Wednesday, June 13, 2007

Our Rules About Money

"Mr. Micawber (said) to take warning by his fate; and to observe that if a man had twenty pounds a year for his income, and spent nineteen pounds nineteen shillings and sixpence, he would be happy, but that if he spent twenty pounds one he would be miserable."

Charles Dickens

David Copperfield

Dickens wrote David Copperfield about 160 years ago. At the time a British pound was worth about $5.00, so Mr. Micawber was talking about an annual income of about $100. Now, while the value of money has certainly changed over the last 160 years, the question is whether our attitudes towards money have also shifted.

People can get into lively discussions about what Micawber meant and how they feel about those sentiments. What he is saying is that if his income – over the course of a year – exceeds his expenses by just a tiny bit, he will be a happy man. But if his expenses are a weensy bit more than his income, he is miserable. Micawber has a fixed rule about money and about the relationship between money and stress. Many of us have a very similar rule.

Is this a rational rule? I have a very good friend who has always lived by this rule. From the time he first started working, he made sure that the size of his paycheck was always larger than his expenses. I don't know if he would have been miserable if he broke the rule because he never, ever broke the rule and it has worked well for him his whole life. He never bought anything on credit and, therefore, never paid interest on anything. Of course, there were many things he either never bought or deferred buying for years, but he never felt deprived.

I have another very close friend who had a very different rule. His rule was "always be able to catch up." He had no qualms about going into debt, but never got beyond his earning capacity. He ended paying more for many of the goods he enjoyed, because they cost him interest, but he never wanted for those goods.

I also know people whose rule is "spend and pray." They "bet on the come." This works well in boom times and bull markets, but they suffer and scramble when things get tight. Then there are money Bulimics who alternate between being tight and spending little and bingeing, spending it all and even more.

Mr. Micawber lived a much more simple life than we do today. There were very few instruments of money. There were no credit cards and, aside from a bar tab, very few means of managing debt.

Life today is significantly more complex. Many people have no idea whether they have more money coming in than going out! Both income and outgo are more complex nowadays. We have IRAs and 401Ks, complex tax structures that only get resolved once a year. We have many forms of investments and we have many forms of debt management.

But when you examine the quote, you may see that Mr. Micawber had another fixed rule about money. This second rule also dominated his life, even more than the first and that rule was, "I cannot manage debt." He may have said it another way, "I cannot be trusted with money." Many of us have those rules, too.

We all have rules about money

All of us act as if there were certain rules about our relationship to money matters. But we don't know that we act that way. I suggest you write down your rules. Over the next week see when they pop up-How do you tip? How do you buy necessities? How do you buy presents? How do you save? What are your rules?

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