Financial journalist and author Jean Chatzky has been covering consumer budgeting, investing, and other personal finance topics for more than two decades. Her simple, no-nonsense approach to spending, saving, and managing money appears in numerous books, including Not Your Parents' Money Book: Making, Spending, and Saving Your Own Money and Pay It Down!: Debt-Free on $10 a Day. Her latest book, Money Rules: The Simple Path to Lifelong Security, includes dozens of short, digestible tips for avoiding debt and reaching financial goals.
U.S. News recently spoke with Chatzky about why people complicate financial decisions and whether the recession has changed the rules. Excerpts:
What prompted you to write this book?
I've been doing personal finance reporting for more than 20 years, and there are certain things that were true 20 years ago and are true now. If people would just remember them, they would be so much better off. These are simple rules that don't have to take up a lot of space in your brain.
Could you give some examples of these money rules?
Money rule No. 35 is "Just because you have a coupon doesn't mean you should go shopping." Anytime something is on sale, we tend to lose our sense of rationality. The four-letter word makes us view the purchase not as the process of getting the item, but as a quest. The item becomes the trophy. You get the same sort of adrenaline rush as when you cross the finish line. That can be a pretty dangerous thing for your wallet.
Money rule No. 54 is from the investment section: "Boring is better." When you look at sexy investments like mutual funds or hedge funds from people who get paid a lot of money for doing that, you end up paying a lot in fees and commissions. When you look at end-of-the-year performance for boring, cheaper index and exchange-traded funds, they beat the actively managed funds hands-down. You're not paying as much in fees and commissions. That's a guaranteed return to your bottom line. They're also cheaper on taxes.
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Have money rules changed with the recession?
I don't know that the money rules have changed, but I think the recession has made people realize the importance of some of the money rules. For example, Money Rule #26 is "Just because someone will lend it to you, doesn't mean you should borrow it." I think it's the lesson of the housing crisis. We over-borrowed. We took out bigger mortgages than we could truly afford because the banks were willing to give it to us. Every unfurnished McMansion proves that point. For everybody who's ever felt house-poor or student-loan poor or credit-card poor, the recession has hammered that home.
Why do people tend to overcomplicate money?
It's really emotional. If I had a bottle of champagne and I opened it with a group of friends, there would be this feeling that we should divvy it up fairly. But if I said, "I have some extra money," people start making value judgments. There's morality involved with how we divvy up the money.
Combined with that is the fact that we're not taught about money as kids or in the schools. There's not room for it in the curriculum. Getting financial literacy into every school in the country is a very important thing to do, but it's an uphill battle. The combination of those two things makes many of us feel insecure when it comes to making the right decisions about our money, whether we're spending it, saving it, or investing it.
However, if you have a rule and you're faced with a question, you know whether the answer should be yes or no. There's a rule in the book that says, "If you can't afford to replace it, insure it; If you can afford to replace it, don't." I can't tell you how many people ask if they should take out a life insurance policy on their kids. Life insurance is income insurance. Your kids don't have an income, so there's nothing to replace.
What are some of the biggest misconceptions about money?
A huge misconception is that more money will make you happier. That's only true up to a point. If you don't have enough money to cover the basics, the lack of money will make you unhappy. But once you've got enough money to pay for your needs and some of your wants, the happiness curve flattens out. More money beyond that will not make you happy. The benchmark, according to some researchers, is $75,000 a year, but it really varies regionally. If you look at how much it costs to pay rent in New York City, it's going to cost a lot more than rent in Peoria.