Laura Rowley Money & Happiness

My niece Kara just graduated from a Rhode Island university with a teaching degree; this was a bit of a shock to my system, since I first met her when she was just learning to walk. This week I wanted to offer Kara and other grads some advice on how to think about money and how to use it as a tool to achieve more happiness. Given what’s happened over the past year and a half, this isn’t an easy assignment.

Too many people are no longer reaping what they sow. They worked hard and got laid off. They saved diligently for college, and their 529 plans tanked (while tuition grew at double the rate of inflation). They contributed regularly to their retirement funds and lost 40 percent or more of their portfolios. They took out a mortgage they understood to buy a home they could afford, and it plummeted in value. They paid for health insurance but ended up bankrupt when they got sick. They followed the rules, and their dreams were derailed.

Some writers have suggested that recent experience means the death of personal-finance advice, because the conventional wisdom turned out to be so wrong under the circumstances. But this is a knee-jerk response that throws the baby out with the bathwater.

Perhaps the real problem is that the personal-finance advisers sold people on the illusion of total control. The underlying message of most personal-finance books is, "Do this and you’ll be rich like me! Guaranteed!" This ignores the fact that making big money -- and hanging onto it -- comes from a confluence of unique factors: upbringing, education, talent, a lucky break, perfectly timing a market bubble, and not bumping into Bernie Madoff at a cocktail party.

We Don't Have Control

The truth is we don’t have control. We can set goals based on what we value most, take concrete steps to achieve them, live within our means, do our best to manage risk, try to find good advisers, and sidestep the bad guys.

But that doesn’t protect us from the stupid things that government, institutions, and other people do that wreak havoc on the economy. In other words, you can eat right and exercise and still get run over by a drunk driver. That’s why we need to have common-sense regulation of financial services in the same way that we regulate drinking and driving. (How about a simple suitability requirement for the nation’s mortgage brokers so they can’t refinance an 84-year-old six times in three years? And a fiduciary duty for anyone who makes his living managing other people’s money?)

To my darling Kara and the other 2009 college graduates, here are the habits of financial peace that I have found in the past two decades, and they do work -- whether the Dow is at 14,000 or 6,000.

1. Work hard at the right things.

Continually develop your joyful skills, broaden your experience, raise your hand for new challenges, and take every free seminar your employer offers. Be as accomplished at making friends and contacts as you are at your job. Keep in mind that public companies often reward their executives in stock, and the stock prices usually go up when the cost of labor goes down (translation: you get laid off, your job moves overseas). Even if you work exceedingly hard, be aware that your competition is global and you are entirely dispensable. So invest your time developing your distinct abilities and a network that goes with you from job to job.

2. Define “rich” on your own terms.

Make a list of a dozen things you value most in life -- the qualities as well as the stuff -- whether this includes strong friendships, excellent health, independence, or a home on the beach. Set priorities and put a dollar figure on them, then work backwards -- if you want to buy a home in 10 years, what do you have to do in five years, two years, six months, or next week and even today to get there? Keep your list in your wallet, and pull it out every time you are tempted to trade what you want most in life for what you want this second.

Be creative and flexible in your definition of rich experiences. Whether you own a house on the beach or you housesit for free, you still get to feel the sand between your toes. If you barter your babysitting skills for personal training instead of paying cash, you still get abs of steel.

3. Banks should pay you interest, not the reverse.

Pay credit cards on time and in full every month. If you already carry a revolving balance, get rid of it as quickly as possible, even if it requires living at home (or with 12 roommates) for a period of time. Credit card firms pretend they exist to help you “live richly,” to borrow from an old ad campaign. But they are like drug dealers -- you’ll get a momentary high and then become wretched and dependent and kill yourself trying to kick the habit. Just say no. Do not arbitrage credit cards, rolling from one zero-interest card to another, because it can trash your credit score, and one tiny misstep can cost a fortune. Given recent legislation reining in the worst practices of credit companies, the days of ubiquitous zero-interest offers are probably over anyhow. Meanwhile, choose a credit union or local bank for your day-to-day finances, and if you do choose a megabank, don’t run afoul of their rules. Your finances will die the death of a thousand stupid fees.

4. Treat your credit score like a vintage race car.

Understand the mechanics of the thing, maintain it, buff it, shine it, and it will speed you in style to your destination. If you let it break down, it will damage your ability to get a job, rent an apartment, or borrow money to buy a car or a home -- and add tens of thousands of dollars in extra costs to everything in your life. 

5. You do not need a million dollars for retirement.

The retirement industry will try to convince you that you do, because they make a lot of scratch managing your excess dough. Save 15 percent of your income from the time you start working in a tax-sheltered vehicle and you should be fine, although there are no guarantees. If you don’t have a 401(k) plan, lean toward a vehicle such as a Roth IRA, where you pay the taxes now, when you are in a lower income bracket, and take the money out tax-free later. The preposterous bailouts of this decade will come back to haunt Americans in future decades in preposterously high tax rates.

6. Learn to manage your own money.

Figure out what a stock is, what a bond is. Learn how the power of compounding works and how taxes affect your returns. Do not invest every penny in the stock market unless you have the stomach to lose every penny you put in. Find a percentage you are comfortable with, and if that’s 90 percent or 10 percent, know that there are risks on both sides. Historically, the broader stock market has never gone down to zero -- but individual stocks and funds have. So if you want to be in stocks, diversify your risk by buying very low-cost index funds or exchange-traded funds. Don’t know what an index fund is, or an ETF? There are dozens of free Web sites and classes where you can learn.

7. Understand the cost of your investments.

Know exactly how much you are being charged in fees for the privilege of investing in whatever it is you choose to invest in, and that includes your 401(k) retirement plan. You may be getting ripped off royally by your plan administrator, in which case you should only participate if you get a match, and then only up to the match.

8. Take good care of your health.

Exercise, eat your vegetables, and don’t smoke. No one knows what’s going to happen with the health care system in this country. But at the moment, illness is financially devastating. A 2005 Harvard study found that medical reasons caused half of U.S. bankruptcies -- and more than three-quarters of those households had health insurance at the onset of the illness.

9. Be giving, be grateful. Both are surefire strategies to well-being.

This advice might give you better control over your path to money and happiness. But there are no guarantees. Spend your money and time doing things with people instead of buying a bunch of stuff. Because, while you may find yourself caught in the crossfire of an embattled economy, no one can evict you from your experiences or repossess your memories.