Sunday, June 20, 2004

where do we learn money management?

Ultimately it seems that we learn about money management from our parents. Maybe I say this because I am a relatively young person - on the other, it seems so obvious to me that the conclusion is either totally valid or invalid.

Anyhow - I got to thinking this because my cousin has terrible investment skills. He's a bit younger than I am and when he works (sometimes during the summer, sometimes during the winter, essentially when he's not at college) he saves money in certificates of deposits at his local bank.

I talked to him about it and he said that he saves his money in 18 month CDs. The rationale for this was that he needed that money every now and then, he said that he "cycles through" them.

(As if you dont get this...but here goes...he saves say 200 bucks in the summer, then by next year's winter he would get the money from the CD, at which point he wont have to work, or he could and save more money.)

To make a long story really short - 18 month CDs are terrible investments. The yield curve on debt would tell pretty much anyone that you should lend at either the very long or very short end of the spectrum (short only if you expect to use the money or expect rates to go up).

Of course to him this does not really matter - all that mattered to him was that his parents are very difficult to get even a few bucks off of (they do decently well for themselves but have a healthy dose of frugality) so he needs to plan for his own future outlays - even if such planning ultimately is a detriment to sane investment practices.

Now - if he understood this (that 18 month CDs were an unfortunate necessity in his situation) life would be okay and good.

He doesnt. All he understands is that the bank will give him money for keeping it with the bank. This is when it occurred to me that he didnt really know about interest rates. For a guy who watches every dime he spends as if it was his last he didnt know about the differences in interest rates between a 60 month CD and an 18 month CD. This isnt too substantial of a difference in real dollar terms (since he doesnt have too many of them) - but it is a difference of over 2% of APY - a HUGE difference to anyone familiar with investing.

When I recommended that he put it in longer maturity CDs he said that he would need the money soon. When I then recommended Series EE and I Savingsbonds - he claimed that he never used them before and would be uncomfortable with them.

So he's now stuck with 18 month CDs yielding much less than ING Direct's then current interest rates on SAVINGS (not tied up) of 1.9%.

In this case his parent's would need to be a bit more competent at helping themselves (since I would bet good money that they dont have the best money management practices either) and their children get a better rate of return by either finding a better rate of return or advising their children to go with longer maturities and being a bit less stingy in the meantime.

I would certainly make sure to be very open about not only my own finances but about financial matters in general with my (future) children. I'm not going to make my mother out to be some saint - but she really informed me quite early on about money, about how money can grow, even about inflation and currency values. I credit her with being very open about these things and informing me more than the average American kid apparently is.

On the other hand...I have had to force my self to take a "vacation" from investing because of it...so...maybe it's not such a good idea...

Anyhow...I am tired. Gnite.
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