#17b: BE FINANCIALLY LITERATE – Rich Sister, Poor Sister – 10 Tips to Save Time and Money

By @ChiefHotMomma. This is part of the Power Plays series. Continued from #17a.

Now let’s talk about money. 

Very much like the illustrative tale of Rich Dad, Poor Dad, this is the tale of “Rich Sister, Poor Sister.”

In this scenario, the sisters make the SAME amount of money each year, they just spend it differently.

6. Setting Limits. Just as with time management in Part I, setting limits around spending is key. In a dual-income household, sometimes it’s as simple as living off of one salary and saving the other.  Or, you can have an automatic withdrawl from your paycheck so that living expenses come after the savings withdrawl – savings is not the END of the equation, rather, the beginning. The Poor Sister believes this is an uncomfortable constraint. The Rich Sister feels empowered by knowing exactly what she wants to spend, how, and when. The Poor Sister goes out shopping, sees a cute bag, and buys it, and a new pair of shoes, and a dress, and some new earrings. The Rich Sister says, “Do I have money left in my $300 clothing allowance this month?” She looks in her Blackberry ‘notes’ where she tallies it, and decides ‘Yes, I do! I will buy the purse. I will come back next month for the other things I like.” The Rich Sister and the Poor Sister both get the purse, but, the Rich Sister knows where it fits in her plan. The Poor Sister overspends every month, and carries credit card debt of approximately $2500 by year-end while the Rich Sister carries none.

• Everyday: Try setting a limit on one area of spending, and practice adding up the amounts spent. It could be eating out, or clothes shopping. It could also be as simple as “When I get to x limit on my credit card, I will stop spending.” No need to over-complicate.

 

7. Front Loading.  This was a concept mentioned in Part I with regard to time. It can also be employed with money. The Rich Sister spends a painful hour on the phone with the cable company getting the best possible rate that will be locked in for two years. For 24 months, the Rich Sister saves approximately $50 each month. The Poor Sister accepts whatever rate she is given by the cable company, because she hasn’t thought to ask about changing it, or because she doesn’t make time for it. She is $1,200 poorer than the Rich Sister by the end of year 2.

• Everyday: Pick one recurring bill that can be front-loaded with negotiation or price shopping, and then locked-in, to get a lower price. Also, you can talk with your utility companies about getting a regular bill payment each month to better plan for your budget.

 

8. Cars. Cars are a huge dividing line between the Rich Sister and the Poor Sister. The Rich Sister gets a “new-used” car understanding that cars become LESS valuable over time. Her monthly car payment is $300, even though her budget is $500. The Rich Sister takes the extra $200 per month and puts it in her savings. She will discuss the plan for that extra money at the end of the year with her financial planner. The Poor Sister wants a nice car because it makes her feel good, and she hasn’t thought about how much she wants to spend on the car. She buys a new, fancy car with payments of $500 per month. The Poor Sister is $2,400 poorer than the Rich Sister at the end of year 1, $4,800 at the end of year 2.

• Everyday: Can you take a depreciating asset (e.g. a car), negotiate a lower price, and invest that money in an appreciating asset? (E,g, Real estate/other investments, children’s education, paying down debt?)

 

9. Household Expenses. The Rich Sister and Poor Sister run their households very differently. The Rich Sister has a budget for weekly groceries, and she makes her choices within that budget. The Poor Sister gets whatever she wants at the store, because it’s fun and seems too hard to think about it differently. She’ll take herself out to eat, or buy easy-to-cook prepackaged (expensive) food at the store whereas the Rich Sister will buy whole foods (cheaper) and find fast recipes on TheScramble.com or more involved recipes on Once Upon a Chef, a trained chef who has a blog. The Rich Sister has a “drop dead” limit on her credit card bill. She gets automatic alerts with the balance, and stops each month when the total reaches $2,000. The Rich Sister even tells her husband, “Stop using the credit card until x date.” The Poor Sister is surprised each month when getting her credit card bill, but, not good-surprised like a holiday present. It’s a bad surprise. This list goes on and on. The Rich Sister runs her household on approximately $500 less each month, making the Poor Sister $6,000 poorer at the end of year one, and $12,000 by the end of year 2.

• Everyday: Review household expenses. Where could you sharpen the pencil? You might be surprised. Be the hatchet lady. It might feel good when you get to the end and start eliminating debt, and then building wealth.

 

10. Financial Planner. When they say, “the rich get richer” this is part of the reason why. The Rich Sister has a financial planner. This planner helps her make decisions about the funds she’s saved over the year. It’s not all investment; some of the funds are used for pure enjoyment. The Rich Sister feels very secure, knowing that her retirement fund and kids’ college education funds are paid into, AND that she can take a great trip with her family. The Poor Sister does NOT have a financial planner. But, she has done the following: 1. Talked about getting a financial planner, 2. Met with a financial planner, but never followed back up. The Poor Sister does not want to face reality. The Poor Sister would rather be in debt, and in denial.

Everyday: Get a financial planner, and if yours stinks, get several referrals from people who are smart with money.

 

SUMMARY: Rich Sister Year 1 and Year 2

Year 1$     0 – Credit card debt / finance charges$  600 – $50 cable savings x 12$ 2,400 – $200 car savings x 12$6,000 – $500 household ex saved x12$9,000 TOTAL Rich Sister Savings

Year 2$   0 – Credit card debt / finance charges$1,200 – Cable savings$4,800 – Car savings$12,000– Household savings$18,000 TOTAL Rich Sister Savings

 

 

 

SUMMARY: Poor Sister Year 1 and Year 2

Year 1$2,500 – Credit card debt / finance charges$        0 – Cable savings$        0 – Car savings$        0 – Household expense savings– $2,500 in Poor Sister debt

Year 2$ 5,000 – Credit card debt / finance charges$        0 – Cable savings$        0 – Car savings$        0– Household savings-$5,000 in Poor Sister debt

 

The Rich Sister invests her Year 1 $9,000 as follows:

• 25% into home improvements, including a home office which improves the quality of her life and adds value to her home.
• 25% into her retirement fund and investments, because she wants to retire at 60 and this is the schedule she and her planner have come up with.
• 25% into her kids’ college fund because, again, this is the schedule she and her planner have come up with.
• 25% into a fun family trip and a flat screen for the house that everyone can enjoy.

 

The Poor Sister is $2,500 in debt, and will repeat the same process in year 2.

 

Again, the Rich Sister and Poor Sister make the SAME amount of money. Thus, the lesson here is not about the AMOUNT of money they make, but their sense of financial CONTROL. Why is this important for women?  Mastery of finances is key to feel confident and in-control, but also because we live longer than men. Women, you’re going to be left with all the money, or all the mess, so start focusing in on this area now.

 

Additional resources:

Rich Woman – The excellent addition to “Rich Dad, Poor Dad”

Carrie Schwab Pomerantz on finance for kids and families

The Hot Mommas Project “Schwab Financial Literacy” category winners: 2009, 2010, 2011, 2012-13

Girl Scouts Financial Literacy Projects  – Get your girls thinking early about money!

Dollar Camp – Are you in a career college? See if Dollar Camp is part of your curriculum

 

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