems (and money is just a small one). But most people aren't using the coffee shop like that, so it's crazy to think you're going to find five or 10 grand a year pinching pennies with the barista.
Instead, you've got to put major focus on major expenses. For most people, the most important major expenses they have are housing and their car. Making the right choices in those two areas is critical. Too many people bite off more than they can handle in one or both of those categories. Then, they really try to watch their spending elsewhere (dining, entertainment, clothing, etc.) yet still struggle and don't understand why. But the reason is clear: They're fundamentally limited by their previous big decisions.
I've been saying this for years and only now, in this subprime meltdown, are people starting to believe it: Just because someone will sell you something does not mean you can afford it. You've got to be the one to do the math and understand what the new financial commitment will do to your overall financial situation. No one else will do that for you—most just want to make the sale. If you take your responsibility seriously, you'll wind up with much more cash—probably enough to buy that latte whenever you feel like it.
Do you still believe in compound interest, even in light of the October stock market crash? Can people count on their investments, like 401(k)'s, going up?
Even more so. That may sound crazy, but if the crash taught savers anything, it is that we don't control how the market performs. Therefore, it is the amount you save and how early you save it that will ultimately determine whether you are able to live comfortably or struggle a life of paycheck to paycheck. While you can't count on your portfolio going up every week, month, or even year, you can still count on it going up over the course of your lifetime. When we're talking about a market crash, we're talking primarily about stocks. And while no stock will ever provide a guaranteed return, over the long term, there is no better place to be invested, provided, of course, you understand your investment, thanks to your unbiased financial education.