How To Make Better Money Tradeoffs

How To Make Better Money Tradeoffs

“There are no solutions; there are only trade-offs.”

Thomas Sowell

There are tradeoffs in most aspects of our lives. We have a plethora of choices and cannot do everything we want to do. For every choice we make, opportunity costs requiring us to forego benefits for the option not selected. Opportunity costs are the loss of potential gains from other alternatives when making a choice.

Tradeoffs between time and money differ significantly based on age and lifestyle based on our unique set of values. With less time like Boomers as an older generation, you might place more importance on time while young people may favor money. That is not always the case.  Based on this global survey, those in the 20s and 30s tend to lean more time than money, valuing experiences over possessions than boomers, as seen in this infographic.

Each of us has to decide based on our characteristics and circumstances. Typical examples of trade-offs between time and money as we ponder our individual decisions, we:

  • Opt for a job requiring a long commute for a pay hike.
  • Have one income with mom or dad staying at home with the kids.
  • Go to a movie instead of working on an assignment due the next day.
  • Job security with the government or seeking a wealth opportunity with long hours and traveling.
  • Attend a community college initially, then transfer to a four-year college.
  • Work at home to spend more time with family.

Sure, we can try multitasking or combine activities when we face conflicting demands on us. However, there is often a price to pay when poor execution results.

Make Diligent Choices

Instead, we may inform ourselves by making diligent choices. How conscious are we when we make these decisions? For some decisions, make complex financial calculations as needed. On the other hand, there are times when we may not even be aware of having made a choice. Time, money, productivity, and health may act as alternative constraints, reflected in your priorities.

Time is a precious finite resource we often waste. Even if we have unlimited capital available, we just don’t have the time to spend it fruitfully. We want to enjoy our lives to the fullest, with health on our side. Without taking care of ourselves, time is short, and no amount of money may cure our illness. Since we have longer life expectancies, we need to support ourselves by fulfilling well thought out financial plans.

Typical Tradeoffs We Face:


Your Home: Buy or Rent

Owning versus renting your home is among the most common tradeoffs involving personal preferences, age factors, and your financial situation. Our family has rented and owned our home. After many years of ownership, we are renting a home in a lovely town, taking advantage of a great public school system.

If you seek to own a home, do you prefer stability, building equity, control over the home, and its responsibilities and tax benefits? Will you enjoy a sense of pride in ownership? These benefits come at a high cost based on a 20% down payment and mortgage loans for 80% of the home’s principal price, with interest rates strongly determined by your credit scores. The opportunity cost of owning your home may prevent you from saving for retirement and making other investments. Your home will not likely appreciate more than inflation.

The term of your loan can vary based on 15 years versus 30-year mortgages–another trade-off. The longer the loan, the lower your monthly payments. However, the 30-year mortgage raises your total costs compared to the 15-year loan.

Financial Implications For 30 Year versus 15 Year Mortgage

When comparing the different loan maturities on a $300,000 loan:

  • The APR will be higher for the 30-year mortgage than a 15 year one, all else being the same.
  • The monthly mortgage payments will be significantly higher for the 15-year mortgage, given the shorter period. If you can afford to pay the higher monthly amount, you are better off with the 15-year mortgage because you pay less in total interest.
  •  Assuming you have a 720 credit score, the total home price, including total interest paid and down payment, will be lower with a 15-year mortgage loan.
  • The 30-year mortgage is much higher because you are paying interest on your loan longer, so the total home price or principal is $375,000 plus $189,622, equalling $564,620.
  • If you opt for a 15 year mortgage, your total home price or principal  is $375,000 ($300,000 loan + $75,000 down payment of 20%) + $76,012 in total interest equals $451,012 for principal and interest.

On the other hand, renting provides flexibility and freedom. Your rent is usually more affordable than home costs, not having to deal with the home’s repair and maintenance, freeing you to use savings to make investments, and not have to worry about potential declining home values. The downside of renting your home has restrictions to do what you want to make your place more livable. Your landlord could decide to sell the property and require you to move. There is always the risk of having a bad landlord whose actions force you to pick up and leave.

My Take

The necessity of the tradeoffs of owning your home versus renting considers the tug between time and money differences.  When buying your home, you are making a long term commitment to the neighborhood, greater responsibilities in maintaining the property, insurance, and keeping up with monthly payments for some length of time. Alternatively, renting is usually a shorter-term commitment that may require future moves but with less responsibility and costs.

For families who want to control their home, buying is the way to go, especially if you can handle the shorter mortgage terms so you can pay off your debt sooner. Understand your long term goals for your family and financial priorities for your money. Don’t take on too big a house that you can’t afford. Renting is a great choice, especially if you don’t want the headaches of your own home. We compare advantages and disadvantages in our guide to owning and renting your home here.

A Car: Buy, Lease or Borrow

If owning your home is seen as the American dream, our culture has long embraced car ownership as a faithful supplement to our lifestyle. When seeking a car, you have a few alternatives. Do you want a new or used car, preferably certified pre-owned? Are you buying or leasing this car? If you are getting this car for personal rather than business use, the tradeoffs between buying the car with a loan or a lease are relatively straight forward. Assume you are getting a new car in a low-interest-rate environment and similar credit scores whether you are buying or leasing. About 30% of those getting a new car is leasing.

The Advantages And Disadvantages Of Leasing A Car:

There are lower upfront costs requiring a security deposit and usually the first month’s payment. Payments for registration and taxes are needed for leasing and buying the car. When leasing, you will make lower monthly payments for the lease term. Your credit score influences the amount, favoring those with very good to excellent scores.

The manufacturer’s warranty covers most if the leased car’s repairs.

Depending on your term, you are getting the latest technology available in safety, entertainment, and comfort. Those who lease can get a new car every 2-3 years.

There are mileage limits on the car though you may be able to negotiate a bit.

You don’t own the car at the end of your lease. Gap insurance is an optional add-on car insurance covering the difference between the amount owed on a vehicle and its actual cash value in the unforeseen event it is totaled or stolen. When returning the leased car, you may have to pay for excessive maintenance, wear and tear costs.

End of lease costs can be a bit shocking when returning the car. When we finished our lease recently, we were quite surprised at some of the hidden fees discussed when we initiated the lease. We incurred costs close to $1,000 to the lessor to reimburse them for taxes to the local municipality. These fees were relatively new to us, causing dismay. This lease was likely our final one.

Advantages and Disadvantages Of Buying A Car:

Higher upfront costs, including down payment and trade-in, if you have another car. Of course, the more the upfronts costs, the lower your monthly expenses.

Owning presents higher monthly costs than leasing, depending on term length. According to ValuePenguin, the national average of US auto loans is 4.37% in 60 months, though in recent years, buyers have increasingly extended their loan terms to 72 months, with 84 months gaining popularity. The longer the loan, the higher the total interest you are adding to the car’s cost. Experian has reported that new car buyers with the highest credit scores have average loans of 63 months versus those with the lowest scores taking out loans of 72 months.

As you own the car, there are no restrictions on mileage or what tires you want. While you can resell your vehicle, keep in mind that it is a depreciable asset that loses value in the early years and is impacted by mileage long term.

My Take:

The tradeoff on buying or leasing a car is similar to owning or renting your home. A third option to buying or leasing a new car is buying a certified used car. Depending on its age and mileage, it may have remaining time left on the manufacturer’s warranty. After purchasing and leasing cars for years, we recently chose this third option. We paid cash for a 4-year-old certified Subaru as a second car, given its strong reputation for longevity. We are tremendously happy with it.

Spending vs. Saving

This tradeoff’s concern is that it ignores the need to temper spending in favor of saving money. If you spend more than you earn, you either will be withdrawing from your savings and investment accounts or, worse, borrowing to pay for your purchases. On the other hand, if you spend less than you earn, you can better afford your living costs and enjoy life. Having money left over to build an emergency fund, save for retirement, and make investments provides you with more options over the long term.

Adopt an attitude that allows you to enjoy life but not be so costly that you can’t afford your bills. Avoid lifestyle inflation, which comes about when your earnings rise, and you increase your spending. The more you can delay spending and reduce impulse buying, the better your financial health. Many experiences are free, healthy, and worthwhile pursuits. Make room in your budget for a solid emergency fund, pay off your debts to manageable levels, and save for retirement.

Emergency Fund Vs. Debt Payoffs

You should be put savings aside for an emergency fund to cover at least six months of essential living costs. This habit will eliminate the stress of the unknown and reduce your need to abuse your credit card. Many people lack $1,000 in savings to pay for unforeseen costs like a job loss, an emergency surgery for a favored pet, or a damaged car. Having to pay for these costs often leads to higher debt, especially credit card debt with higher interest costs. Set small savings amounts aside earmarked specifically for an ample emergency fund and invest this money in a readily accessible liquid account.

Paralleling these savings, you need to pay your monthly student loans and your credit card bills. If you can’t pay your credit card balances in full, reduce your spending. It is easier said than done. However, committing to keeping debt at a manageable level is critical.

Saving For College Or Retirement: A Tough Choice

When faced with helping your children with their college funding or tapping your retirement money, it becomes a tough choice you don’t have to make. If you are in your 50s or more, you should not touch your retirement account. True, you want to avoid burdening your kids with student loans early in their lives. The average student loan is $31,172, a significant amount of debt to carry. However, they have the benefit of a longer-term horizon than you.

As a young couple, your earnings are rising through your 20s, 30s, and beyond. To avoid having to make a difficult choice, later on, save, and invest now. These are the years you should make your money work for your future. It may mean spending less now, so you have more money to address critical areas of your lives later consciously. These involve essential trade-offs.

Don’t ignore what you can do now to provide plenty of benefits to you and your family long term. Handling money allocation into key baskets for college funding, retirement, and investments early will improve your financial outlook.

Save For College Early Using A 529 Savings Plan

When you expect a child, put aside some money into a 529 Savings Plan or other plans you can read about here. You get tax benefits using pretax money invested in several options based on your preferences. The more money you can put into these funds, the greater likelihood of lower borrowing in your children’s college years. Most states have their plans and have a lot of investment choices. Prioritize saving early in your child’s life so that you don’t have to borrow from your retirement funds.

Retirement Savings In Your 20s

You should begin to save for retirement as soon as you enter the workforce, if not before. Most employers offer 401K retirement plans that make it easy to fund your account through your paychecks. Automating these payments is simple though it may require an opt-in process. Setting this up at work is among the first things you should do when you start your first job.

Many employers will contribute to your retirement account based on a pre-determined match formula. For example, if you save a targeted percentage of 6% of your paycheck to your company-sponsored retirement plan, they may add 50% of that amount or an additional 3% of the money to your account. Separately, you should also set up an IRA or a Roth IRA and focus on contributing up to the maximum amount allowed.

Saving for retirement in your 20s allows you to have a sizable nest egg with compounding returns when you are ready to move to the next stage of life. On the other hand, catching up to saving for retirement in your 50s, while possible, is very difficult. It may mean working longer or tapering down your lifestyle in your later years. The risk you have of waiting too long to accumulate retirement money is that of losing your job in your 50s or if, for health reasons, you no longer can work.

Facing these tradeoffs head-on and early in life create a lot of flexibility and freedom in your later years. Make your money and time work for you as productively as possible. It is easier to sacrifice some choices for the more significant wallet needed later on. Long term comfort in retirement is a worthwhile aim.

Final Thoughts

Making tradeoffs that consider time and money may be intuitive or involve financial calculations balanced with your financial priorities. Addressing many major decisions early in life may provide you with financial flexibility and the freedom to choose an array of lifestyle options. The more you delay thinking about your choices, the harder the trade-offs you have to make. Your 20s and 30s are golden times to tackle savings as your earnings rise. Avoid finding more things to spend on that don’t positively add to your comforts.

Thank you for reading! Please visit us at The Cents of Money to see other such posts and subscribe to our weekly newsletter.

What kind of tradeoffs have you been facing? Did your choices involve your lifestyle or career? We would love to hear from you!







How to Overcome Biases In Financial Situations

How to Overcome Biases In Financial Situations

We all have biases–cognitive and emotional– that may cloud our judgment when making day-to-day decisions, especially about our finances. We often depend on our intuition, but sometimes we are unaware of how our gut feeling may be faulty. 

These biases affect how we think, act, and make purchases against our better judgment. 

Learning how these biases work is a first step to guarding ourselves against becoming irrational when managing money when we want to save, be more rational shoppers, and invest.

What Are These Biases?

Biases are either cognitive or emotional that can lead us astray. They create behavioral patterns that may interfere with our financial goals. Our decision-making may be faulty when cognitive biases interfere. 

On the other hand, emotional biases are distortions in cognition, but emotional factors may lead to poor decisions. Emotional biases are ingrained in our brains and may be harder to overcome than cognitive biases. Marketers exploit these behavioral psychology traits to get us to spend more and buy impulsively.

Common Biases We Need To Overcome


1. Anchoring Bias

When shopping, anchoring, a cognitive bias occurs when we place a lot of value in the first information we get. We often rely on the listed price when we make price comparisons. For example, seeing priced T-shirts that cost $700 in one store and another one that is $200 will cause the latter shirt to look cheap. The higher cost is your anchor price. Retailers often use a higher list price for coats on “sale” at $1,000 with a 75% markdown to $250. Now, that coat’s a bargain, but it may not necessarily be so.

“I am not paying the retail price!”

I often shop with a friend, Sue. She will never pay the full or retail price for anything. As a result, Sue feels great walking out of a store, her hands full of marked-down items by various percentages.

The problem is that many retailers know that jacking up their list price to an unrealistic level with a beaming sale price will get shoppers’ attention and play to their beliefs that they got a bargain. It may not be so. Do your research and know the merchant’s sales strategies as well as the quality you are getting. Getting false deals is a real let-down.

Bob’s Furniture Store has a different strategy. There are no sales or ability to negotiate a lower price for their furniture. The list price is what you pay, period. We recently looked at several furniture stores before we ended up buying our children’s furniture there. While other merchants used anchor strategies, their marked down prices were either the same or higher, often for less quality.

Anchoring comes into play in various ways, such as negotiating your salary, a car loan, or getting a savings account. On the latter, you may get a higher annual percentage yield (APY) on your savings account than other banks, but it may charge higher fees. Know all of the specifics of the deal and compare it to other offerings to increase your savviness.

2. Choice Supportive Bias

Sometimes referred to as buyer’s remorse after making a particular purchase, choice supportive bias helps us to justify that discomfort we may feel postpurchase. Sometimes this is called cognitive dissonance. Ever experience regrets after making an expensive purchase? I have had that feeling which is sometimes akin to guilt or doubt about the decision. We want to convince ourselves we made the right choice. Increasingly, marketers recognize this tendency and work hard to provide postpurchase customer service by welcoming you to that merchant and asking if you need any help with the product.

Choice supportive bias changes what we remember about our decision. We distort our memories about our choices, ascribing more positive traits to justify our selection better. In a selective distortion 2000 study by Mathers, Shafir, and Johnson in 2000, the participants chose two job candidates. Each candidate had positive and negative attributes. Later, the subjects remembered their preferred candidate’s better aspects. 

Rather than twist our thoughts around, we should make better choices in the first place. Evaluate your alternatives and review return policies before making your final decision. This way, you maintain your control over buying decisions. We can reduce our spending by becoming better shoppers.

3. Confirmation Bias

“I never allow myself to hold an opinion on anything that I don’t know the other side’s argument better than they do.”       Charlie Munger

If choice supportive bias is selective distortion, confirmation bias is about selective attention. People will remember information selectively, interpreting data to support their existing beliefs, even if the evidence is ambiguous. We tend to agree with people who seem to conform to our ideas. Alternatively, we are dismissive of new information even if that provides evidence that is wrong but accurate. Sometimes we skim or not read all of an article or report.

I sometimes see my students do this in their term papers. For example, when looking to support their views, I will see only one part of the argument presented rather than writing about the opposite point of view they are encouraged to know. News from social media often reinforces one side of a debate. That tendency is pervasive and used to protect our egos from thinking we may be wrong.

This bias may hurt our abilities when making financial decisions. For example, if you are truly open to deciding between renting or buying your home, you should want to know both sides of each decision. There are pros and cons to every decision we make. Confirmation bias works when we may have a preference. We may only focus on the relevant information for your choice. However, you should always do research and know both sides of an argument.

Talluria Study On Dots

Talluria et al. study highlighted a confirmation bias based on experiments that seek consistency across different stimuli. In this case, the researchers asked the participants to view two successive movies featuring a cloud of small dots moving on a white computer screen. They reported on the direction of the moving dots after the first movie. They did the same, that is, report on the path of the dots after the second movie.

The Talluria et al. study proved that people would hold the same confirmation bias even if they are making choices (i.e., dot pathways) that are far less consequential than financial decisions. 

4. “Bandwagon” Effect

The majority of us fall for the bandwagon effect whether we consciously know it or not. The bandwagon effect (or jumping on the bandwagon) occurs when people mimic other people’s buying choices. For marketers, this phenomenon, when triggered, can propel the popularity of a certain product or service into a grand slam.

This psychological trait influences consumer behavior even when the product has features we don’t need. Think about those who bought 4K TVs when most broadcasts and hardware didn’t support those resolutions. Even today, people will stand in line (especially if it is a long one) for the latest iPhone release to buy the latest dual-camera offering. Are they better than the single-camera? People will also switch to a winning candidate than sticking with their choice. Groupthink happens in fashion, music, politics, and restaurants. Social media amplifies this cognitive bias.

When IPOs Are “Hot” And Sometimes Not

This happens a lot in the financial markets, incredibly when pricing the initial public offerings (IPOs). On their first day of trading, these stocks average 20% rises or higher. Beyond Meat, which makes vegetarian burgers and sausages began trading at $25 a share, ending the day at $65.75. This was among the most significant first-day pops of recent IPOs. This stock continued its rise months afterward.

However, many stocks ultimately flop after the first day’s rise, such as Blue Apron and Snap. Investors clamored for Facebook’s IPO, which immediately rose after it began trading. However, it fell back to its IPO price of $38 at the day’s close and had dropped below $18 in a few months. Yet, investors who aren’t able to buy at the IPO price may flock into the market, jumping on the exciting bandwagon after the new stocks begin trading, only to be disappointed later on. Warren Buffett, among the best investors of all time and a proud contrarian, says, “Be fearful when others are greedy and greedy when others are fearful.

5. Framing Effect

We often make decisions influenced by the presentation of information. Is the glass half-full or half-empty? Risky situations use framing. For example, when characterizing a rescue mission, saving 90 out of 100 people sounds better than losing ten people out of 100 people. When seeing sales signs, people are attracted to bigger percentages (25% as compared to 1%) as significant savings. For example, a lamp that sells for $40 has a 25% discount or $10 off. It might be worth the ten minutes drive to the store. On the other hand, if a $1,000 couch is marked down $10 or a 1% discount, we may consider this worth the trip.

Amos Twersky and Daniel Kahneman did a lot of research on framing risk. People generally avoid risk when presenting a positive frame. In their 1981 study, when presented positively, treatment A was chosen by 72% of people affected by a deadly disease. When presented negatively, only 22% of people selected it.

6. Ostrich Effect

Ever want to avoid bad news? You start to distract yourself with nonsense work, putting your head in the sand like an ostrich. I have done this more times than I would like to admit. It sometimes occurs when you are holding stock and you ignore bad news a company has released like missing their earnings target. Rather than sell the stock, I may delay making a decision. This is a form of selective attention. We may be missing information that proves to be an opportunity.

Coined by Galai & Sade in their 2006 study, the  ostrich effect means “avoidance of apparently risky financial situations by pretending it doesn’t exist.” Karlsson, Lowenstein & Seppi in their 2009 Scandinavian study, found that investors checked their investment portfolio’s value 50% to 80% less in weak markets. While we don’t want to know negative news, it could be beneficial. However, investment experts point out that imperfect markets could be huge buying opportunities. For those who were fully invested in the market, it could be good news to pick up beaten-down stocks if fundamentals are alright.

Avoiding what we need to do may cause us to miss deadlines such as opting in our company’s sponsored retirement plan or dealing with credit card debt getting to dangerous levels. Avoidance is somewhat akin to being a procrastinator as an easier path over making decisions in the short term. Longer-term, matters get worse with inaction. Be proactive over significant decisions in your financial life.

7. Overconfidence Bias Aka Dunning-Kruger Effect

Ever sit next to someone at a holiday gathering when that someone is spouting about a topic, holding everyone’s attention, and speaking confidently? You may admire that person for their intelligence at first. Later, you may realize that it is not so. This bias is when people believe they are smarter and more capable but they do not have the self-awareness to recognize it. They hold overly favorable views of themselves.

In the early days of attending law school, I noticed sometimes with envy that there were a few students who raised their hands constantly answering questions with zest. However, the professors didn’t seem too enthusiastic about their explanations. Over the next few months, these same students I thought were among the brightest quit law school, apparently flunking out.

In a Dunning & Kruger study testing humor, grammar, and logic, participants scored in the 12th percentile but estimated that they were in the 62nd percentile, overinflating their skills. They found that those with overconfidence aren’t necessarily embarrassed to learn differently because they hold strong views.

Overconfidence can get in the way of digging deeper into a topic whether at work or at school. You may truly believe that you know a lot in a certain area but your boss isn’t impressed and wants a full report on his or her desk.

Know What You Don’t Know

To combat this tendency, know what you don’t know. Exhaustively researching a critical subject doesn’t mean reading some articles online. Social media provides snippets of information and may convince you to see a lot. Dig deeper and explore beyond the superficial layers that you first. It takes more energy but it may get you to a better draft.

As a professor, I experience this often with some students. When searching for corroborative articles to support their thesis, they may say, “I looked everywhere and only found this one article.” They were sure they sifted through all the relevant articles. When they visit me in my office, we will search together using a number of different keywords. Over a relatively short period, we have gathered some more meaningful reports for their project after checking more ways.

8. Endowment Effect Aka Status Quo Bias

What you own or use is “the devil you know.” This bias refers to our preference for the current state of affairs. Making changes can be difficult. Data shows that switching jobs at the right time can be a smart move if it helps to maximize income. Yet, many of us resist even exploring the opportunity because of the switching costs like having to work with different bosses, co-workers, benefits, and systems we don’t yet know.

Status quo bias arises when we consider going to a different doctor, brand, or hair salon even if they charge better prices. We may even hold onto to a “losing” stock rather than sell it because we are continually expecting a turnaround that may never come. Status quo is similar to loss-aversion bias which says that what you own is more valuable.

 Wine Values That Appreciate

Kahneman et al write in a 1991 study about a gentleman known to have gotten several good Bordeaux wine bottles at low prices. The gentleman learned that the wine much appreciated from its $10 cost per bottle. It would fetch $200 at auction. Although enjoying this wine on occasion, this man would neither sell at auction nor buy at $200. This pattern reflects the fact that people often demand much more to give up an object than they would be willing to pay for it. According to our status quo bias, it suits us to hold onto this object we value, be it land, wine, or jewelry rather than part with it.

Sometimes, we may stay too long in a far more risky portfolio we bought when we were younger and without children. While it was appropriate then, reconsideration of your current lifestyle now is essential. Speaking to a financial advisor at different stages of your life may help you to realize that you should be modifying your investments. Your children may be approaching college years as you should be thinking about your retirement planning. Diversification and risk allocation should be reviewed by you annually and conformed to your life stage and appetite for risk.

Automate Where Possible

Overcome this inertia by planning. If you recognize that you have this tendency of paralysis and not making changes, automate your bill payments and automatically enroll in the retirement plan at work if this is available. Consider target rate funds when investing. These funds automatically reallocate your investments based on changes in your age and risk tolerance. When you start a new business, plan for an exit strategy if things don’t work out rather than losing money if success is not in sight.

Klontz Study On Personal Savings

In a recent study called The Sentimental Savings Study, Dr. Brad Klontz used financial psychology to increase personal savings. The study compared financial psychology sessions and financial educations sessions.

There were 102 subjects who participated in three stages: pre-session, post-session, and a follow-up. After the session, the group that received the financial psychology session showed statistically significant increases in their readiness to save, confidence in their financial abilities, and satisfaction. At their 3rd week follow-up, the financial psychology group reported a 73% increase in their savings versus a 22% increase for the other group. As Dr. Klontz proved, those who tend towards status quo bias, need a nudge to automate payments to enhance savings opportunities directly from paychecks.

9. Present Bias And Procrastination

This bias values the present when we are planning for the future. We procrastinate rather than thinking ahead to our detriment. It affects our health, including our financial well-being. If we favor the present, we won’t delay gratification. Instant gratification suggests that some of us shop impulsively, ringing up unreasonable bills and saving less than we should.  Stephan Meier’s study in 2010 found present-bias minded individuals are more likely to borrow and accumulate higher balances on credit cards.

10. Sunk Cost Fallacy

The feeling of throwing good money after bad arises in many investment situations. A sunk cost is a cost that has already been spent and permanently gone. You don’t have it in your budget.  If you are running a business, there are certain fixed costs, like salaries you have to pay. If you are renting your apartment, it is your monthly bill for the benefit of living there for time of the lease.

Examples of Sunk Cost Fallacy

Sunk cost fallacy is a negative mindset when you are honoring the sunk costs you already invested. For example, you bought paint buckets for your home. After painting a part of your living room, you realize that you hate it. However, you spent a lot of money thus far so you may as well use it.  This is probably not a good idea. You can return the unused cans and start over rather than be miserable. The cans already used are sunk costs, but the fallacy is when you go forward with the paint you don’t like anyway.

I sometimes stay too long with a book I am not enjoying. Other than losing time, it doesn’t feel like too much of a mistake especially if I find redeeming values at the story’s end. On the other hand, holding onto a stock well after it has become clear that the company’s best days are long gone is an example of sunk cost fallacy. Use the long-term capital loss to reduce your tax bill instead.

Don’t Make Bad Decisions Worse

Continuing to pursue an option that no longer makes sense is a waste of your time and money. Buying tickets to a show you are no longer interested in may not be the best way to spend valuable time. Consider giving them to a friend who may enjoy the show or at least the gesture. Time is more valuable than money especially when it is limited.

A common way to experience sunk cost fallacy is investing money into a home that is too small for your growing family. If you love the house, it may be worthwhile to get estimates and consider expansion. On the other hand, if you are continuously are putting money into your home to fix it to your liking (and it’s becoming The Money Pit), it may time to search for a new home.

Recognize that small losses will become bigger losses if you continue to spend or invest money you are no longer supporting. By continuing down the road, you are making a bad decision worse. Learn how to cut losses and consider that amount in the past.

11. The Halo Effect

Ever find yourself prone to first impressions even in the face of adverse news. Many of us consider those early beliefs important, whether it is visiting a new store or website or buying a new brand. Marketers know this and tell their companies that they have to get things right the first time a potential customer sees the new product.

Tesla’s Elon Musk counts on that first impression although his recent flawed presentation of the futuristic Cybertruck when the windows broke reasonably quickly despite being touted as bulletproof. It may yet be a hit as Tesla and Musk have that halo effect that many CEOs envy. Early buying of the truck seems promising.

12. Denomination Effect

This bias refers to currency and our penchant to hold onto bills with big dollar amounts such as $100 rather than spending it. In the Journal of Consumer Research in December 2009, Priya Raghubir & Joydeep Srivastava found that consumers like spending smaller denominated bills ($20) while holding onto to larger denominations they received as a means to control spending. The lower spending power of the lower denominated bill was preferable.

Final Thoughts

As humans, we have biases that create blind spots in our lives. Recognizing biases often impacted by biases is a big part of the battle. We can outsmart these tendencies.

Many biases are promoted by marketers using behavioral psychology to call our attention to what they want us to see. Instead, take back control of your thoughts and decisions. Be proactive, make plans to counter these biases whether it spending more rationally, knowing the specifics of a deal, and automating retirement savings and investments for your financial future.

Thank you for reading!

Did you recognize any biases you have? How do you overcome these tendencies to get more done than you would prefer? We would love to hear from you! Please subscribe to our blog and find more articles like this.


How Gratitude Can Lead To Better Finances

How Gratitude Can Lead To Better Finances

“Gratitude is not only the greatest of all virtues but the parent of all others.”            


You probably don’t need Cicero to tell you that we feel better expressing our thanks to those we love. Telling our families and friends how much we care feels good for both parties. Both givers and receivers of gratitude can serve up a host of advantages that can help us lead more prosperous lives.

Why not be grateful every day? Gratitude studies suggest these benefits:

  • Healthier mental and physical well-being;
  • Our happiness increases;
  • Reduces stress, anger, and other negative emotions;
  • Generates positive chemical reactions in our brains; and
  • It enhances coping mechanisms.

All of these advantages are free AND can lead to better social relationships at work, school, with family and friends. Expressing gratitude is a win-win for us. It can help better deal with our careers and our finances.

How Gratitude Can Lead To Better Finances


 Boosts Motivation And Strengthens Our Social Relationships

We spend much of our waking hours working with others in teams, as employees, managers, and clients. Thanking someone for a job well done motivates us. We are getting high ratings on reviews from those we serve, and that feels great.

Gratitude is like a moral barometer. Getting a few words of appreciation from your boss when working on a challenging assignment provides a boost and energy. According to a 2001 study, gratitude is on par with empathy, agreeableness, guilt, and shame. Beneficiaries of gratitude are motivated, behave more prosocial, and are valuable to your team.

When managing others, you want everyone to be equally devoted and contribute to the team’s good, especially for the client. As an employee, you want your peers to share their ideas and efforts. Collaboration is a major part of the future workplace. Both the leader and employees need to be in sync. As the saying goes, you can catch more flies with honey than you do with vinegar. These researchers found experiencing gratitude fosters social behavior for both beneficiaries and benefactors, improving our interpersonal lives.

Increases Patience, Decreases Instant Gratification

Those who are thankful may have more incredible willpower and can delay instant gratification. Delaying gratification is a substantial benefit when it comes to shopping and impulse buying. In a study led by Prof. David DeSteno, a psychologist at Northeastern University, randomly assigned participants went to one of three conditions of which they wrote about a past event that made them: 1) grateful, 2) happy, or 3) neutral.

 Participants had to pick between getting $63 now versus $85 in three months to measure impatience in this study. Those who wrote on experiences that made them feel happy or neutral favored the immediate payout of $63. On the other hand, those who were grateful opted for the higher amount of $85, delaying gratification. The damage is done to our wallets because we are impatient, wanting instant gratification. That can be expensive.

A high percentage of us shop impulsively. Overspending or spending beyond our means leads to higher borrowing, usually on credit cards, which command high-interest costs on unpaid balances.

In a poll:

  • 5 of 6 Americans admit to impulse buying, spending $100 or more.
  • 84% of poll respondents made impulse buys, and 77% did so in three months.
  • 79% made spontaneous purchases in the store, with only 6% buying on their mobile phones.


Alternative To Materialism And Envy

Gratitude is negatively associated with envy and materialism. Materialism is a persistent emphasis on lower-order needs of material comfort and physical safety. Those values are in contrast to higher orders like self-expression and quality of life. As gratitude involves wanting what one has rather than having what one wants, instilling a sense of gratitude may help people appreciate the moment’s gifts. That is, free yourself from past regrets and worry about future anxieties. It is a better place to be. With gratitude comes the realization that happiness is not contingent upon materialistic happenings in one’s life. Rather, it is because we are part of caring networks of giving and receiving.

Being grateful is a more frugal pick over being materialistic. We may want expensive homes, luxury cars, and exotic vacations. These things make us feel more prosperous in front of our friends and family as a measure of our success.

Hedonic Treadmill

When we buy a new car, we usually get a boost of energy and happiness that is short-lived. This temporary boost is called a hedonic treadmill or adaption theory. As such, there is a tendency for people to get a quick buzz after their purchase and then quickly return to a stable level of happiness. Buying major things are habitual for some. The enjoyable moment is fleeting (though the bills are not). Spending to be happy often leads to lifestyle inflation which can be costly. Better financial habits can be learned even from millionaires.

One of my favorite books, The Millionaire Next Door, explores the different financial paths of two different kinds of millionaires. In one group are the frugal millionaires. They allocate their time and money efficiently to build wealth. The more typical millionaires concern themselves with the display of their social status but are financially more vulnerable. The book is based on studies from the 1990s and remains relevant today.

Count Your Blessings And Be Happy

Reflect on your present blessings, on which every mand has many, not on your past misfortunes, of which all men have some.”    Charles Dickens

We feel good when we are grateful and we function better with others. We live more prosperous lives, not solely based on money but as fulfilled beings. Grateful people have more resources–psychological, social, and spiritual–that can be drawn on in times of need.

A 2013 survey confirms earlier studies and broadens the demographics finding:

  • Americans are a grateful bunch.
  • Women are more grateful than men. (I knew that!)
  • Age is not much of a factor in gratitude as gender is.
  • While “your current job” received the lowest score from those surveyed, that is, people are not so grateful for their jobs, those earning over $150,000 are. Good to know!

Gratitude has a seemingly endless list of physical, psychological, and emotional benefits that help us live better every day. According to many studies, we have better immune systems, lower blood pressure, sleep better, have less stress, have greater self-worth, are more productive, experience joy and pleasure. Dr. Robert Emmons has pointed to a 25% increase in our happiness levels. Let’s be grateful for that!

Grateful Expressions Boost Our Brains 

Regularly expressing gratitude changes the molecular structure of our brains, A study led by Zahn using functional MRIs to measure the brain activity of participants imagining their own actions toward another person, experiencing different emotions either conformed (eg. gratitude or pride) or were counter to a social value (eg. anger or guilt). They found that gratitude can boost areas of the brain, releasing dopamine, a chemical that plays a positive role in many daily behaviors such as motivation, movement, and energy. I’ll take that dopamine now!

Promotes Generosity

Studies suggest that there is a neural connection between gratitude and altruism. Culturally, we admire people who give to others selflessly. Appreciation from others may lead us to offer more as part of our moral barometer to take great action. Hearing someone being grateful to us may encourage us to feel more generous. When we are beneficiary of kind words, we feel more optimistic, less stressed, and feel good in general.

Giving to others doesn’t always mean charitable donations, although that is meaningful giving. It could also mean volunteering in a soup kitchen, reading a book to a child or an older person in a hospital or rehab center. Paying it forward to others in any way you can has its rewards.

Being Grateful Is Good For Our Career

We are more productive at work, enjoy better relationships with our coworkers, and are more confident in asking for raises. Gratitude cultivates better decision making and improves engagement with others. More sleep and less stress allow thinking more clearly. We are motivated and energetic in our workplaces and better reach our potential.

Being Grateful Leads To Financial Goal Achievement

The same advantages we gain at work can help us deal with our personal lives’ financial situations. We can better handle money management issues head-on rather than delay payments. Procrastination is among the worst traits to have when dealing with money, especially when carrying burdensome debts. Instead, be proactive with your financial situation and make changes when necessary. Postponing bill payments adds late fees, higher interest costs, and negatively impacts your credit scores.

To better achieve our short term and long term financial goals, we need better habits.

Here is a list of ten “must do’s” to strengthen your financial position:

  1. Establish an emergency fund of at least six months of your living expenses in case of unforeseen events.
  2. Automate payments to avoid late fees.
  3. Pay your credit card balances in full, not just the minimum.
  4. Monitor your credit reports to find errors, and find ways to improve your FICO score. A higher score will help when you can have financial flexibility when needed.
  5. Save for retirement through tax-advantaged employer-sponsored benefits. Separately open up an IRA (preferably a Roth IRA) for more retirement savings.
  6. Set up a 529 savings plan as early as possible for your newborn. You will benefit from more years to invest; compound interest on interest will help you avoid borrowing later on for your children’s college tuition.
  7. Spend within your means to lessen or eliminate your borrowing needs.
  8. Don’t be impulsive when shopping. Retailers encourage us to spend, so counter those tendencies by buying what you need and value.
  9. Pay your income taxes on time and avoid unnecessary penalties. Why pay the government more than you owe?
  10. Earn more by being productive at work, making better decisions, and improving social relationships.

How To Practice Gratitude More

Be thankful for what you have; you’ll end up having more. If you concentrate on what you don’t have, you will never, ever have enough.” Oprah

  1. Simply smile at what you have in terms of family, friends, a job or a career you enjoy.
  2. Send old fashioned “thank you” notes to those whom you are grateful to or for having in your life.
  3. Keep up a gratitude journal to save those great moments.
  4. Practice saying and thinking about gratefulness in a meaningful way.  Exercising your ability to switch gears to counting your blessings rather than focusing on obligations often works for me. With two teenagers, it can be challenging to have some quiet moments for yourself. However, I find it can work for the good.
  5. Sometimes, losing a loved one makes you more grateful. It may run counter to the most challenging experiences. My mother lost her whole immediate family and extended family except for my Uncle before 20. Yet, she was always grateful for her life and that of her brother. It gave her the chance to have her own family.
  6. Having a traumatic experience often makes us grateful. I recently finished and enjoyed I Am I Am I Am, a memoir by Maggie O’Farrell. She had 17 brushes with death. Towards the end of the book, she is talking to a guy about her experiences. He said to her, “How unlucky for you,” to which she emphatically answered, “No, I was quite lucky,” and goes on to express her gratitude which ultimately made her stronger among other emotions.

Final Thoughts

Practicing gratitude is an inexpensive way to feel physically and mentally healthy. Try to have daily doses of gratitude which may help to reduce strains at work and home. It may produce better benefits than spending money impulsively, leading to big bills and higher borrowing costs. There are many reasons in your life to be grateful. Give yourself time to appreciate what you have as often as you can. Express your feelings to others. The perks are worth it.

Do you write in a gratitude journal? Have you been told you are appreciated or have you said it to others? You can make someone’s day better and remove some stress, add some motivation and energy to someone’s day, or helped them to resolve a lingering problem. 

Thank you for reading our blog. You are appreciated!







5 Budgeting Methods To Boost Financial Discipline

5 Budgeting Methods To Boost Financial Discipline

I have to admit that  I am hostile to the term, “Budget.” The word signifies limitations as if I will have to change my lifestyle. Before I prepared a budget, I felt anxious about doing one. Only one out of three (32%) people prepare a monthly budget, and those making at least $75,000 a year are likely to do so. Why do people not want to do a detailed budget?

Common Reasons For Not Having A Budget

  • It is too much work, and I don’t know where to start.
  • I don’t know if I need one.
  • Fear of finding out about mistakes I was making.
  • “Don’t want to rock the boat,” as it may involve confrontation and change.


The Mistake Of Not Finding Out

I had a vague idea about preparing a budget but was reluctant to do one. Craig, my husband, paid the bills, went grocery shopping, and we dined out most of the time. Financially, we were in good shape, living more modestly than others we knew earning less.

Changes like these often require a financial review. We never really sat down to discuss our finances through the years though we met several times with a financial advisor to draw up a financial plan. We were enjoying financial flexibility, but we wanted kids and more space. At some point, virtually overnight, we had two babies and needed a bigger apartment.

These changes meant thinking through our finances since I had left my lucrative career, and Craig was building his law practice.

As I was in law school, I relied on Craig to work through some of the numbers as to what we could afford in terms of more space. That was a big mistake on my part and unfair to Craig. I was the numbers person, yet unaware of our finances. Many of our assets–land, arts & antiques–were less liquid than I realized.  Later on, I found many late notices from delayed payments on bills. And it was the beginning of the financial crisis, and it impacted Craig’s practice.

My Epiphany

We had two kids, a dog, a spacious apartment in less than three years, generating lower-income and still spending as when it was just the two of us. I felt lost, realizing Craig’s income was down, and I did not have a good handle on our monthly costs.

Where was our money going? I soon realized that I needed to create a budget to review and analyze our finances better. It sounds like a cliche, but it was an epiphany for us. Yes, I found mistakes I didn’t want to admit to making, and yes, Craig and I had arguments. We worked to resolve them together by making changes, some more drastic than I wanted. We still handle money differently, and I am more firmly in the frugal camp.

Start Budgeting Early

Don’t wait to budget as I did, using excuses of not needing one or not knowing how to start.  It can be easier to create a budget when you are young because you have less money and few assets. Sure, budgeting is tricky when you are just starting in your life. You may be carrying student debt and renting an apartment while your salary is at the beginner’s level. On the other hand, you have fewer costs to monitor, making it an excellent lifelong habit. Use it as a motivational tool to save more and spend less. Be diligent in improving your money management skills. 

Yet, preparing a budget is the cornerstone of a successful financial plan. Budgeting is a lot like dieting. It is hard to start one when there are many choices. Each works differently for each person. Both diets and budgets, may provide lasting benefits and bring you closer to achieving goals.

There are many benefits to having a budget at any income bracket. Even if you were to inherit $100,000 tomorrow, you need to understand how to deploy this money best. A budget can help you.  You just need to find the best budget method that works for you. We discuss five different budget methods below.

Reasons For Having A Budget

  • Having awareness provides essential financial discipline.
  • Make changes to patterns you want to avoid.
  • It helps you to achieve your financial goals.
  • Be more conscious of how you handle money, so you rein in overspending.
  • Improves your ability to pay off credit card debt by allocating saving better.
  • When you have better control, you can allocate more savings to investments.



5 Budgeting Methods To Boost Financial Discipline


1. The 50-20-30 Budget Rule

This budget rule is straightforward. It prioritizes your needs over wants to build your financial future.

Essentially, you are dividing your after-tax income into three buckets:  

50% For Basic Needs

Paying for your basic needs is your priority. About 50% of your earnings go toward your basic living needs. Housing is the proportionally most considerable amount of your basic needs and includes utilities, groceries, car, loan payments, minimum debt payments, and other monthly fixed expenses. 

20% To Savings And Debt Prepayment

This income bucket devotes 20% to savings. This amount is building your financial future. If you have significant debt levels, then a higher percentage should go into this bucket and be reduced from the wants category. Your savings can pay down debt, build an emergency fund, retirement savings, and investing.  When paying off your debt, you are likely saving money by eliminating the interest costs you carry on your balance, especially credit cards. 

30% For Wants 

After the above priorities, allocate 30% for wants or desires. This allocation is for discretionary or flexible spending for entertainment, vacations, and shopping. After your preferences, the remaining amount is for your desires. Overspending here means you will have a debt to pay above. 

The Pros of the 50/20/30 Budget Rule

This method is simple as you are only tracking three categories, needs, wants, and savings. You have the flexibility of allocating the savings into other areas, like debt pay-offs.

The Cons of the 50/20/30 Budget Rule

It is not as structured as other methods, and some people just need that discipline. You may have little to no savings but have more debt in that bucket. Then proportion the buckets to fit your needs. Paying off debt may be more of a priority than spending as much as 30% on your discretionary wants.   

 2. “Pay Yourself First” or Reverse Budget

This budget strategy to pay yourself first aligns well with a lifelong principle of personal finance. It is a reverse budget because, unlike other methods, you are saving before paying your bills. It emphasizes savings as the golden rule to learn early in life.

For some, saving money is hard, let alone putting 5%-10% away, which may be virtually impossible. Instead, set aside even small amounts like $50-$100 for your retirement, emergency fund, and savings accounts first. Automate a savings plan for these accounts. When you can, earmark more money, so you will grow your financial future.

That does not mean you don’t have to pay your monthly bills (you do!) but make savings your mantra. You may need to be more frugal at times to restrain some of your spendings so that you can put some away out of your reach.

The Pros of the “Pay It Yourself” Budget

By prioritizing your savings to a retirement account, you can earn compound interest on interest or pay off your debt if your levels are high.

The Cons of the “Pay It Yourself” Budget

As a standalone budget plan, “pay yourself first” may be too simple. You should understand the trade-offs between paying off high credit card balances, which will grow faster than savings as the card issuers charge far higher interest rates than you will get on savings.  However, saving money is an essential personal finance concept that will lead you to invest more at higher returns.

3. The Envelope (or Cash Diet) System

The envelope system may be a more comfortable budget method to adapt to if you are more cash-oriented. If you are paying for everything via credit card, this could be a rigid way to budget. This system entails placing exact amounts of cash into envelopes for each monthly expenditure you make, including your fixed costs. Putting money in jars or socks can substitute for envelopes, but I don’t think you want to walk with that.

Here’s how it works. You need to go to the bank to get a large amount of cash and allocate amounts into your spending categories. You would label each envelope and its amount for each of the following typical costs:

Groceries $500

Rent/Mortgage $1,000

Utilities $300

Dog Grooming $75

Gas $100

Gifts $100

When an envelope is empty, funds are exhausted for that category, and you can’t take out money from another envelope. This method involves a good understanding of how much you typically spend on each classification. The envelope system provides strict budgetary control and may reduce overspending. You run out of money for dining out, and you may have to change plans.

 This budget is essentially a cash diet, and some categories, such as rent or your mortgage payments, don’t translate that well into cash. You can still pay most things with checks. Studies show that people tend to spend less when they use cash payments.

You can use white envelopes for this system if you are frugal like I am. I have seen beautiful Celine envelope wallets ($700+), binders, and there are envelope apps to use like Mvelopes and GoodBudget.

Pros of The Envelope System

You are using cash, which can teach you to be more financially disciplined. It will require you to know your budget and the key categories well. You will likely spend less when you know you are running low on cash.

Cons of The Envelope System

This method is time-consuming, especially at first. It is inconvenient to have to withdraw money and carry cash around. Carrying cash conjures up that scene from The Wolf of Wall Street when Donnie Azoff (Jonah Hill’s character) was lugging around a suitcase filled with bills to deposit in a Swiss bank.

Paying cash is not always welcome. A cash diet may be challenging for particularly fixed costs, like paying your mortgage. Instead, you can try the envelope method for discretionary spending and then see if you can pay fixed costs by check. Using checks may mean more work or creativity on your part.

4. Zero-Based Budget or Every Dollar Budget

The Zero-Based budget originates from a business concept where every expense needs justification by a project’s need. This method is number-crunching heaven for those who need more structure in their budget. Essentially income minus costs need to be zero.

Households can implement this budget, similar to a traditional budget. The primary difference here is the budgeter proactively allocates remaining money, if not spent, to a financial goal.

Expenses are costs, outlays for savings, debt payoffs, investing, and charity. You assign a role for each dollar of your earnings to your expenses, savings, debt payments. Savings is a line item on your budget.

For a family, you would total the household earnings from multiple sources minus costs and allocate the rest of the money to where best it should go. When you have minimal debt, you can add the remaining cash where you need it. It could go to your emergency fund, retirement, or investment accounts. On the other hand, if you have high debt balances, use your savings to reduce those levels.

Preparing the Zero-based budget is a lot of work, combing through many details by itemizing your bills and overall spending. At the same time, you need to consider your financial goals, matching where the leftover budget money may best go. This budget method requires a good understanding of your household’s needs, wants, and financial future.

Pros of the Zero-Based Budget

It is structured to pay your costs and use the remaining money where it best should go. This method is goal-oriented, relying on a detailed account. If your expenses are high, variable expenses fluctuate; and are the best area to cut spending.

Cons of the Zero-Based Budget

It is detailed, time-consuming, and can change monthly. You need a good handle on all your expense items and your goals, understanding trade-offs between saving or paying off debt.

5. Traditional or Line-Item Budget

This budget is a personal income statement for an individual or household. It is similar to the zero-based budget but a bit simpler.  It totals net income from multiple sources minus total estimated expenses equal plus or minus amount. I use this budget on an excel spreadsheet, making changes over the years. For years, I did not use a budget for many reasons. There were only two of us; we were financially comfortable; it seems like a lot of work, and we kept postponing the task.

Monthly income sources include wages, tips, commissions, dividend income, and passive income.

Total monthly expenses are fixed and variable costs. Fixed costs are housing, food, transportation, utilities, and loan payments. Variable costs are less predictable and are associated with entertainment, medical, clothing, personal, and discretion expenses.


Total  Monthly Income                     $___________

Total Fixed & Variable Costs          $___________

Minus- Total monthly expenses      $___________

Total Savings/Deficit   $___________

Pros of The Traditional Budget

The traditional budget is a good starting point for understanding your household finances. It pulls a lot of detail together about income sources and expenses. Unlike a zero-based budget, it doesn’t have to a goal per se. Instead, if there are funds left, you can allocate it as you please. That is easy enough to figure out.

Cons of The Traditional Budget

Like the zero-based budget, it is detailed and time-consuming. It is a tool rather than a mechanism to help you identify areas to reduce your spending.

When Our Budget Became A School Project

Whenever I think of the line-item budget, I remember this story. I set up the template that had primarily been a back-of-the-envelope work of art. A few years ago, my son, Tyler, showed an interest, and we worked on it together. At the time, I didn’t realize he had a PowerPoint project due for his computer class.

After a few days, I was comfortable with doing a simple budget table jointly with Tyler. About a week went by, and Tyler came home, telling me that he used the budget we worked on for his project. I remember gulping, tensing up, and asking Tyler, “With numbers?#!” And he said, “Yeah, Mom, they didn’t care about the numbers, but they liked the colors.”

Hybrid Budgets

All of these budget methods have advantages and disadvantages. They can be used together, breaking envelopes into three bucks of needs, savings, and wants, and dividing into more categories with our needs, and so forth. In any budget you do, consider paying yourself first, that is, saving before overspending on discretionary categories such as entertainment. Be conscious of your spending, so you have money to save and invest.

Irregular Income

About a third of Americans generate irregular or less predictable income. Uneven income can be a problem for many, including us. Craig and I had budgeting challenges for many years, as most of our earnings were irregular and unpredictable. I had a salary with an annual bonus that varied significantly from year-to-year. Craig is a self-employed attorney and receives payment dependent on deal closings or other legal areas. Each area varies.

How do you budget in that case? Depending on your income sources, where there is variability, it is best to look back to the last three years and divide by 36 months to develop a meaningful income figure. The more conservative your estimate is, the better.

Final Thoughts

 The reasons for preparing a budget far outweigh any reasons not to do so. There are at least five different budgeting methods to choose from ranging from simple to more detail-oriented ways to review your finances. Creating and reviewing your budget is the cornerstone of a successful financial plan. It helps you identify your household’s strengths and weaknesses and help you devise a plan to make corrections. Find the best budgeting method for you.

Thank you for reading! If you find value in this article, please visit us at The Cents of Money for more articles of interest. Please consider subscribing to get our weekly newsletter.





How Safe Are Your Bank And Financial Accounts?

How Safe Are Your Bank And Financial Accounts?

The coronavirus has weakened our financial markets and our economy as social distancing has slowed economic activity. With high unemployment and tweaked growth, we have been in a recession. Many people are hurting. Unfortunately, there are many who like to take advantage of those who distracted by losing jobs, keeping businesses afloat, and worrying over the tragic virus. 

Are You Financially Safe?

Are your bank and financial accounts safe during this time? Yes, it is to a great extent. However, it is essential to know if your funds are secure. That varies by product and how it is offered. Which accounts are insured and from what potential risks?  We will review the different financial accounts you have. You also need to consider the safety of your bank. The last recession-plagued banks either were acquired by larger banks or collapsed. More than 450 banks failed across the US during 2007-2012 according to the FDIC.

We will discuss your financial accounts at banks, credit unions, and at your brokerage firm. Our stocks and bonds carry more risk than bank accounts. Recognize that fraud may rise due to swift economic changes. We have some recommendations below to better protect yourself. But first, a little background on where we are today given the havoc caused by the coronavirus.

The Federal Reserve’s Emergency Measures

The Fed has taken massive emergency measures not seen since the Great Recession, which we address here. Chair Jerome Powell deserves credit for aggressively providing liquidity to lenders and our financial system swiftly. We need to see these actions.

Thus far, Powell and his troops have reduced their benchmark fed funds rates to near zero. They lowered the Fed’s discount rate used for those banks that couldn’t borrow from peer banks. The Fed will lend to those banks as the banker of last resort.

As part of their program, they have purchased considerable amounts of government and mortgage securities and will do more. They have adopted similar quantitative easing levels used during the last recession. Also, they reduced the reserve requirement ratio to zero from the standard 10% level. A lower reserve requirement means that banks can increase the lending of their deposits in their vaults. Banks are being encouraged to lend 100% (from 90% regularly) of their capital to businesses and consumers in need.

There will likely be more liquidity sources from the US government, Small Business Administration, and the private sector as the Biden Administration takes over. There is a movement to provide increased financial support.  Check your local websites for more information

From Economic Stability To Economic And Financial Market Volatility

Today, banks are more robust than during the last recession. However, credit pressures are now rising, and cash is needed by many. That is especially true for small companies, their employees, and households who don’t receive paid sick leave. Fear of the virus spreading has required us to change how we interact, shop, and dine. Social distancing has become the new norm.

After a long economic recovery and a bull market, we are now moving into an environment reminiscent of the severe recession of 2007-2009. Then, failures of financial institutions caused bank customers to try to liquidate deposits. The Fed is trying to avert a credit crunch.

Fraud often rises in this environment. As a result, use available security features to protect ourselves from gaps related to new digital technologies. As consumers, we need to know what risks exist. We provide some recommendations.

Another question you may ask: how safe is your bank? Bankrate reviews and rates various banks. Banks with $1 billion in assets are typically more vulnerable in weak markets we have now. Check this list for your bank from time to time to make sure they are not troubled.

Financial Crisis Left Some Bad Memories

Market liquidity failure caused the Great Recession. Rumors and false news were always around. I remember watching Citigroup shares dropped to $0.97 per share in March 2009. Investors lost confidence and feared that more than Lehman would collapse. The market value of Citigroup fell below $6 billion from $277 billion in late 2006. People were standing in lines around the block at a New York City midtown Citibank location to withdraw their money. No one wants to revisit that scenario.

According to the Federal Deposit Insurance Corporation (FDIC), more than 450 banks failed from 2007-2012. Most of those that collapsed were smaller banks. While we are not facing such a scenario today, it is worth knowing what kind of protections are available for our financial accounts.

FDIC Insurance For Deposits At Banks And Thrifts

The FDIC insures deposits in banks and thrifts of up to $250,000 per depositor ($500,000 for joint accounts), per insured bank for each account. To check if the FDIC covers your accounts, you can check their estimator.

Most banks fall under the FDIC insurance mandate. State banks may have insurance coverage if they are members of the Federal Reserve. So are state-chartered banks that are not members. There are very few state banks that do not have FDIC insurance. You can check here.

What Accounts Qualify For FDIC Protection

You have coverage for deposits in accounts for savings, checking, negotiable order of withdrawal (NOW), money market deposit account or MMDA (but not money market mutual funds), time accounts like a certificate of deposit (CD), cashier’s check, or money order.

To maximize coverage, you can open accounts at different financial institutions and for other accounts. However, different branches do not count as a separate bank. If you are holding money in qualified accounts, like savings or money market securities, you may have coverage for retirement accounts, specifically for traditional IRA and Roth IRA. However, keeping your retirement savings in money market accounts are not a good way to build a nest egg.

What Is Not Covered

FDIC does not insure bonds, stocks, Treasury securities, mutual funds, annuities, municipal securities, life insurance policies, safe deposit boxes, or their contents or any investments. These financial products are protected separately by the Securities Investor Protection Corporation (SIPC). We will discuss this below.

What The FDIC Does Not Protect But Other Federal Laws Do

The FDIC does not protect bank customers from losses associated with bank robberies or thefts, including identity theft, fraud, or privacy.

While identity theft, fraud, or privacy is not protected by the FDIC,  report any occurrences to the Federal Trade Commission (FTC) as soon as you discover them. If your credit, ATM, or debit card is lost or stolen, federal law limits your liability for unauthorized charges. Report it immediately.

Data breaches have become more common in recent years. In this guide, we discuss what you should do if these fraudulent transactions hurt you.

The Electronic Fund Transfers Act (EFTA)

Consumer risks rise with the increase of instant electronic payments. The Electronic Fund Transfer Act (EFTA), also known as Regulation E, protects consumers when using electronic means to manage their finances. This federal law covers transactions that use computers, phones, or magnetic strips to authorize a financial institution to credit or debit a customer’s account.

Electronic payments often take the place of traditional paper checks. More consumers are banking online. While people still use paper checks, fintech adoption is expanding. Specifically, peer-to-peer payment (P2P) providers are enabling instant transfers via mobile apps like bank-sponsored Zelle and Paypal’s Venmo.

Fintech Platforms Are Convenient But Need To Be More Secure

These products were likely not anticipated by EFTA. As a result, they may have raised consumer risks without enhanced protection against data security and privacy breaches. However, providers are strengthening their products.

Statista estimates a total 2019 transaction value of $4.1 trillion in digital payments, with an average transaction value of $1,102 per person. However, an S&P Global Market Intelligence Fintech late 2018 survey reports consumers avoiding these mobile apps cite security as a significant concern.

Consumers should be responsible when using these P2P platforms. Peer-to-peer products are convenient for sending money quickly to those we owe money. Just make sure you are sending it to the right party. P2P users should double-check the relevant address, number, or username of the person they are trying to send money to. We can make mistakes, or worse, be defrauded.

Consumer Reports (CR) reviewed peer-to-peer payment providers comparing their safety features. They called for the EFTA to extend protections for unauthorized transactions when potential fraud may occur. 

NCUA Protect Credit Unions 

Credit unions are financial institutions like banks. They are member-owned financial cooperatives. Members, usually union workers, control these entities. They are nonprofit organizations, offering savings accounts and loans like a bank.

However, the National Credit Union Administration Insurance Fund (NCUAIF), not the FDIC,  insures credit union members’ accounts with $250,000 in coverage for their single ownership accounts. They cover the same type of accounts as FDIC but refer to accounts as “shares or share drafts” for savings and checking accounts.

If you go over the federal limit of $250,000, you can ask your bank or credit union if they offer private deposit insurance for more coverage.

 You can find an estimate of whether your share is covered, check here.

SIPC Provides More Limited Safekeeping For Investors

SIPC provides coverage for investment assets held in a brokerage, limited to the custody function. They only protect customers of member broker-dealers if the firm fails financially. The Custody Rule is to safeguard client funds or securities against the possibility of being lost, harmed, or misused.

Coverage is up to $500,000 for all investment accounts at the same institution, including a maximum of $250,000 held in cash.

No Coverage For Market Losses

SIPC does not provide blanket coverage. Market risk is not covered, meaning investors’ losses from the declining security values are uninsured. Investors assume all losses.  It’s part of the higher risks (and rewards) of investing in stocks and bonds. The latter securities are subject to more market fluctuation than risk-free and liquid cash and cash-equivalents insured by FDIC.

Instead, SIPC’s coverage protects unauthorized trading in customer accounts for stocks, bonds, treasuries, CDs, mutual funds, including money market mutual funds. They do not protect commodity futures.

Retail investors, including young investors and traders, increased participation to 20% of the market trades by mid-2020, up from 10% in 2019. Attracted to the rising stock prices, inexperienced investors may ultimately lose money if they are not fully aware of the risks. Retail stock trading app Robinhood, a SIPC member, has ramped up a young customer base in recent years. Like all brokerage firms, they need to make their customers aware of the risks they assume.

Where FINRA Comes In

The Financial Industry Regulatory Authority or FINRA is a self-regulating nonprofit organization overseen by the Securities Exchange Commission (SEC). While SIPC does protect market losses, consider filing a dispute against the broker if they bought securities that were unsuitable for your portfolio. FINRA resolves disputes between investors and brokers through arbitration and mediation.

If the broker sells worthless securities to a customer, the customer will file a complaint with FINRA, not SIPC.  FINRA is responsible for monitoring the broker-dealer industry. They oversee that qualified and licensed brokers remain so. Securities sold to investors must be suitable based on that individual’s needs and risks adequately disclosed. For example, selling high-risk securities to retirees is not generally appropriate.

For a time, I was an active FINRA arbitrator, hearing alleged injured investors and their brokers after stocks fell during the severe recession. Many investors lost a lot of money in fanciful mortgage lenders like Countrywide.

How Can We Better Protect Ourselves From Fraud

 Mandated consumer protections for our financial accounts only go so far. We need to have a healthy dose of skepticism and take our own precautions. Digital technologies are growing faster, providing us with more capabilities and convenience. Compliance gaps exist among incumbents (like Wells Fargo) and fintech companies.

Here are our recommendations to protect thyself:


1. Be Alert To Imposters And Phishing Emails

According to the FTC, scammers are sometimes posing as someone you can trust, such as a family member, government official, or charity. Never send money or give out personal information in response to an unexpected request.

2. Safely Dispose Of Your Personal Information

Use a paper shredder or wipe your computer’s hard drive. Find ways to delete all your information from your smartphone and remove your SIM card. To be honest, I keep all my old electronic devices.

3. Don’t Use Public WiFi

In the recent past, I always used Starbucks’s wifi, literally living at my local place when studying for the bar (to practice law). Now, we encourage our kids to use public wifi rather than drive up our data bill. No more! We find it easy to connect to public wifi because there isn’t authentication that is beneficial for hackers.

4. Don’t Believe Your caller ID 

It is effortless for scammers to use fake names and numbers. I have picked up my house phone because I recognized my own cell number. I hung up that baby so fast that I almost broke my phone. My house phone is on borrowed time.

5. Consider How You Pay

While credit cards have significant fraud protection when detected, wiring money does not. According to the FTC, wiring money is among the worse methods you can use to send money. If you are using Western Union or MoneyGram,  be aware that you can’t get your money back.

When I worked on a case for the court, an elderly woman who was losing her mental capacity was literally giving away a large portion of her significant net worth through MoneyGrams. She had a constant caller asking her to meet him in mysterious places in her neighborhood. Her family was unaware of her declining capacity or her constant money wiring until they found huge withdrawals.

When using Venmo, Zelle, or Apple Pay, make sure you are sending money to the correct party. Check the recipient’s address and contact info.

6. Keep Your Passwords Private

Young people tend to overshare everything including their smartphones, and often will provide friends their passwords. Change passwords often and use strong passwords. For those who worry about forgetting a password, use a password manager.

7. Don’t Carry Your Social Security Number In Your Wallet 

I am preaching the obvious but don’t carry any private information containing your social security number. That number is your identification and on many different kinds of documents, such as credit card applications, bank applications, or your health plan. You never want to lose your identity to others.

8. Review Your Credit Report For Possible Issues

The three nationwide credit reporting companies–Equifax, Experian, and TransUnion–are required to provide you with a free copy of your credit report at your request, once every 12 months. You can also visit for your free report. The FTC does not recommend that you use other websites for free reports.

9. Monitor Your Personal Statements

Review all your statements when you get them and call vendors when you spot a mistake. Check your deposit balances daily. Sign up for text alerts with your bank.

10 Don’t Open Suspicious Emails

When you get mail with a bank name, scrutinize it carefully. Don’t open links from someone you don’t know or appear to be suspicious. Your bank will text if they see unusual spending or call you.

For more on how to protect your privacy, see here. If your child has their own bank account or credit card, they need to take precautions as well.

Final Thoughts

Our financial assets are important to us. We need to make sure our accounts are safe from outside factors and take our own precautions. Our bank accounts are insured by the FDIC. To a lesser degree, so are our investment accounts by SIPC. As we do more banking online and use P2P platforms, we need to be aware of increased risks and take precautions.

Technology is a wonder given its convenience. Banks (and businesses overall) have increased data privacy and security. For the most part, our accounts are generally safe. Most importantly, I hope you and your families stay healthy.

Thank you for reading!

How are you fairing in this crazy world? What precautions have you taken that work well? We would like to hear from you.


Money Lessons From 5 Favorite Classic Novels

Money Lessons From 5 Favorite Classic Novels

We often can’t see our own mistakes through our rose-colored lenses. Instead, we can see errors more easily made by others when we are less emotional. The same happens when we find colorful characters in fiction who make blunders we know they should avoid. Reading books provide us with teachable moments.


Five Classics Illustrate Money Lessons:

  • Decadence Of Money
  • Social status
  • Reversal of fortune
  • Accounting fraud and corporate greed
  • Virtues of work
  • Financial independence

These factors play a role in impacting the lives of the characters below. Often, we have experienced some of these very same financial issues.


“I shall go on shining as a brilliantly meaningless figure in a meaningless world.”

“Wine gave a sort of gallantry to their own failure.”

I recently finished this novel packed with money lessons. It explores the decadence of money, social classes, socialites, and elitism. The lives of F. Scott Fitzgerald and his wife Zelda likely serve as a model for this work.

Financial Dependence

Anthony Patch has returned to upper-crust Manhattan, having graduated from Harvard. He socializes with his wealthy friends, parties, and drinks heavily. Partying leaves little time for a career or work.  As a presumptive heir to his grandfather’s fortune, he has no motivation to be purposeful. His grandfather, Adam Patch, raised Anthony after his parents died. The elder Patch made his wealth on Wall Street. Grandpa provides Anthony with an ample allowance. However, he has no patience for Anthony’s idleness, drinking, and lack of purposefulness. It doesn’t sit well with Adam, who is for prohibition politics.

Gloria Gilbert is a cousin of Anthony’s close friend, Dick, an author. She is an even match for Anthony by being a socialite who parties, drinks, and lacks seriousness. Seen as a beautiful couple with a bright future, they court (i.e., date) and eventually marry. Their relationship exposes their tendencies: jealousy, selfishness, easily bored, and vanity. Gloria’s friends often ask Anthony about his laziness and lack of goals, to which he asks, “Why can’t I be gracefully idle?”


The Patch couple rent two homes in Manhattan and Westchester, which they cannot afford despite an abundance of money. Given the likelihood of inheriting a lot of money from  Adam Patch, their friends envy them for their headstart towards wealth. However, Gloria and Anthony are wasteful of money and time. These tendencies grow worse as they move through their 20s. They spend heavily on lavish parties, dining, traveling cross country, and to Europe.

Intermittently, Anthony visits his grandfather but comes to hate seeing him. Adam Patch peppers him with questions about his lack of savings, overspending, investing, financial responsibilities, and lack of goals. He wants to understand how the Patches haven’t saved money with an income of $7,500 per year—combining Anthony and Gloria’s allowances.  That they have not saved anything despite an abundant income disturbs his tycoon grandfather.

Adam starts to pursue his grandson’s opportunities even though Anthony insists that he is an author and spending his time writing. That said, he is yet to have published any of his articles.

Work Is No Occupation For The Patch Couple

At one point, Adam finds a job for Anthony as a bond salesman. Anthony tries to sell bonds but finds sales distasteful and quits soon after. Besides, Gloria has no fun when Anthony works because she has to sit around idly and alone. However, they recognize that Adam Patch could live another ten years and have difficulty making ends meet.  Anthony has no financial independence, relying entirely on his grandfather.

World War I has begun, and Anthony goes for military training in the South. He meets a woman, Dorothy (Dot), who is relatively poor, clingy, and does not know about Anthony’s potential wealth. Anthony opens up to Dot, sharing how hard his life has been. Dot is a good listener and doesn’t require much materialism, as Gloria demands. The war ends before Anthony sees action, and he returns to Manhattan and Gloria.

Budgeting Isn’t Easy.

Adam realizes that they need to budget so that they can afford their rent. He starts to record their income and track some of their spendings. They begin to make changes, like moving to a smaller apartment. Unfortunately, they use their savings frivolously as they have the little discipline to manage money. Gloria suggests earning money as an actress through a mutual friend who owns a growing movie studio. Anthony becomes jealous, refuses to let her do so.

They still have the house in Westchester and host a raucous party with dancing, drunkenness, and general depravity. At the height of the party, Adam Patch comes to the house unexpectedly. Adam is visibly upset and leaves with a friend abruptly. The next day, Anthony tries to see his grandfather apologize, but he is ill. Apparently, the party caused Adam’s decline. Within months, Adam Patch dies.


The Patches have counted on Adam Patch’s fortune. They never considered that there was any chance of not inheriting his money. However, at a reading of the will, Anthony Patch learns that he is penniless. Adam’s secretary and very distant cousins received the bulk of $40 million. Gloria and Anthony hired an attorney to file objections to the will. Besides not getting the money, Anthony faced shame as the lawsuit became public given Adam Patch’s stature. The case, including appeals, was expected to take years and many upfront payments for retainers.

Financial Jeopard, He Should Have Had An Emergency Fund

“It was too late–everything as too late. For years now he had dreamed the world away, basing his decisions upon emotions unstable as water.”

The Patches needed emergency fund to provide liquidity. Anthony sold bonds to raise capital. At one point, he sold bonds that were only worth 30% of their par value. As a result of lacking money, Adam took the hit on the bonds. Yet, he still spent money frivolously. He treated his two best friends to dinner even though they made more money in their respective careers. As money became tougher to get, Anthony sunk into an alcoholic state. He spent most of his cash on cases of alcohol and stopped going out with friends.

Tensions were rising for the Patch couple. To raise cash, Anthony begins to write bad checks for rent payments. Then he tries to pawn his watch so he can buy drinks at a bar. He has trouble paying his retainer fees to his attorney as the case makes its way through the court system. It seems to be a hopeless case; he begins to believe he will lose the case. He misses the highest court’s decision because he was drunk and a mess.

The Case’s Decision

Gloria comes back to the apartment to tell him they won the case and get his inheritance. He doesn’t appear to care anymore. It is quite a downbeat ending for the reader. On the other hand, he doesn’t enjoy the win. Did Anthony get his just desserts, meaning that he caused his physical, psychological, and near financial demise based on poor management and discipline? He has never saved, didn’t have an emergency fund, overspent frivolously, lacked goals, and remained idle except for drinking. It is hard to have sympathy for Anthony and his wrecked life at the end.

Advice For The Patches

Anthony did not heed his grandfather’s advice to save money, invest, find a job, and earn an income. However, they would have been in far better shape had they boosted their income. Gloria and Anthony came from wealthy friends and families. They expected their wealth would come in the form of an inheritance. In the meantime, they overspent their allowances “to keep up with Jones.” Today we may refer to that as lifestyle inflation and something to be avoided.

The Patches should have controlled their spending, had a reasonable budget and an ample emergency fund. Adam, his wealthy grandfather, managed his money very well.

Virtues of Work

With a Harvard degree, Anthony would not have had trouble finding a job he liked. Work hard, and you can play hard.

.“Choose a job you enjoy doing, and you will never have to work a day in your life.”  Whether Mark Twain or Confucius said this, it is a sentiment worth aiming for whether you plan to work for ten years or 40 years. Embracing hard work allows you to put away money for savings, investing, and emergencies.

I always valued my work, appreciated its challenges, and a way to give our lives meaning. Sure, there are still days we would instead not be working. However, seek fulfillment from your job and career or make changes. Explore and broaden your interests. Our jobs give us a sense of pride, independence, identity, purpose, a way to meet people, improve our skills, and of course, financial support. The Patches needed a set of reasonable goals and a game plan to execute for financial success.


“For white men to live is to own, or to try to own more, or to die trying to own more. Their appetites are astonishing! They own wardrobes, slaves, carriages, warehouses, and ships. They own ports, cities, plantations, valleys, mountains, chain of islands. They own the world, its jungles, its skies, and its seas. Yet they complain that Dejima is a prison. They complain they are not free.”

Make A Fortune And Marry Your Wife

This historical novel, While not a classic, this historical novel begins in 1799, in Dejima, a small port near Nagasaki, Japan. Jacob de Zoet, has left his Dutch homeland to earn enough money and status to marry Anna, his fiance. First, he gained Anna’s father’s respect and approval to marry his daughter within a six-year timeframe. Jacob, the nephew of a pastor, is a young clerk with the Dutch East Indies Company. He has brought a valued Psalter from home but fears its discovery as a Christian book not allowed in Japan.

Accounting Fraud And Corporate Greed

De Zoet, an educated bookkeeper, stands out for strong moral fiber among unsavory and ethically challenged peers and managers. He is praised, promoted for honest accounting, and as quickly demoted and ostracized for his not wanting to sign off on doctored financial accounts. This novel is a morality tale released in 2010, shortly after the financial crisis. Accounting scandals and greed are not a modern-day invention.

Jacob favors the educated and those with strong moral fibers. He admires the highly trained midwife Miss Orito Aibagawa.  Orito has exceptional skills in delivering difficult babies, having studied under the likable and respected Dr. Marinus.

Jacob’s Highmindness

The Dutch East Indies Company’s members supplement their incomes by stealing money from the company’s accounts, smuggling, and cheating. They act according to their self-interest rather than that of their employer. The men justified illegal activities as they were stuck on a small island all year away from their loved ones. To Jacob, there is no justification for theft of any kind.

Good Versus Evil

Orito Aibagawa is a notable character for being independent-minded and well educated. She has more freedom and respect as a woman in this era. She grew up in a well-to-do intellectual family. However, she had a facial scar, which carries symbolism. Orito is a marked woman once her father dies.  DeZoet devotes his life to save her and others subjected to rape and horrific captivity. There is a lot of cruelty and betrayal in this novel.

Jacob represents the best of characters. His intelligence, strong work ethic, modesty, and sense of morality are great virtues among the chaos.


“It would degrade me to marry Heathcliff.”

Wuthering Heights is one sad story with a cast of characters hard to tolerate. This Victorian novel is rich with morality, love of money and social status, inheritance, and gender income inequality.

Thank heavens for Nelly Deans, as a storyteller to Mr. Lockwood, a boarder to Thrushcross Grange, caregiver to Mr. Earnshaw ‘s children Catherine and Hindley, the orphan Heathcliff. Mr. Earnshaw has taken in Heathcliff, who was homeless with low social status. However, Mr. Earnshaw begins to favor Heathcliff over his son, Hindley, who in turn is consumed by jealousy. Hindley leaves the estate to attend college.


Mr. Earnshaw dies three years later, and Hindley inherits the Wuthering Heights. Once favored and pampered by Mr. Earnshaw, Heathcliff gets demoted to common laborer by Hindley. Hindley shames Heathcliff and becomes revengeful. Hindley marries Francis, and someone Hindley met in college. However, she soon dies in childbirth. Hindley drinks heavily and becomes more abusive to Heathcliff.

Money And Social Class Are Priorities

Catherine loves Heathcliff but marries wealthy Edgar Linton for money. She seeks social advancement, which Heathcliff cannot give her. The Lintons are socially more secure than the Earnshaws. Edgar loves Catherine, who learns to love Edgar.

Reversal Of Fortune

Heathcliff runs away from Wuthering Heights and comes into significant wealth mysteriously. He plans his revenge against everyone, especially Hindley. The latter has been mishandling money due to his despair and alcoholism. As a result, Heathcliff lends him money, and Hindley’s debts grow. When Hindley dies, Heathcliff inherits the Earnshaw estate. Keep in mind that women like Catherine were not eligible to inherit money and property in those days. Hence, Heathcliff was next in line. And that’s not all. By marrying Isabella Linton (sister of Edgar Linton), Heathcliff is now in line to inherit the neighboring Thrushcross Grange.

Heathcliff’s Return

Heathcliff’s return to the Grange unravels Catherine as his demonic love for her is her demise and is ultimately the demise of every character.

The conflict between Edgar and Heathcliff is between good and evil. Heathcliff’s turmoil is everyone else’s torture, except for his nephew Hareton Earnshaw, son of Hindley.

Wealthy Heathcliff But Without The High Social Class

Rising to gentleman based on his accumulated wealth, Heathcliff lacks the manners and dress of one in that social class. The former homeless person was now asserting his power overall, acquiring both estates. Heathcliff is among the most demonic, unhappy, miserable characters in all of literature. Young Catherine, daughter of Edgar and Catherine Linton, marries Linton Heathcliff. Linton is a son of Isabella (Edgar’s sister) and Heathcliff, being among the weakest and most pathetic literature characters.

It was difficult reading this story more than a few pages without wanting to throw the book. It caused that much discomfort. Catherine Linton married for wealth, comfort, and social status and may have lost Heathcliff, the man she truly loved.  Emily Bronte’s descriptions of the moors and scenery were beautiful breaks from its main character’s tirades and violence. I am glad to have read this unquestionably classic gothic story, rich in characters that will live on and on.


“I am no bird, and no net ensnares me; I am a free human being with an independent will.”

“Some of the best people that have ever lived have been as destitute as I am; and if you are a Christian, you ought not to consider poverty a crime.”

The Bronte sisters produced memorable women characters. Charlotte Bronte may have remedied Catherine Linton’s weak character with Jane Eyre. This classic Victorian deals with wealth, social status, and, refreshingly, women’s financial independence.

“Reader, I married him.”

Jane Eyre, orphaned as a child, and a cruel aunt, Mrs. Reed, raised her. She is hired as a governess at the Thornfield Manor to teach Adele Varens, the ward of Mr. Rochester, a sad and dark character. She has strange encounters with Rochester, helping him fall from his horse and saving him from a fire at the manor.

Jane falls in love with him and is surprised when he proposes to her, given her low class. However, she learns Mr. Rochester is married to a woman who has descended into madness and is locked up away at the manor. The wedding ceremony is broken off. Mr. Rochester suggests they go to France and live as husband and wife. That proposal goes against Jane’s Christian values, so she leaves Thornfield with what little money she earned.

Jane’s Newfound Wealth

Becoming penniless again, Jane is taken in by the three Rivers siblings at another home and gets a teaching job. Jane learns that her Uncle John Eyre has died and left her a fortune. She realizes that her Uncle was also uncle to the Rivers, so she splits her inheritance with her new relatives.

Newly rich, Jane seeks to return to Thornfield and Mr. Rochester but finds the estate burned. Bertha, Rochester’s wife, set the fire and died. Now on an equal footing to Mr. Rochester, Jane rebuilds her relationship with him, and they are married. Before her inheritance, Jane had been too intimidated to marry the wealthy Mr. Rochester.

Female Independence

In this gem of a classic, Jane Eyre is a very progressive independent woman at a time when women, as brides, were expected to have a family dowry, property or money, to contribute to her future husband. Jane speaks her mind on parity to Mr. Rochester. We admire Jane for her strong moral character, generosity, and independence well ahead of her time.


“She had not known the weight until she felt the freedom.”

Nathaniel Hawthorne’s classic The Scarlet Letter addresses public shaming, social isolation, conformity, earning money, and feminine resilience. Although it was written in 1850 and based on 1640s Puritan Boston, it remains relevant today.

Hester Prynne’s Strength In Adversity

Hester Prynne was a strong woman, accepting the consequences of her weak moment with reticent dignity. As a result of an extramarital affair in the 17th century, she had a baby (Pearl) out of wedlock. She has further exacerbated her crime by refusing to name Pearl’s father.

After a short inquiry, Hester Prynne is found guilty of adultery.  She is required to permanently wear an “A” on her dress for all to see.  The community is encouraged to shun, shame, and gossip about her. She stands on the symbolic scaffold for three hours, holding her baby while being exposed to public humiliation. Hester refuses to name the father of the child. Her husband is not present and is believed to be lost at sea.


Hester’s proud dignity runs counter to Pearl, her wild child “elf,” whom Hester loves and fears. Pearl is a complex character and represents a form of punishment that Hester endures. Among critical characters in the story are the minister (“good”) and the physician, Hester’s older husband, who returns (“evil”).

Symbols and themes enrich The Scarlet Letter: sin worn inside and outside, good vs. evil, lack of materialism, dreams, night and light, meteors, knowledge, “the Black Man,” witches, civilization versus the forest wilderness, societal outcasts, and strong feminine identity. Hester forgives those who have punished her. She is generous to them with the little resources she has.

Shared Her Meager Resources With Others

Hester worked hard as a seamstress to support her difficult daughter.  By all accounts, she was a devoted mother. She shared her limited finances with others without expectations or recognition for her good deeds. Hester has forgiven the townfolks. Punished by her neighbors, Hester is a dignified person with a strong moral caliber. Instead, it is the community, acting as a mob, whose behavior is immoral.

Strong Female Independence

Hester Prynne is an early example of female independence in literature. As a single woman, she is bold, takes care of herself and her daughter, Pearl. She earns her own money through hard work and shares her money with others. She violated social expectations and cast out of the community. However, Hester’s ousting is freedom and redemption. She is free of social conformity. Ultimately, she returns to the town humbly and happy.

Final Thoughts

I have read and reread these books, finding so much more in these classics as time goes on. There are some books that we shouldn’t pick up until we are at least 40 years old. Sometimes characters such as these are like old friends you are visiting.

Indeed, The Beautiful and Damned, based on F. Scott and Zelda Fitzgerald,  is an excellent example of how not to handle money. At some point, after they were married, Gloria and Anthony decided that they wanted to have the best lives possible while they were in their 20s. They discussed not needing to save money for their old age because they expected to die young. F. Scott Fitzgerald died at 44 while Zelda was in a mental institution at age 30 and then killed in a fire at age 48.

For more: Personal Finance Lessons In Classic Literature

Have you read of these books? Any books you would recommend with similar themes? We are always on the look out for suggestions. We would like to hear from you!


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