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Tuesday, September 15, 2009

My Daughter Gets Her First Lesson On Money Matters!

My brother is visiting me with his family in a couple of weeks. I had a chance to visit him on my way back to the US after taking care of my father, recovering from cardiac bypass surgery. I had discussed a possible vacation with him at that time. He finalized his plans in the past couple of weeks.

He used to live and work in the US a while back before he took up various jobs in various parts of the world. He has had a chance to compare gadget prices in the places he has lived in with those in the US. Surprisingly, he finds that most electronics items are much cheaper in the US than in any of these other places. For the record, these other places are not high-cost places like Europe. I would expect prices to be higher in Europe because of their import restrictions, taxes and overhead. But, he has found the same to be true of places I normally associate with cheap imports, such as Hong Kong.

Looks like items are made cheap in these places and they get shipped out to the US. They are cheapest in the US. And the only way to get them in a place like Hong Kong seems to be to reimport them from the US, making the items much more expensive than in the US. I am obviously talking only about physical gadgets, not items like movies, music and software. Obviously, these items are much cheaper in Hong Kong because of reasons that have nothing to do with the legal rules of trade!

In any case, my brother has taken his upcoming visit to the US as an opportunity to acquire a few gadgets for cheap and take them back with him. In the past, when he hasn't been able to visit the US personally, he has had me order items for him from places like and then ship it to his place. Even with Fedex shipping charges added in, he claimed that he could easily save 10 to 20% on electronics and computer purchases.

This time, his gadget purchases included a MacBook pro and a Kindle DX. The MacBook arrived by Fedex about a week back and my brother has been asking me to unpack it, switch it on and make sure it works. He also wanted to find out if it had Snow Leopard on it, so that if it didn't he could arrange to get an upgrade disk as soon as possible. I kept putting it off because of various things that always seemed to take up all my time.

But finally, this weekend, I unpacked the MacBook and powered it on for the first time. The computer was incredibly light, and very sleek and good-looking. The LCD was brilliant, being LED-backlit. The keyboard was also very different from the keyboards I am used to on my other laptops - and it is backlit too. Overall, a pretty slick machine.

I am a windows person myself. I have 3 laptops at home and in all, I have owned a series of windows machines going back about 15 years. I have always considered Macs overpriced toys. As I mentioned before, I practically never buy software and there are always more than enough free software options on the PC to get practically anything done on one of those machines without having to shell out money for software. Unfortunately, the same can not be said about Macs. And when you add in the fact that most Macs cost twice to three times what similarly equipped windows PC's cost, you can easily understand my disdain for Macs.

Except for the very first PC I bought, all my PC's have been quite cheap also. I think I paid $1,500 or for my first PC, and I am still shocked at how or why I did that. Since then, I haven't spent more than $1,000 for any PC I have bought and the latest two laptops I have bought for the home have both been under $500. They are not fancy or top of the line, but they are more than adequate for surfing the web, emailing and running skype on.

I am not a serious audiophile or gamer, so this is pretty much all my computers ever end up getting used for. I fail to see what I would gain by paying much more than this to upgrade the CPU to a faster version or put in a fancy high-end graphics chip in my PC. My main concern is RAM and hard drive size and both the laptops I bought have 2 GB of RAM and 250 GB of hard drive space (the maximum size laptop hard drives went to when I bought those laptops).

My wife and kids crowded around me when I powered up the Mac, and I told them this is what you get when you are willing to shell out $2,000 for a laptop. They were impressed, no doubt. My wife then asked me what it was capable of doing that our $500 laptops could not do. I did not want to go into a lot of technical detail because my wife and kids are not technical folks. I just told her that for the purposes we use our laptops for, there is nothing special this laptop could do that our laptops could not handle. But I added that since my brother does a lot of photography, he probably bought this laptop because Macs are supposed to be better for graphics.

Kids do say the darnedest things and ask the darnedest questions. This is when my elder daughter (who looked quite mesmerized by the look of the new laptop's LCD screen and the feel of its backlit keyboard) looked at me and asked me in all seriousness, "is your brother much richer than you? Why are you spending so much time trying to find the cheapest prices on your computers while he buys such an expensive computer?"

I don't know how to answer such a question. First of all, I am not privy to my brother's financial situation except what he chooses to reveal to me. Moreover, I don't want to give the impression to my daughter that being rich by itself was something to aspire to. So, I decided to be honest and give her a lecture on how my financial situation is different from my brother's. I also decided this would be a good time to talk to her about different attitudes towards money and finances.

My brother and his wife both work. My wife stays at home. So, his household income is probably much higher than mine. Moreover, he lives in a place with no income taxes. So, his take-home pay is certainly much higher than mine. In addition to income taxes, I also pay a certain percentage of my income to the government in return for a guarantee from the government that I would get a retirement income when I retire (social security).

My brother and I are also in different stages of our lives. He is five years younger than me, so he has a little longer to go before he faces retirement. He had his first child only a year back while my daughters are 10 and 9. He doesn't have to worry about his daughter asking him to buy her anything for the next 4 or 5 years while my daughters are already wondering when they can get their first cell-phone!

My brother is different from me when it comes to spending his money. He may be spending more money because he has more money to spend. It is also possible that he is not saving as much as he should for retirement and for emergencies. The government where he lives does not charge him income taxes or social security taxes. By the same token, they don't pay anybody anything in retirement either. Each person is responsible for ensuring their own retirement income.

I have always been quite fanatical about financial security for myself and for my family. I have always saved money in various ways so that I could put it away for a rainy day or two. In addition to social security payments, I also max out my 401(k) and my and my wife's IRA's. In addition, I have money automatically taken out of my pay check and invested in a couple of non-retirement savings accounts. Because of that, my take-home pay is only about half of what I actually earn.

What I earn is not a poverty-level wage by any stretch of the imagination. In fact, I know for a fact that my household income (even though I am the only wage-earner) is much higher than the median household income in the US even though that median is pulled upward strongly because of the number of double-income households out there.

But, my attitude towards money has never allowed me to spend it carelessly without thinking carefully about all the aspects of the expenditure. I balance the cost against the future value I will get out of the item I buy and make sure it is actually worth it. This means that I am realistic about my needs and don't get carried away by the impulse to upgrade everything I buy to the top of the line. As everyone knows, the features and capabilities that one actually uses are a small subset of what the top of the line provides, especially when it comes to computers and other electronics, so I see no point in springing for it. That is also why I did not go for the top of the line when I bought my latest dishwasher (a Bosch model that is reviewed here) to replace the one that died recently.

I bought my house more than 10 years back and it has now doubled in value since I bought it. But, I have refinanced only the balance on the house every time I have done so to take advantage of lower interest rates, rather than taking cash out of my house. I also opted for a 15-year mortgage instead of a 30-year one. Because of that, my house will be paid off when my daughters start college. I can either use the equity in the house to pay for college or I can redirect my mortgage payments towards college once the house is paid off.

My brother bought a house only a year or so back. Because of the housing market crisis, he is now upside down on his mortgage. He also has a full 30 years to pay off his mortgage and own the house if he wants to. He is not going to be working at the end of that 30-year period, so at some point he has to make some decision about how to handle the mortgage. Moreover, where he lives, schooling is not free. He has to pay for schooling his one-year-old daughter starting in about 4 years. So, his expenses are going to increase at some point and his spending habits might change at that time.

I have always paid cash for my vehicles. I also hold onto my vehicles for a long time. Only recently, I traded in my 10-year-old van for a car under the government's cash for clunkers scheme. I might not have done that if it weren't for that scheme. After all, except for cosmetic and passenger-comfort items, the van was in pretty decent shape. But I considered the scheme an opportunity to get $2,500 from the government (that was what the $4,500 government incentive was worth over and above what the van's trade-in value was) and move to a car which will save me close to $600 a year in fuel costs. It seemed to make sense to me. But the car I bought was a Hyundai Elantra (reviewed here), which is pretty much the cheapest, good-quality car in its class.

My brother and his wife drive a high-end BMW and a large SUV. Gas is cheap where he lives, so the fuel consumption of the vehicles is not a problem for them. But, both cars are bought on borrowed money, so he has to make payments on them month after month. He obviously values the prestige that comes with owning and driving those vehicles rather than the cheap vehicles he could afford to own outright. Are they that different objectively in terms of being able to do what my cars can? Probably not a whole lot. I would never spring for such an upgrade, but my brother chooses to.

The differences go on endlessly. My brother owns a large 50-inch LCD HDTV while my TV is a 19-year old relic. I hardly ever watch TV (and nobody in my family does either), so it does not make any sense for me to upgrade my TV. He spends money on a cable subscription while I would rather put that money into my daughter's dance classes!

My daughter's eyes were probably glazed over by the time I finished my explanation. She did try to keep up with me and asked me a few questions, so she hadn't gone to sleep, but she was probably wondering why she had ever brought the topic up!

I think it is important to be somewhat honest with children about finances from a young age. You don't have to drown them in details or impose your attitudes on them with no latitude for them to experiment and develop their own ideas. But you don't want them living in a bubble either, with no idea about what money is, how to use it and how not to use it.

My parents were not as well off as I am. My mother used to sit in front of my brother and I and share the household budget with us. She was entirely honest about how much money my father made and where that money goes. Many of my financial attitudes were shaped by those conversations with my mother. But I haven't been brainwashed into being my parents either. I love traveling, for instance, and I consider almost nothing too high a price to visit some exotic place. Sometimes, I come home all excited about finding a cruise that goes to all these exotic places and my wife would shoot it down saying it was too much money!

Young people nowadays get exposed to marketing messages from an early age that emphasize instant gratification. Many of these messages are from companies looking to sell a product. Some of these messages are also from financial companies that are trying to sell them the means to get to this "instant gratification" in the form of credit cards and other loans.

It is important for parents to sit down and explain their financial decisions to their children from the age they are able to understand such things. When a child is told that he/she can not have some toy or something else they want, they deserve an explanation of why you think it is not worth it. Or why you think there are better ways to spend the money.

When children grow up without a good understanding of household finances, they are more likely to get into financial trouble in their later lives. The media is filled with stories of people overwhelmed by debt there was no reason for them to get into in the first place. When children are not equipped with the right information to make good tradeoffs between instant and delayed gratification, between spending and saving, between a good value and a bad value, they are likely to take the easy way out by choosing whatever gives them the most pleasure in the short run. Associating that action with the displeasure that is caused many months or years down the line, and teaching them a lesson based on that, is not only impossible, but would be too late in many cases even if it were possible.

I am hoping the conversation I had with my daughter is the first of many she (or I) will initiate as she grows up. I hope this account of my conversation encourages more parents and others to have similar conversations about money and values with their children. With more such responsible children at the helm, one can begin to hope that things like the mortgage crisis (which was fueled by greed, and the ignorance of people who signed mortgage agreements that they did not and/or could not understand) would be less common in the future.

By the way, the Macbook did not have Snow Leopard on it, but it did come with a DVD that had the OS on it. After making sure the computer worked, I slipped the DVD into its slot and ran the upgrade program. After an hour or so, it was all done. All I had to do was reboot the machine, then shut it down, pack it up and put it away for my brother to come and play with!

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