There are many definitions of interest, but this one has been my go-to for a long time. Short. Simple. Strong.

in · ter · est

  1. the cost of money

The cost of money. Let that sink in. It means that there is a cost associated with money’s existence; not just for borrowing or lending. There is also a cost to holding on to money. You know, the old shoe box, mason jar, or mattress-style storage facility. What’s the cost with the jars or boxes? Opportunity cost – the money can’t earn interest; it can’t work for you.

Our bank accounts are in play here as well. If money is in the bank, we aren’t using it, and that is our cost. We make up for that cost by asking the banks to pay us interest.

But most of the time, we think of the cost of money in the form of paying interest–it’s a real cost and a major factor when we borrow.

However, although interest rates are highly marketed as the starting point for borrowing decisions, they shouldn’t be. The borrowing decisions should always start with how much is being borrowed, why it’s being borrowed, what it’s going to buy, and whether we can afford the entire amount rather than just a monthly payment with “low low LOW” interest.

#1 on the list

Car loans. There is no better example of how debt is marketed through interest rates than the car loan. When I see a $40,000 vehicle sold as “only $550/month for 72 months at our LOW 2.9% APR” it triggers a sort of personal finance trauma, reminding me of when I put myself into the car debt cycle, all the while convincing myself that I got a “deal” based in the interest rate.

A quick analysis based on 2024 data:

Average new car price $48,000
Average interest rate 7%
Average term 68 months
Average down payment + trade-in $12,000
Monthly payment $645
Total interest paid $7,700  (11% of price of car)

Now apply the “limited offer” of 2.9% APR (only the best credit scores get this, by the way):

Monthly payment: $574
Total interest paid: $3,100 (6% of price of car)

Did interest rate matter? Yes, to the tune of $4,600 over 68 months or about, coincidentally, $68/month.

The bigger personal finance issue here is that the interest was based on a loan of $36,000 (after trade and down payment) for a $48,000 ride.

What’s more likely, that we find ourselves in a pinch because of $68/month in interest or because of a $48,000 purchase (which is losing value by the mile)? And don’t forget all the other costs of a $48,000 car; higher property tax, MUCH higher insurance costs, higher sales tax.

Again, interest rates must be considered, but not as much as the amount borrowed. Transportation is important, cars are the reality for most of us, and prices are staggering. But there are ways to mitigate those costs – the overall cost of a car and its impact on our financial well-being.

The bottom line: minimize borrowing for a car and interest rate will be an afterthought.

Plastic problems

When we find ourselves concerned about the interest rate on our credit card, we have a bigger issue to address—credit card debt period. Pay off the debt and only use cards for budgeted expenses, and the interest rate won’t matter. Furthermore, signing up for a new, lower-interest card to transfer a balance is often a symptom rather than a cure. This is not ‘never do that’ advice, but a caution that these card offers exist because, statistically speaking, most people will end up using the new card and, ultimately, find themselves further in debt instead of improving their financial situation.

The best plans for managing credit card debt include:

  1. not using the card
  2. using a budget with a payoff plan and/or
  3. contact a free credit counseling service if the debt is overwhelming your finances.

But what about student loans?

From a numbers and interest rate perspective, I could just copy and paste from the first section on car loans. The math is what it is and, once again, interest rates don’t matter in comparison to the amount borrowed. The big difference here is that an education is not a depreciating asset, so the calculus on how much to spend/borrow includes other (and not always quantifiable) variables.

The bottom line is the same—minimizing borrowing comes before worrying about rates.

There is a lot to consider—FAME is here to help. Check out this link and the resources on the side menu.

Date the rate, marry the home

Similar theme for houses, but the stakes are higher. Yes, it’s easy to see that a 1% rate difference on a 30-year loan could mean $100,000 in interest, but since the rates are determined by credit score and market conditions, it’s largely out of our hands when we sit down to sign the papers. What is not out of our control is how much down payment we’ve saved, how much we borrow, and ultimately, whether we are choosing a home we can truly afford.

This is an excellent tool from Enrich on determining how much home you can afford, considering income, location, down payment, and other debts. Enrich: Home Affordability Analyzer

It took me a while to get here but it was worth the effort

For me, it took many years to reestablish a financial foundation, and one of the key pieces of the puzzle was eliminating non-house debt and paying cash for just about everything—including cars.

So…

  • I have no idea what rate my credit card charges because I haven’t paid a dime of interest in a couple of decades. I use it for budgeted expenses and pay in full every month. Emergencies are paid for from my emergency fund. The credit card provides convenience and reduces exposure to theft/fraud compared to a debit card.
  • I paid cash for a used car.
  • I don’t love the interest rate on my home, but the house is affordable based on our down payment and how the overall mix of mortgage, home value, income, and budget is in my favor. And refinancing at a lower rate is often worthwhile for an appreciating asset like real estate.

Finally, if debts are paid, then the only interest you need to think about is the type you are earning. What’s the cost of your money?

“The first principle is that you must not fool yourself — and you are the easiest person to fool.” –Richard Feynman, Nobel laureate and physicist, from his speech to the Caltech Class of 1974.

*****

Wow, all I had was, “Graduates, as you head out into the world, remember to be good to one another… And remember to spend less than you make.”

I don’t think Dr. Feynman was referring to personal finances, but I could argue that right there, he offered some of the best money advice you can find. I say that because so much of “adulting with money” comes down to making sensible decisions, yet it’s too easy to get off that track and fool ourselves with “I need that new car, a higher credit card limit, a sports betting account, the XYZ streaming service,” etc.

What should be on the financial radar for new college grads? It can’t all be done in a day, but it all can be done. This isn’t really life advice – it’s personal finance advice – but there is probably significant overlap.

First, get to work. Whether you are diving right into the “grown-up” job related to your education or just trying to earn while you look, it’s critical to get the earnings flowing. All work experience is valuable, even some of those awful jobs we hold as we move down the career path. I’ve had a lot of jobs. Maybe I even have a spreadsheet listing them to share with my son someday. Maybe it’s a couple of pages long. Learning what you don’t like or don’t want to do has value. I am now doing the best work of my life, and even the worst work experiences from my resume have contributed to the skills I use today.

Take advantage of time. I put this high on the list for a reason. There are a lot of reasons but let’s focus on opportunity cost or the cost of decisions. When it comes to retirement savings and the cost of missed opportunities, I know what I’m talking about. A 25-year-old let’s say YOU, who saves $200/month until age 65 will have accumulated approximately $525,000 (based on 7% returns and average inflation). Someone else, let’s say ME, who waits until age 40 will have to put away $700/month to reach that same amount of savings by age 65. There is no better formula for reaching your financial goals than time + steady habits. Check out Vanguard’s take on this topic and/or try out this calculator and run some numbers for yourself.  

Learn to budget. No matter how much you are making, learn now how to plan and account for your spending. Many banks offer budgeting features, there are plenty of free apps and websites, and, of course, there is the old-fashioned but most effective spreadsheet.

Make saving a habit and build an emergency fund. If you are collecting a regular paycheck, consider automating your savings and build up a $1,000 emergency fund as quickly as possible (before investing, before the long ski trip, before anything considered a “want”).

Manage your housing costs. Housing is and will be your largest expense, so it’s best to get used to making smart decisions. You want your own place, but maybe your future self says, “Hey, do the roommate thing for a few years, it will save you thousands.”  

Take charge of your student loans. You signed for the loan, and now it’s time to pay it back as agreed. Pay what you should but do it in the most sensible way for your income. Visit StudentAid.gov, make sure you are on a plan, stay in touch with the loan servicer, and understand all your rights and responsibilities.

Understand health insurance. This is one of the most expensive and difficult to manage aspects of Americans’ financial lives. If you are fortunate enough to be on your parents’ plan, you can stay there until you turn 26. Beyond that, health insurance is a major consideration when looking at potential jobs and has to be accounted for every step of the way.

Learn about taxes. The good news is that there are plenty of easy-to-use, accurate, and reasonable software services out there. The bad news is that as you move into earning a full-time income, taxes will eat more of your pay and the rules will get more complicated. Enrich offers an excellent introduction to dealing with income taxes.

Watch out for car loans and credit cards and payday lenders, and rent-to-own… And, ugh, there are a lot of places to misspend your hard-earned dollars. Buying too much car is one of the most likely areas where we stumble, and that impacts our ability to save, and that affects our choices down the road, and so on and so on. Drive used cars, borrow as little as possible, and always save part of your income for car expenses and the next car.

Protect your identity and your money. In other words, be careful with your financial life and technology, and be sure to be insured! Car insurance, renter’s insurance, health insurance – all those pieces should be in place as you begin to save and build wealth. Ask a friend or family member for a trusted agent, get some advice, and evaluate your coverage every year. For protection from financial scams, stay current with help from sources like the Federal Deposit Insurance Corporation (FDIC).

*****

Finally, listen to your future self. I could go on all day. So, when I say finally, I mean for now.

Yes, you hear that voice. It’s firm, sometimes mean and annoying, but always kind and full of good intentions.

“Are you saving for retirement?”

“A new car? Really?”

“A few sacrifices now will be worth it later.”

“Have fun, but plan for it and understand what it costs.”

“Spend less than you make, or I’ll come through time and…”

Economic conditions are increasingly volatile and stressful, and that is the perfect time to take a deep dive into our budget, look for leaks, cut where we can, and build our financial defenses.

——–

Okay, that’s $25/month saved by cutting one streaming service and changing another to the plan with ads. Then $2 more/month by paying my car and home insurance in full rather than monthly. Spent $100 on exercise equipment, but will be saving $40/month by cancelling that rarely used gym membership. That’s about $67/month, not much, but… Wait a minute, that comes out to over $800/year! If we sell a few things that are gathering dust, we can raise a couple hundred more…

——–

Sorry, you caught me taking the family spending plan out behind the woodshed. I review my budget regularly, but this time I did it with a bit more urgency and concentration because 1) we are trying to carve out funds to put toward the next family vacation, 2) food prices are moving again, and 3) that uneasy feeling about the economy is hard to ignore.

I’ve been known to yammer about the connections between personal finance and economics… maybe even offering a few posts in this blog on the subject.

And it seems that econ is actively pounding on our collective doors, proclaiming its relevance and demanding to be heard. Yes, the phrase, “…in these uncertain economic times” has been beat to dust, overused and misused until it’s completely ignorable. But this time… Well, it’s hard to ignore the numbers, in writing, plastered on the wall.

Is a recession imminent? It seems likely, but I’ll also say that, at the beginning of 2024, most economists said we’d see a recession by the middle of last year, and that did not even come close to happening. So, right now, we don’t know.

What we do know is that we consumers are getting hit from all sides with rising prices, stock market slumps, and threats to the employment picture, both from the private and public sectors. Add it all up, and GDP is likely to take a hit this year, and sooner rather than later.

So, as I always say, “when economics makes you fidget, it’s time to tighten the budget.” Honestly, I just made that up, but it’s true!

Goldilock$ Budgeting

Other than the bottom line – spend less than you make – there is not really one approach to budgeting that fits everyone. Age, income, lifestyle, stage of life, and the reasons for reviewing/adjusting a budget are all a part of deciding how to get it just right.

Let’s start with the why. Defining the problem (or opportunity) leads to best steps to get the most out of our budget. This is not a comprehensive list, but it does cover several classic situations. It’s also possible that a combination of these is a match.

  • Trying to make ends meet, must make cuts and shift priorities right away
  • Need to build an emergency fund
  • Want to begin saving/investing
  • Want to increase or redirect savings/investing
  • Not happy with where money is going, want to make trades

After identifying the reason for examining your spending plan, you can then take steps towards your goal(s).

There are always choices when it comes to trimming a budget. The question is whether we want to make those choices and will we change our behavior to match our goals?

Tips on squeezing a few bucks from that budget:

  • Quick savings can often be found with streaming services. I recently told one provider that I was cancelling because it wasn’t worth $24/month. They said, “How about our $8/month plan? There are a few ads.” Deal. $16/month savings.
  • Food: I’ve recently started grilling pineapple as an occasional meat substitute. Great taste and about half the price/pound of meat. What changes can you make?
  • Gas: when tough choices must be made, cutting down on driving should be at the top of the list. Look into shorter drives, local tourism, more walking, etc.
  • There is out-of-pocket risk by raising insurance deductibles, but if your emergency fund is in place, you can save hundreds/year with higher auto and home deductibles.
  • Side gig$ & yard $ales: a friend recently told me about his four-hour/week job at a local gym. He originally did it to use the gym, but after the first month, he got a charge when he realized he made an extra $250 by using time that he probably would have spent watching TV.
  • Stop a budget leak and immediately redirect the money into an automated savings or investment account – financial and psychological benefits abound.
  • Connecting to my Goldilock$ budgeting comment above, this video by Ramit Sethi is interesting in that it looks at financial strategies by income level.

Finally, feel the power in small changes.

  • Make five small changes that save you an average of $7 each. That is $35/month, which can also be expressed as $420/year.
  • Sell a handful of items for $75.
  • Find a side gig, at 10 hours per month. That’s about $1,800/year.
  • Redirect that $2,000/year to what you want or what you need. 

Most of us cannot affect the economic wheels spinning around us. However, most of us can affect our own mini economy, and that in turn can make a not-so-mini difference.

If you Google, “Personal Finance Tips for 2025”, you’ll get 800,000,000 results. Not only did I not read all 800,000,000, but I also didn’t even get through the first eight before I found contradictions. This didn’t really surprise me as I see plenty of tips and tricks from a variety of sources, and, yeah, they are all over the place.

And I recently started following another PFG (personal finance guru), enjoying his takes on money topics as well as his analysis of other advice he has seen on social media. As I was listening to him rant against reckless spending, he went on a budgeting tangent, and he said, “I don’t like budgets, I don’t use budgets, I don’t recommend budgeting to my clients.”

What?!? (needle scratches across the record…) Say it ain’t so! Later, in another video, he comes out against home ownership, saying that he rents and will continue to rent.

Foundations rattled; pillars crumbled. My all-time PFG (Dave Ramsey) would be plugging his ears or unplugging his speakers.

Personal finance is important, and there should be a standard playbook, right? Well, maybe not. While there are some fundamentals that apply almost all the time to almost all individuals, there are also different methods/tools/strategies which push us toward the same result and there are nuances within personal finance subjects which depend on age, income, stage of life, values, and more.

It can be overwhelming to decide which advice is right.

So, at the well-calculated risk of further muddying the waters, I’m offering my tips on sorting through personal finance tips.

A Few Pillars to Lean on

First, let’s cover ground absent of debate, places where respectable PFGs gather in peace.

  • Spend less than you make
  • Follow the law
  • Buyer beware

That’s All?

There are probably more personal finance principles that most would agree on, but the list is (surprisingly?) short. It’s much easier to note where folks don’t agree.

  • Coffee will make you poor
  • Always save 10%
  • Always save 20%
  • Rent don’t own
  • Own don’t rent
  • Pay debt before investing
  • Invest as much as possible as soon as possible ignoring debt
  • Pay student loans
  • Wait for government modifications to student loans & payments
  • Don’t buy new cars
  • Never buy a used car
  • Always use cash
  • Credit cards are never a good choice
  • Buy term life insurance
  • Buy whole life insurance
  • Don’t buy life insurance at all

Quoting myself from a few paragraphs ago…

 “…there are nuances within personal finance subjects which depend on age, income, stage of life, values, and more.”

This also illustrates the difference between PFGs (personal finance gurus) and CFPs (Certified Financial Planners) and other personal finance professionals (and Certified Personal Finance Educators like me).

PFGs, even when honest and well-meaning, throw out generalizations and statements, and might be trying to attract attention (if they get paid by views and clicks).

CFPs, CPFs, ChFCs, CFEs, etc., take a global look at finances with a holistic approach to charting a path, addressing the details along the way that make the most sense for the person, time, and place.

But This, This is Just Wrong

I just saw a social media marketing post, disguised as financial advice, which lures readers with something like, “Stop Making These Financial Mistakes”. SIX of the eight items on their list included recommendations to BUY something or to BORROW.

I can’t get behind any financial wisdom which advises buying or borrowing. Sometimes, and when I say sometimes, I mean rarely, refinancing can be on the table but might be for situations involving crippling debt or other crises.

Examples of this type of “advice” are not hard to find, you’ve probably seen or heard an ad or post that says the way to improved finances can be found through:

  • Home and/or auto warranties
  • Another credit card (but this one has a lower introductory interest rate!)
  • Invest in real estate (risk free!)
  • More life insurance
  • Buy cryptocurrencies
  • Refinance credit cards (for a fee)
  • Buy cheaper insurance (no matter if the coverage is appropriate)
  • Get a credit card with bonus miles
  • Pay a retail store a membership fee so you can then buy more overpriced toilet paper than a family will need this decade

Some of these sources also imbed (sort of) the idea of shopping around for the best deal on certain items, and that is generally a good idea. However, when they say to shop around but provide you a link to just one company, you are reading an advertisement, not financial advice.

When consuming personal finance articles or posts, consider this: if they are selling, they are not helping.

—–

It’s tricky offering advice on taking personal finance advice. One might think that the numbers don’t lie and that every decision about money is correct if made by applying experience and math. But it doesn’t work that way because the ones applying the experience and the math are people, and no two people see things the same way. So, yes, paying debts off according to interest rate might make mathematical sense, but paying debts off the Dave Ramsey Snowball Way (smallest to largest) can provide a critical psychological boost which can propel someone to greater success than math alone.

After a couple of decades of this, I have established a few unbreakable pillars, but I’m always listening to fresh viewpoints as well. However, for several years now, most “new ways” of mastering money that I’ve seen are at best gimmicky and at worst outright FOMO-driven schemes designed to separate us from our money.

I think it’s probably been this way for as long as there has been money.

So, for those of us who live in the paradox of not having enough money to pay for advice on how to have more money… Keep learning, know yourself, understand your risk tolerance, spend less than you make, and when approached by the latest trend which unlocks money’s mysteries, hold onto your wallet and back away.

Links on PFGs and other types of personal financial advisors.

Types of finance professionals from Enrich

Guru 1

Guru 2

Finally, SNL tells us all we really need to know.

There is no quick or definite answer to that question. But there are ways to analyze coverage versus cost and feel you are getting what you need at a price you can stomach.

***

“The car won’t start,” texted my wife early on a recent Sunday morning, while I was 1,000 miles away visiting my mom.

She sent me a video, and I brilliantly concluded that the battery was dead. After a few minutes of trying to determine why the battery died, we turned our attention to figuring out what to do about it. It took me a minute to remember that we had AAA. For seven years living in Spain, AAA was not a part of my life, but as soon as I moved back to Maine and got a car, I reupped as that service had towed me, jumpstarted me, and even pulled a loved one out a ditch.

And while AAA is not necessarily marketed as insurance, for me it is and a darn good-value-insurance at that. That got me thinking…

Issue #1: Why Do We Buy Insurance?

Let’s put aside all things related to legally required insurance and focus on our choices. I cannot help anyone into the insurance happy zone as it lives in the same place in our hearts as taxes. What I hope to do is offer a path to peace of mind, to know you are doing the best you can with your insurance costs and choices.

The purpose of insurance is protection against loss; partially restoring our financial position. Contrary to mass-marketing messages and popular belief, insurance is not designed to make us 100% whole after a loss. So, know that going in – we will pay for insurance protection and still have to pay more when we use the insurance.

And, not only have the upfront premiums gone up, the portion we pay in the form of co-pay, co-insurance, and deductibles, has also ballooned.

There are plenty of factors blamed when discussing why the above is true, and I can’t tackle them here. What I can say is 1) insurance companies are in business to make a profit for their shareholders/owners/policyholders 2) losses from natural disasters have increased, and perhaps more importantly, are expected to increase even more with climate change 3) there are more people living in areas affected by these disasters 4) the costs of home repair, car parts, medical care, and liability activity have gone up as fast or faster than almost everything else in our lives.

Deal or No Deal?

It is tricky to determine if your insurance is a fair deal. I say fair because Economists Rule #7 (yes, a nod to my favorite writer, the late Robert Parker) states that you can’t really expect a good deal out of any transaction. If someone is getting a good deal, that means someone else is getting a bad deal. Generally speaking, insurance companies, with their legions of actuaries and analysts, are probably not getting a bad deal when they do business with you, so better to think in terms of fair.

It comes down to premium (cost) versus potential benefit. Potential because we hope to never use our insurance. A few notes:

  • This is subjective. We don’t all value the same things in the same way. This is affected by our habits, experiences, and cultural values. Ultimately, insurance decisions are personal.
  • These are generic examples, aiming at what would be realistic for most folks.
  • Circumstances that affect insurance costs are sometimes out of our control.
  • It’s a moving target. Stay informed, review, and evaluate often.

I’ll offer analysis on a few common types of insurance with ballpark cost/benefit numbers. Thinking about insurance in this way is transferrable to other kinds of insurance and can be a great tool in your personal finance toolbox.

Term Life Insurance: $250/year for 20 years of a $200,000 death benefit for a relatively healthy 40-year-old. Peace of mind. A financial cushion for those who depend on you. A bargain.

Term Life Insurance: A $10,000 “burial” policy for someone over 70, at a cost of $600/year. While coming up with burial costs is a significant financial and emotional burden, $600/year to protect $10,000 is not a strong financial move. In this case it might be better to self-insure, put that $600/year into an investment, and try to save extra for when it’s needed. This is a case of one size does not fit all, and you have to do what feels right.

Mobile Phone Insurance: $200/year premium plus a $100 deductible in case of loss, all to protect a $750 phone. This is a bad deal for the consumer. It’s very little potential coverage for the cost. Put that $200 you would pay for the insurance plus the $100 deductible in your emergency fund and treat your phone like it’s worth $1000.

Homeowner’s Insurance: $1,200/year to insure a $500,000 home, plus $300,000 in liability protection, all with a $1,000 deductible. Sign me up every day. Yes, prices are going up, but the ratio of cost/potential benefit is good for the insured. This is what insurance is meant to do. If you paid these rates for 25 years, it would cost $30,000 plus lost investment opportunities. A lot, yes, but nothing compared to the cost of replacing, repairing, or rebuilding a home, or paying legal fees when a clumsy neighbor trips over your tulips. 

Product Insurance: I recently purchased a $30 fan at a big retailer. They offered additional insurance/warranty for $9.99 for two years of coverage. Hmmm… How do I say this clearly? It’s awful! The insurance costs a full 30% of the price of the product! And many credit cards offer an additional warranty automatically on purchases made with that card. Maybe you are saying, “Yeah, there is NO way I would buy that.” But keep in mind, they do not continue to offer it because no one is buying. A lot of folks are, and it’s incredibly profitable for the company, and the way it’s sold at checkout makes it easy to “include it in the cart” without really thinking about it. Buyer beware.

AAA Roadside Assistance: It’s how this conversation started, so I’ll finish here. My AAA plan is about $100/year. I hope it’s $100 wasted. However, chances are I will use it, just like I had to last week. There are specific benefits that can be measured against the annual AAA fee, and they can be substantial (calling for assistance, towing, jumpstart, etc.) but with this insurance it’s also about the uncountable costs incurred when you or a loved one is stuck on the side of the road in the middle of two things – the night and nowhere.

You can get affordable roadside coverage through your auto insurance as well but be careful to get the full details on what is covered. In my experience, some of those car insurance add-ons are not comprehensive.

Other Insurances: I apply the same process to all my insurance decisions. Cost analysis first, then add the uncountable.

Cost/potential benefit + intangibles = is it worth it?

Still Not Sure?

If you are facing a big increase in your insurance premiums or trying to decide whether to buy a certain insurance, shopping around and evaluating coverages and deductibles are the first steps to take. I also recommend finding a local agent to help sort through the details and shop for the best coverage/price combination.

Insurance is a necessary piece of our overall financial wellness. It’s not going away, and it’s not going to get cheaper or easier to manage. While I can’t tell anyone what kind or how much insurance they need, I can help (and I am happy to, just send me an email) with the analysis and how to evaluate the options.

Once upon a time, in a high school far enough away, I taught a full-year economics course. And in that course, I often referred to classic schools of thought and, of course, to Adam Smith, philosopher, economist, and the fellow generally considered to be the Father of Capitalism. I enjoyed playing devil’s advocate and provoking students to analyze U.S. economic policy by asking “What would Adam Smith say?” I find his invisible hand theory fascinating to look at through the lens of 21st century economic realities and the evolution of global markets.

Fast forward to the end of one school year, final exam time, and I was excited to see a student’s (let’s call him, JT) analysis of whether our economy was truly a free market system. As he dove into his argument he referenced the Father of Capitalism, Atom Smith. Atom. Not Adam. I assumed it was a typo, it gave me a chuckle, and I moved on…on to see all references to AS were Atom-ic.

It was a good essay, and I did not take off a single point for the Adam/Atom issue. But I had to ask, and I had to wonder if or how many times I had referred to AS in writing during the year. I certainly wrote his name on the board, didn’t I?

So, I asked, “Atom Smith?”

“Well, I honestly didn’t think about it much,” JT replied. “It’s just that all year long I had this image of Smith as sort of an economics superhero, and from that I drew Atom as his name, rather than Adam.”

Did not see that coming. I remember thinking and wondering how many concepts, terms, or people might have been slightly and/or humorously misinterpreted by my students when I got on an economics roll. Which brings me to a favorite line from a favorite character from The Princess Bride.

“I Do Not Think That Means What You Think It Means”

That’s what Inigo Montoya says to Vizzini after he keeps taking liberties with the word, “inconceivable”.

I heard it used the other day to (hyperbolically) describe potential economic policy moves by The Fed, and it made me think about the many financial terms and concepts that are often misunderstood or misused. Here are just a few:

Principal and Principle

In school we learn to respect the top authority, the principal. In finance, our principal is the initial amount of money borrowed or invested. And principle is the foundation of a concept, truth, or argument.

Let’s give this a try:

The principal, while covering a class for an absent economics teacher, instructed the class that the principle of safe investing is to protect your principal.

APR and APY

APR = Annual Percentage Rate, the declared or stated rate of interest for an investment or a loan, can also include fees.

APY = Annual Percentage Yield, the actual amount of interest earned (or paid) when including the effect of compounding.

You might see a CD with an APR of 4%, but it also lists an APY of 4.07%. Interest compounded (monthly in this case) attaches to and grows the principal, so at the end of a year, you’ve earned more than 4%. See the link at the end of the post for a great APR to APY calculator.

The Federal Reserve Bank and The U.S. Treasury

The Fed is the nation’s bank and the bank of banks. It was created by Congress in 1913, and its principal function is to manage the nation’s money supply to maintain stable inflation and employment. Jerome Powell is the current Chairman.

The Treasury was created by Congress in 1789 to manage the nation’s money and pay its bills. The Treasury prints money through its Bureau of Engraving and Printing and produces coins through the U.S. Mint. Janet Yellen is the current Secretary.

Although it’s not easy to define exactly what the Fed is or isn’t, it is easy to clarify this common misconception—the Fed does not print money, the Treasury does (it is true that the Fed’s actions can directly lead to the Treasury printing money, but the Fed itself does not print money).

401(k) and 403(b)

While both are tax-advantaged employee retirement accounts, they differ when it comes to participation and investment options. Eligibility is straightforward: 401(k)s are for employees of for-profit companies while 403(b)s are for employees of non-profit institutions. As for the investing part, 403(b)s can invest in annuities and mutual funds while 401(k)s can offer additional opportunities such as bonds, individual stocks, company stock, and ETFs (What’s an ETF? Read on…).

Mutual Funds and ETFs (Exchange Traded Funds)

These are both widely used options for investors to diversify their stock market holdings. The main differences lie in the details of how they are managed and traded.

Mutual Funds are actively managed, and trades can be made only at the end of each day. There can be a performance benefit from active management, but there are fees that come along with that.

ETFs are often passively managed and shares in the funds can be traded like stocks. ETFs often track an index or an investment sector. ETF investors like the flexibility of being able to trade shares during the day, just as they can with individual stocks.

The differences between the two are not as distinct as they once were, but each still has its niche in the world of stock market investing.

ATM Cards and Debit Cards

ATM cards allow access to an account only through ATM machines.

Debit cards allow access to accounts through ATM machines and through point-of-sale transactions, just like a credit card. Debit cards with the Visa and/or Mastercard logo are processing your purchases on the same digital money highway where all the credit cards drive. So, stay in your lane!

And, yes, ATM cards still exist. Some banks have done away with them, but they are around at most banks if you ask.

***

English is tough enough on its own, with an endless number of confusing words, homonyms, idioms, Adams, and atoms. When combined with the huge and ever-expanding glossary from the financial world, it can seem impossible to keep up. So, let’s keep learning little by little, word by word. To not do so would be… Inconceivable!

I don’t currently have a TV, and I am spending a few minutes of these TV-less days thinking about whether I want to have one again. However, I’m thinking back to when I still had a TV, and a conspicuous ad caught my ear. Yes, my ear. I was cooking, not really watching the screen, cutting veggies, and listening to Captain Picard bark out commands when I heard (paraphrasing), “I just got a new car … and I know I can afford it because it fits my monthly budget.”

Ahhhhhhh! I had to look up from my work, nearly causing an unfortunate carrot-knife-finger-slicing incident.

The ad in question was from a certain car company with a cute animal mascot and is just one in an endless line of examples showing the American marketing machine at work, making (excess) spending so easy—too easy.

We are conditioned from a young age to see costs based on monthly payments. Paying for things monthly has a place in our society and is not always a bad thing. It makes sense for mortgages, utilities, and other expenses that are incurred monthly. However, thinking we can afford something because it fits a monthly budget is at least a contributor to long-term financial stress and at most an absolute drain on our ability to build wealth and maintain financial stability.

Oh, I’ve Been There, Spent That

I have “owned” new cars; I loved them. Got my first one when I was 20, financed by my 30-hour/week grocery store job and my parents’ (co)signatures. It was a four-year loan on a Plymouth, but after just three years I saw a sporty Dodge Shadow and just had to have it. Of course, thanks to my low down payment and depreciation, I was upside down on the Plymouth—owing more than the value of the car.

“We can work with that,” the sales rep told me as he leaned on the soon-to-be mine Shadow and adjusted my sunroof. “What kind of monthly payment can you afford?”

Ah, there it is. They “rolled” my unresolved debt from Car #1 right into the loan for Car #2, added another year to the term at a slightly lower interest rate, and … it fit my monthly budget. The reality was, however, that it was a financial mistake. I couldn’t afford the car—the total cost of the car. Yet I did the same thing not three years later with new Car #3, which was a little more expensive and the loan included a little more debt “rolled” in from the last car.

I found my financial footing a full decade after Car #3, and a big part of getting things together was facing and understanding the cost of those car loan decisions. How bad? Let’s just say it was thousands in interest and depreciation. The worst part was learning that I had paid interest on the debt from Car #1 rolled into my payments on Car #2, and so on. The other worst part was when I came to understand the opportunity cost; the 5-digit actual costs in dollars could have been invested or used for education or saved to buy a future car—IN CASH!

Would a basic personal finance course in high school have helped me avoid this misstep? Who knows for sure, but I know I would have liked the chance to find out.

The Inevitable One-Hand/Other-Hand Analysis

The car payment is likely the biggest-ticket depreciating asset that we tend to cram into our monthly budget rather than looking at whether we can afford the total cost. But there are others like furniture, appliances, electronics, etc.

On one hand: Buying things based on payments gives us the ability to have things now that we can’t afford now.

On the other hand: Buying things based on payments gives us the ability to have things now that we can’t afford now.

The American Monthly Payment Mindset (AMPM—can I trademark that?) extends to mobile phones, insurance, and streaming services, just to name a few. True affordability requires looking beyond the 30-day view.

Tips and Disclaimer(s)

  • Count smaller monthly items as annual expenses. For example, the average American has 4.3 streaming services at an average cost of $17 each. It’s far too easy to say, “Oh, I can sign up for QuickFlix, it’s only $17/month.” Maybe the question should be, “Hmmm…I am spending about $800/year on streaming services. Can I afford that? Can I afford thousands of dollars over five years? What else could I do with part or all of that money?”
  • Analyze a car purchase based on the total cost of various options over a period of years, say seven, which is now the average term for car loans in the US. Compare new and used cars looking at that total number including expected repairs, interest, taxes, and insurance. Send me an email, please. I am happy to help with that process. I’ve crunched the numbers to dust, and I can say that buying a good used car and borrowing as little as possible always wins when it comes to the Best Financial Decision. For me, eliminating car payments from my life has been one of if not the biggest factor in turning my finances in the right direction.
  • Turn the monthly payment mindset into something good—use it for savings. Cut a streaming service and start putting $17/month into an IRA or into a 529 education savings account. Try this savings calculator, watch the money grow.
  • Determine what can be paid annually. My auto and home insurances are discounted by about $75 by paying in full for the year (or six months for auto). That is $75 to pay for something else or to save.
  • If you are a millionaire, buy any car you want, and while you are at it, buy one for a friend.
  • Business tries to make it easier for us to buy, putting the unaffordable within reach. That’s their job, maximizing stockholder wealth and all that. I get it. But our job is to spend less than we make today in order to have a better financial tomorrow.

I am not preaching; I have no right to. I’ve made the mistakes listed in this post—some more than once. I was fortunate to realize that the path I was on was draining my financial stability and my ability to build wealth. I was robbing my future self, the me of today, who has found solid ground but who has also become an expert in the “If I’d only known then…” phenomenon. I’d like to see a TV ad leave us with this thought, “I can afford this car because I sacrificed, saved my money, paid cash, and have no monthly payments.”

Last time I outlined my experience learning and then learning to love economics. Now it’s time for detail and ideas for economics-related discussions in personal finance classes.

Maybe Starting by…

Refreshing yourself on or learning anew these core principals and passing them on to your students and community (another mention here of FAME’s YouTube channel and the webinar I did last fall on the economics-personal finance connection).

I offer each of these along with teaching nuggets and/or “Steveisms” in italics.

This also seems like a good time to mention that as part of my work at FAME, I visit classrooms and organizations (in-person and/or virtually), and I’d love to talk about visiting yours to talk economics and/or personal finance. Email me!

Trade-off and Opportunity Cost: A foundation of economic thought and really the cornerstone of personal finance. Every decision is a choice; every choice has a cost. Accept the cost or make a different decision. Opportunity costs are often not measurable in dollars but still have financial implications, the great example being the cost(s) of our time.

“Who bought something today? You made a trade-off. What was the opportunity cost? What were the non-financial opportunity costs? Who chose to come to school rather than sleep in? What are the costs of education? What are the opportunity costs of not having an education?”

Scarcity: It means that, simply put, there isn’t enough of anything, and that forces us into decisions or trade-offs. Welcome to the basic problem of economics.

A terrific exercise for the classroom is to challenge students to think about resources that they assume are unlimited, then work through situations that prove otherwise, get into what happens to prices, etc. Grains of sand are endless, right? There could never be a shortage, right? Look at this article.

TANSTAAFL: There Ain’t No Such Thing As A Free Lunch. The key is to challenge students to identify and understand costs associated with decisions and think about, “Is free always free? Is free always a deal?” This is a daily challenge for all of us, isn’t it? When a business offers a “FREE” TV with a purchase… Come on, is that TV really FREE? Did that restaurant really give me a “FREE MEAL” or did that coupon actually cost me $50?

I always advised my students to be wary of “FREE”, typically saying something like, “Hold onto your wallet, back away slowly, eye contact optional.” The more serious message being that, once again, everything has a cost. The key is to root out that cost and decide if it’s worth it.

The Circular Flow of the Economy: I admit, this one sounds BORING, but it’s actually very interesting and is perhaps the glue of our economic system. To summarize, everything is connected. The CF (with its lovely diagram for visual learners) shows the relationships between working, earning, and spending, between spending and business vitality, and between business vitality and working, earning, and spending. It matters because it shows us how our role as consumer conflicts with our role as financially responsible citizen/family member/cog in the economic wheel.

Core discussion: Is savings is a withdrawal or an injection? Is savings good or bad for the economy? Take a look for more on injections and withdrawals connected to the CF of the economy.

Inflation and Prices: I don’t like paying $50 to fill my gas tank.  However, economics (with some help from math) shows me that adjusted for inflation, a gallon of gas is hovering right around the cheapest it’s ever been. Economics, and the perspective it provides, reminds me that it’s not a politician or an evil oil company causing me pain when I fill my tank. I’ll use my energy to focus on expenses I can control, on larger environmental concerns, or on the costs (and opportunity costs) of converting to the next major source of energy.

Have some fun with the class and explore prices as they compare to the “Good Old Days” with this inflation calculator. For example, 40 years ago a gallon of gas cost $1.21.  Adjusted for standard inflation it should cost $3.65/gallon today. The average price/gallon in the US now according to AAA?  $3.60. Wow. The overwhelming political/message is that gas is outrageously expensive and it’s <insert name>’s fault. Gas prices are in line with inflation. What’s not? A pound of ground beef cost $1.30 in 1984. Adjusted for inflation it should cost around $3.92 today, but no, it does not. The average price/pound in the US is around $5.20.  Where’s the society-wide, media fueled and politically charged cry for change?!?

Politics and Economics: Economics is my filter. It helps me decide if a policy is good or bad for me or for my community. It can be hard to distinguish between economics and politics but remember this – economics doesn’t benefit from being elected; it is what it is, an honest and objective analytical tool.

Have the class look at almost any political ad from any era, ask the students to identify the economic concepts and discuss whether the message of the ad is rooted in economic truth or political persuasion.

Honorable Mentions:

  • The Federal Reserve, monetary policy, interest rates, and they affect consumers.
  • The Paradox of Thrift (I predict that there will be a post dedicated to this gem).
  • The theory of wage-price spiral and inflation in general.

Quick Quiz

Economics:

A) is a great tool for supporting our personal financial decisions.

B) is a great tool for understanding political conversations.

C) doesn’t have to be boring – you can make it sizzle.

Yep, all of the above.

In our economic system—let’s call it Mostly Capitalism—there is no escaping the incredible weight of decision making when it comes to managing our personal finances. We need every possible intellectual asset at our disposal.  I recommend using economics as a key tool for you and your students on your personal financial journey.

We’ve been through a lot, econ and me, and although we are in a good place now, it hasn’t always been easy. The stages of my relationship with economics, starting with the most recent:

  • Love it, need it, teach it, preach it.
  • The “Ah ha-I get it now-this is fascinating” stage. A major turning point thanks to my experience in the Peace Corps and to a graduate refresher course.
  • In my 20s there was no econ or personal finance, just credit cards, car loans, and consumption.
  • Junior and senior years of college, one professor planted an idea or two.
  • Freshman and sophomore years in college… Read on.

Lecture Halls, Production Possibility Curves, and Yawns

Just a few years ago, (ha, ha, ha. Define “few”) I majored in economics at Southern Connecticut State University. I chose economics because it was the best way to get a business-related degree without taking a lot of math. Ah, the rationale of a 17-year-old. So, in the fall of that year, I fired up my old orange Subaru and headed off to class, but the start of my economics education was inauspicious at best.

You are probably familiar with this scene: a lecture hall with 150 students for Day One of Econ 101–Principles of Macroeconomics. Yuck. What followed was 100 weeks (ok, it was only about 12) of sleepy lectures filled with aggregate output curves and the impact of public goods.

The only thing worse than those classes was the textbook–4.5 pounds of graphs and chapter titles like, “Factors of Production and Aggregate Supply & Demand”. Absolutely no knock on SCSU or the teachers—it was a function of large classes, a tired yet established way of teaching economics, my age, and the absence of meaning in the abstract theories, numbers, and charts.

Econ 102 followed, which focused on microeconomics and rocked our intellect with production possibilities curves and the price elasticity of widgets. Then came the 200-level courses which were slightly deeper dives delivered in smaller classes.

Halfway through the degree, I was considering a switch to sociology.

But in my junior year I was able to take econ electives, and everything changed. Professor Crakes gets full credit for sparking what would become a foundational topic both in school and in my pursuit of personal financial righteousness.

A Few Years and a Few Credit Cards Later

In post #2 of this blog, I mentioned that during college I stumbled and fumbled with money. Credit cards were easy to get, with monthly minimum payments fooling me into thinking I could afford yet another thing that I didn’t need. It was a time when I wasn’t connected to my personal finances or to economics. Eventually, and fortunately, these two pillars of financial life came together and ever since I’ve included econ in my personal finance classes and in my personal financial life.

In fact, it was while I was teaching economics at a high school in Richmond, Virginia, that everything gelled thanks to a “Macroeconomics Refresher” course at the University of Richmond and another influential teacher. I enrolled to brush up on concepts that I never felt connected with back at the start of college. The instructor was Dr. Gerry Swanson from the University of Arizona.

You might not have heard of Dr. Swanson, but some of you will recognize this name, Ross Perot, the one-time independent presidential candidate (1992) and his 30-minute prime-time infomercials where he lectured American voters on economics. Remember the charts? He used a lot of them, and 16 million people tuned in for the first installment. Well, it turns out that Dr. Swanson was the guy who made those charts. Politics aside, it was fascinating to hear details from that campaign.

But not as fascinating as what he showed us about the economy and how it affected every one of us.

TANSTAAFL, Trade-off, and Opportunity Cost

Dr. Swanson came in one day wearing a t-shirt with TANSTAAFL printed across the front. We finally asked and he answered by turning around and showing us the full phrase on the back, “There Ain’t No Such Thing As A Free Lunch”. He then led us through an exercise in trade-off and opportunity cost, showing the costs associated with “free” things. The bottom line was that nothing is free, and at the core of every economic choice should be a consideration of opportunity cost (the cost of making a choice).

Around that time and in the years since I realized (and continue to remind myself almost every day) that the key to personal financial behavior lies in this core economics concept.

As we went on to study economic policy, The Federal Reserve Bank, and the national debt, it became clearer than ever that although our government (regardless of party) does not adhere to Econ 101, 102, 202, or 502, individuals should be using econ basics to inform our decisions about money. That pushed me to double down on my efforts to manage my personal economy regardless of the state of our national monetary or fiscal policy.

Sharing the Love

Understanding economics is integral to personal finance and, therefore, to personal finance education. It helps by holding up a mirror to our behavior and by helping us understand the economy, how it swirls around us and affects us, and how we affect it.

Yes, this is about economics. It’s also about the impact and power of good teaching.

We learn in our own ways, and I am sure that since the time of Adam Smith many have learned and enjoyed economics taught the old-fashioned way. However, for me, and maybe for entire generations, those heavy textbooks and even heavier graph-centric lectures did not do the topic justice.

Economics came alive when I was lucky enough to have teachers who made it relevant. They didn’t just explain the nuts and bolts of elasticity of demand, they illuminated the connections to everyday experiences, especially when it came to decision-making and money. Those teachers inspired me to do the same for my students.

To survive and thrive in our system takes more than just managing money and resources. It also takes an understanding of how everything is being managed around us. We might not always like what we see or hear, but being armed with the skills to interpret it is vital.

Next time, I’ll share my thoughts on what I think are some critical economics topics that fit perfectly with personal finance. In the meantime, you can check out this webinar on FAME’s YouTube channel  I recorded a few months ago. According to at least one friend it was, “a good listen while driving”.