On Getting Older: Money and Credit

Money and Credit

As I mentioned in my introduction, my parents are products of the Great Depression.  It was my mother who first taught me about money and budgeting – she controlled the family purse strings.  Dad was the breadwinner, and he brought home cash each month and turned it over to my mother to run the household.  This was a common arrangement at the time. 

The Envelope System

While I was in high school my mother sat me down with her checkbook and this folder that consisted of various envelopes, each with a label (food; clothing, etc.) and cash in them!  This was mother’s system – Dad brought home cash, and she put it in the envelopes, and that’s what was there per category to use that month.  There were no Excel spreadsheets then, nor budgeting apps.  So if there was more month than money, and an envelope was empty, there were two choices:  defer the spending until next month, or borrow from another category. 

I’m grateful for this training and I use a variation on the theme with many clients today.  She also taught me how to balance a checkbook.  There was no debt.  A common attitude of my parents’ generation was that debt was for people who couldn’t manage their money – meaning only losers went into debt.  It was a matter of pride, in fact, to pay cash everywhere.  Think of it – people even paid cash for cars.  I remember Dad’s new 1968 Chrysler Newport Custom (pictured above) – the car I learned to drive on – costing some $4000, paid in cash IIRC. The thing was an ark.  

It wasn’t until I was well into my high school years that credit cards came into somewhat common use.  Department stores and, indeed, my grandfather’s shop allowed customers to have charge accounts, which didn’t necessarily extend credit, but rather deferred payment.  The Bank Americard (Now Visa, I believe) is the first I knew of.

How to Impress a Woman

Contrast that with today!  It is impossible to live without credit.  A potential employer will run a credit check.  Of course, you can’t rent or buy a residence without good credit.  Not only that but think of how cards are marketed – with an element of prestige!  Your Gold card will turn heads.  Used to be that if a man wanted to impress a woman, he’d flash a roll of bills.  Now – just the gold (or platinum) card. 

This is worrying to me for the next generation.  I see young people – not just young, actually, with $20K or more of credit card debt.  And they have no idea how long it will take to pay that debt off.  Don’t get me wrong – I’m not necessarily anti-credit.  The practice of my own household is to run as much as possible through various cards to obtain the airline miles and hotel points – but we pay the balance in full when the bill comes.  Otherwise, we’re leaving a lot of travel benefit on the table.  But I distinguish between good credit and bad – the good being used to acquire an asset, such as a home or an education, and the bad used to merely gain an experience – a night out, for example.  Think of double-entry accounting:  an increase in a liability and a corresponding increase in an asset account yields no change to net worth. 

To make a generalization, we see many of the young professional people with whom we work simply tap the debit card to make purchases.  Contrast that with seeing my mother’s empty envelope at the end of the month.  There is no empty envelope when all you do is tap!  Meaning there are no guardrails on your spending, making budgeting all the more important. 

What amazes me is that many of these same young professionals thank us profusely for helping them to get in charge of their cash flow – even calling it the fun part of the planning engagement.  So sad that throughout otherwise stellar academic professional careers there’s been absolutely no education on money and debt!

Digital Currency

This is sort of a tangential issue to money and debt, but something that worries me deeply.  Until 1971 our greenbacks were backed by gold and silver – the physical metals.  After that point the backing went away, and we now have what’s called fiat currency.  Fiat currency is simply created by the US central bank, called the Federal Reserve.  It is accepted as a store of value because, well, everyone accepts it. 

As we have more inflation, savvy investors have looked to crypto assets as a store of value – Bitcoin, Ether, etc.  Such transactions occur using blockchain technology, which will revolutionize money transfer and finance.  These transactions are recorded on a public ledger – the blockchain – and are immutable. 

Now, quick look to China.  The government controls everything.  They have a social credit scoring system, meaning the government keeps tabs on all your activity and your spending.  If they don’t like what they see, they can shut you down – restrict your access to your own funds.  Well, they’re communists, and that’s what communists do.  But guess what?  During the trucker strike in Canada recently, Trudeau instructed banks to restrict truckers’ access to their own accounts.  No legal process.  Just an order, and banks complied.  This scares me to no end. 

Could it happen here?  The US Federal Reserve is actively looking into a digital dollar – one they would control, and one they could also restrict.  This keeps me up at night.  And my readers should know that now at CameronDowning we now offer direct cryptocurrency investing. 

Best to all,

--Glenn J. Downing, MBA, CFP®

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