The Road to Financial Independence

Melanie at The Wine-Dark Sea has written a post on money and rewarding obedience, which reminded me that I have intended for a while to write about how we handle pocket money and allowances.

While there are some good arguments for linking children's allowances to chores, particularly the idea of teaching them that money needs to be earned, we opted not to go down that route. We had two reasons: firstly, we felt that helping around the house is simply part of being a family; secondly, because as the girls get older they get an allowance to buy things we would otherwise expect to buy for them. We do occasionally pay them for specific chores as a way of helping them get extra money if they are saving for something, and Angel now gets a small amount for babysitting, but the bulk of their money comes without strings attached.

Our main aim has been to help the girls learn to the skills they will need to handle their own finances well as adults. We try to teach them to manage money by gradually increasing their financial responsibilities. To start with, they get a small amount of pocket money - purely fun money, that they can spend on whatever they want. Our rule of thumb has been ten pence for each year of age, starting when they were four. The trigger for first giving Angel pocket money was the attraction of slot machines for bubble gum and junky trinkets outside the leisure centre where I took her for swimming lessons. The first few weeks she had pocket money, it all went into those machines. Then the novelty wore off and I never had to deal with hopeful pleading for twenty pence pieces again.

When Angel turned eleven, we started giving her an allowance of twenty pounds a month and specific responsibilities. We opened a bank account for her which provides a cash card from age eleven and a debit card from thirteen, and paid her allowance by direct debit into her account. Lots of financial lessons there - how to operate an ATM, how to pay cash into an account, direct debits and standing orders, reading bank statements, interest (what were those extra pennies going into her account?), and keeping track of balances. Out of her allowance Angel had to buy her own clothes and fund her mobile phone (we do phones early, but only on a pay-as-you-go basis).

At thirteen Angel's allowance increased to thirty pounds a month, but she now has to pay for her own social life and incidental expenses ... say she wants to take the train to the next town and go ice skating or to the cinema with friends, she pays; or if she wants to grab lunch while she is out, she pays. At fourteen, she got another small rise in her allowance, which now includes five pounds in return for babysitting for one evening during the month so that Tevye and I can go out. If she wants more money in future, it will have to be earned - she has just started helping out at her gym, and is planning on doing coaching qualifications so that she can get some paid work there. Having her own allowance has worked out beautifully. Angel takes her responsibilities seriously, budgets her money carefully, and enjoys the sense of independence it gives her.

We are planning to take exactly the same approach with the other two girls. One small tweak we have made with Star is that we switched her pocket money from weekly to monthly at ten, so she currently gets five pounds a month rather than the pound a week we gave Angel. She is very much looking forward to August when she will get her own bank account and allowance. Angel prefers dealing with cash and has opted not to use her debit card. Star, on the other hand, wants an account with a different bank as she is keen to get a debit card when she is eleven and this bank will provide one. It is going to be interesting to see how she handles her money, as she is a very different character to Angel.

You Read It Here First

"Governments on both sides of the Atlantic are going to have to decide how far they want to bail out banks." The Bookworm, 12 July 2008

Why bother with the BBC or Sky News when you can come to the Bookworm for incisive economic analysis, spiced with the doings of charming toddlers and snapshots of bookshelves?

Seriously, I looked back on my random economic thoughts post to see if my opinions on the current economic mess had changed in the light of recent events. They haven't. I still think it is largely a crisis of capitalism, where the financial markets have been forced to recognise that hypothetical values bear no relation to reality. I certainly wouldn't want to be a banker right now, because I'm sure the convulsions among banks will go on for a while. However, I'm going to throw in a little optimism ...

On the macro level, the financial markets tend to overcompensate. Mass selling hysteria takes over but it doesn't last, and once the hysteria wears off everything bounces back to a stable level. The more solid banks will come out the other end stronger. While things were never as golden as they were painted over the past few years, they are also probably going to be painted as blacker than they really are. Painting things black tends to suit the media. I notice there is a lot of "it has never been this bad" around, but I don't agree. I don't think the current crisis is worse than others I remember, just different.

On the micro level, I'm noticing a lot more Sold signs on properties. If that is anything to go by, it suggests the housing market - at least in our local area - is no longer in free fall. Also, there are lies, damned lies and statistics. This morning Tevye read out a statistic from the newspaper, that the amount lent in mortgages in August 2008 was 95% down from August 2007. That sounds dire, but only tells part of the story. A significant part of the mortgage market was people switching lenders for a better deal, not people buying properties. That isn't happening any more. Take re-mortgages out of the equation and I bet you would get a very different statistic, but nobody seems to be mentioning it. Remember what I said about painting things black?

ETA: I did a bit of research into mortgage statistics, and found this article which suggests I am at least mostly on the right track. There are still more remortgages than I allowed for (I forgot about remortgages by people coming to the end of fixed rate deals), but the number of loans for house purchases have been fairly stable in 2008 after falling by around 50% during the second half of 2007. The article concludes:

The mortgage market has contracted over the past year and business levels will undoubtedly remain low for the immediate future. However, the statistics show a market which appears to have been rumbling along at a reasonably constant rate during 2008 and which is not, as some headlines would have us believe, continuing to nosedive.

Random economic thoughts

Yesterday's financial news was that we had officially entered a bear market (a falling Stock Market that has reached the point where it is statistically confirmed) set me to pondering the general state of the economy, and trying to pull various random thoughts into ... an incoherent collection of random thoughts? And where else would I share a collection of random thoughts but here. I tried to think of snappy title for this post but failed. I'm afraid it just isn't a snappy subject. Feel free to move on!

I am old enough to remember three major economic crises. The "three day week" and high inflation of the 1970s; the miners' strike and high unemployment of the early 1980s; and the house price crash of the early 1990s. This time round, I don't think things will get as bad as the 70s and 80s, at least, but there are some new factors that make things unpredictable.

Unemployment seems to be the least worrying issue. If we are heading into an economic recession, at least it is from a strong position of low unemployment. For what anecdotal evidence is worth, I am not hearing people say they are worried about their jobs.

Inflation is biting, but in historic terms it is still at quite manageable levels (in the 70s it got as high as 24%). Higher food prices, higher gas and electricity bills, and petrol prices of over £5 ($10) a gallon and rising, are hurting almost everyone I know. It's definitely feel-bad time ... but for most people so far that feel-bad is more about having to tighten belts and cut back on non-essentials, than about hitting economic crisis point.

The housing market is a mess. We live on a popular estate (neighbourhood?) where houses usually sell quickly. Not now. There is a veritable forest of "for sale" signs. Higher interest rates and restrictions on mortgages mean there simply aren't enough people wanting to buy. With mortgage payments going up and house prices going down, it looks as though we may be heading back to the bad times of the early 1990s, with negative equity and repossessions.

There are new twists to the economic problems we are seeing now. Somehow we have to get through two crises: a crisis of resources and a crisis of capitalism. Rising food and oil prices are at least in part a function of demand. As the economies of the east (China and India) grow, limited resources have to spread a lot further. A BBC News report I found says that the number of car owners in India is expected to double between 2000 and 2010, from 0.5% to 1% of the population. The Indian economy is growing at 8%p.a., so that rise in car ownership isn't going to slow any time soon. Presumably the same is happening in China. Increasing prosperity in the east also means more people have more money to buy more food. Add to that a rising world population, less land suitable for food production (due to global warming?), and the use of food crops to produce biofuels and you get rising food prices. Somehow the western economies are going to have to learn to live in a world where resources are shared more equitably, and where those resources are in any case becoming scarcer.

The other crisis is one of capitalism. Capitalism runs on money ... and on hypothetical money. Capitalist markets are not about real value, but about perceived value. This is probably at least partly responsible for those high petrol prices. The financial markets make assumptions about future oil shortages - that may never happen, or may only happen on a smaller scale - and push up oil prices to levels that bear no relation to the real cost of actually getting it out of the ground and refining it. According to a friend who works for BP the cost of the oil they produce is a small fraction of the value put on it by the market (I think maybe one-fifth, but can't remember for certain). So when you pay through the nose to fill your car, remember this ... you are paying an amount that will give the oil companies huge profits, not because they have decided to charge an excessively high prices but because some financiers in Wall Street or the City of London are betting that oil will become increasingly scarce. You are paying not just because China and India are using more oil now, but because they are expected to use more in the future.

Those same financial markets are also behind the whole credit mess. I struggle to understand the technicalities of the sub-prime debacle, beyond the fact that irresponsible lending came back to bite the banks who thought they could make a profit out of it. Their manipulation of hypothetical money got out of control, until suddenly everyone noticed that the emperor had no clothes. Banks and mortgage lenders are now in free fall. That is very scary. Governments on both sides of the Atlantic are going to have to decide how far they want to bail out banks. Here the government have already done it with Northern Rock. Will they go further? Will any western government allow a bank to go under? Banks are also now petrified of lending money, which means the housing market isn't going to recover any time soon.

Am I leading anywhere with this? Afraid not! Except to say that if I had much money in the bank (which I don't), I would spread it around rather than leave it all in one place, just to be on the safe side. Also, that now is a good time to get used to being more economical in the use of resources, with careful food shopping and trying to drive less. High food and petrol prices aren't going to go away any time soon.

Small is Still Beautiful

I recently finished reading Small is Still Beautiful by Joseph Pearce. This is based on Small is Beautiful: a Study of Economics as if People Mattered by E.F.Schumacher, originally published in 1973, and is quite a departure from his usual literary biographies. I found it an odd book as parts are taken verbatim from Schumacher's book (with the blessing of his daughter), parts are Pearce's own, and the rest is a mish-mash of the two. The mixture of the two voices isn't particularly successful and the result feels bitty. It also still seems out-dated in parts, despite Pearce's additions.

Despites its weaknesses, I found the book worth reading. Although I think some of the arguments are simplistic, it does show the absurdity of economic systems that depend for success on never-ending growth and over-consumerism. It makes the very important point that economics should not be solely about economic utility, but should also encompass philosophy - essentially, economics should take into account other aspects of human well-being besides simply material ones. The part I liked best was the last section, which did a good job of setting out the argument against industrial scale farming and demonstrated how public demand for organic food is helping to buck that trend. There was enough here to convince me that I should be going further down that road. It also reminded me that I have been intending for a while to do some reading on "Catholic economics" - relevant papal encyclicals, Belloc and Chesterton on distributism, and any more recent books on the subject I can get my hands on. Catholic Social Teaching and the Market Economy by Philip Booth and Catholicism, Protestantism and Catholicism by Amintore Fanfani both sound interesting.