Books > Making The Most of Your Money > Excerpts

From Chapter One

All of our deepest beliefs about money are formed in the years when we grow up. We learn the great lessons of our era and set out to put them all to work.

But time is a trickster. Just when you think that you've learned all the rules, some hidden umpire changes the game.

Think about the Depression Kids. Those woeful years left a legacy of fear. Forever after, the generations marked by the thirties saved compulsively. A loan made them feel sick to their stomachs. They took no risks. When the Great Prosperity swelled around them, they mistrusted it. They knew in their hearts it wouldn't last.

Now think about the Inflation Kids, raised in the 1960s and 1970s. They saw in a flash that a dollar saved was a dollar wasted because inflation ate it up. A dollar borrowed was a dollar saved. You could use it to buy a car or a stereo before the price increased.

The Inflation Kids felt sorry for the codgers who saved so fruitlessly and lost so much. In the 1970s, the value of fixed savings, pensions, and insurance policies fell apart.

But what do the Inflation Kids-otherwise known as the Baby Boomers-know about money, in their hearts? They, too, are wedded to some of their earliest beliefs. For example, they're waiting for real estate to soar again. They still think it's smart to borrow because inflation-or something-will whisk the repayment burden away. They're wrong, but to think differently goes against their grain. The boomers born later in the cycle replaced real estate with stocks as their dream way of getting rich in a hurry.

The new turn of the wheel is bringing us the Compression Kids, Generation X. They're seeing a very different world. Jobs, chancier than people used to think. Real estate, boring. Wages, not rising very fast. Stocks, paying remarkable returns. As they see it, the rules for living are: save early and often, learn to invest, and let the rising value of stocks carry the burden of debt away.

Can the Inflation Generation change its approach to money any better than the Depression Generation could? How soon will the Compression Kids get trapped by the orthodoxies they proclaim today? Can we all find a better place to stand? On the answer to those questions, everything depends.

A CYCLE OF SPENDING AND SAVING

Money comes and goes in your life at different times. Mostly goes, when you're young. Those are the spent years. Maybe the misspent years. But never mind. As you grow older, the urge to save creeps up on you. Here's the typical cycle of wealth:

Ages 20 to 30. You establish credit, buy your first furniture and appliances, take your first auto loan, learn about insurance and taxes. Maybe (here I'm dreaming) you save a little money, in the bank or in company retirement accounts. Retirement accounts are money machines for young people because you have so many years to let them grow untaxed. By the end of the decade, you get married, have a baby, buy a house. (You save for a house the old fashioned way-by borrowing some of the down payment from your parents.)

Ages 31 to 45. You don't know where your money goes. Bills, bills, bills. College is a freight train headed your way. Maybe (here I'm dreaming again) you start a tuition savings account. Money still dribbles into retirement savings, but only if your company does it for you-by taking it out of your paycheck before you get it to spend. When you're pressed, you open a home-equity line and borrow money against your house. This is a good time to start a business or get more education. Invest in yourself and hope for a payoff.

Ages 46 to 55. You do know where your money goes: to good old State U. At the same time, you get the creepy feeling that maybe you won't live forever. You thrash around. You buy books about financial planning. You have an affair. When all else fails, you start to save.

Ages 56 to 65. These are the fat years. You're at the top of your earning power, the kids are gone, the dogs are dead. Twenty percent of your salary can he socked away-which is lucky because you will need extra money for your children's down payments (kids never really go away). Consider long-term-care insurance.

Ages 66 to 75. How golden are these years? As rich as your pension, Social Security, and the income from the money you saved. Start out by living on the first two. Let the income from savings and investments compound for a while, to build a fund for later life.

Ages 76 and Up. Quit saving. Spend, spend, spend! Forget leaving money to your kids-they should have put away more for themselves. Dip into principal to live as comfortably as you deserve. This is what all those years of saving were for.

WHEN YOU FALL OFF THE CYCLE

You say you can't find your place on the cycle? That's no surprise. Almost no one lives exactly to order anymore. There are a million ways of getting from birth to death and they all work. If you fall behind financially during any decade, you'll need a plan for catching up.

You Have Your Children in Your 30s. It seemed like a smart idea at the time-diapers tomorrow but never today. No one told you that in your 50s, you'd he paying for college just when you were trying to save for your own retirement. (And even if they told you, you'd never have believed you would ever be that old.) You might have to choose between sending your children to a low-cost college or shortchanging your own future. Maybe your children will have to pay for their education themselves. The moral, for those who can think ahead: save more in your 20s, using the discipline of tax-deferred retirement plans. These plans penalize you for drawing money out, so you're more likely to leave it in.

You Get Divorced and Start Over. Divorce costs you assets and income, with the greater loss usually falling on the woman. She rarely can earn as much money as her ex-husband takes away. For the man, a new wife and new babies might mean that college-tuition bills will arrive in the same mail as the Social Security checks. Unless you're rich or remarry rich, divorce is a decision to cut your standard of living, sometimes permanently.

You Don't Marry. You lack the safety net that a second paycheck provides. On the other hand, there's usually no other mouth to feed. You can start saving and investing earlier than most.

You're Married, with No Children. You've got nothing but money and plenty of it. You are one of the few who really can retire early, not just dream about it.

Life Deals You an Accident. A crippling illness. Early widowhood. A child with anguishing medical problems. A family that has always saved can make it through these tragedies. A family in debt to the hilt cannot.

You're Downsized. That's today's euphemism for getting fired. The money in your retirement plan goes for current bills. Your next job pays 20 percent less, with no health insurance or retirement plan. The millennium plays hardball. But you can still secure your future by down scaling your life to match your income. There's honor at every monetary level of life.

You Get the Golden Boot. A forced early retirement. Sometimes you see it coming, sometimes it catches you blindside. You get a consolation prize, in a lump-sum payout or a higher pension for a retiree of your age. But you lose five to ten years of earnings and savings. This risk is the single strongest argument for starting a retirement-savings program young. At your age, a new job will be hard to come by, but you can't afford to retire for real. So it's project work, part-time work, unexpected work like clerking, to pad out your early-retirement check.

Memo to All Workers: Employers don't care that you've worked hard and late, that you haven't been sick in a dozen years, or that every supervisor you've had thinks you're hot stuff. They ask only: What have you done for me lately? Is your job essential to business today? Are your skills the right ones for business tomorrow? Few people hold a job anymore. Instead, we have talents that we sell to employers for various projects, some longer term than others. In this kind of world, nothing is more important than continuing education and upgrading skills.

1997, Berrybrook Publishing, Inc.