Be Money Smart This page intentionally left blank Be Money Smart A Practical Guide for Starting Out, Starting Over, and Staying on Track Farnoosh Torabi Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jeanne Glasser Editorial Assistant: Pamela Boland Development Editor: Russ Hall Senior Marketing Manager: Julie Phifer Assistant Marketing Manager: Megan Graue Cover Designer: Alan Clements Managing Editor: Kristy Hart Project Editor: Betsy Harris Copy Editor: Keith Cline Proofreader: Water Crest Publishing Indexer: Lisa Stumpf Interior Designer: Gloria Schurick Senior Compositor: Gloria Schurick Manufacturing Buyer: Dan Uhrig © 2012 by Farnoosh Torabi Published by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America First Printing October 2011 ISBN-10: 0-13-288806-8 ISBN-13: 978-0-13-288806-6 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educatión de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Library of Congress Cataloging-in-Publication Data Torabi, Farnoosh. Be money smart : a practical guide for starting out, starting over, and staying on track / Farnoosh Torabi. p. cm. Includes index. ISBN-13: 978-0-13-288806-6 (pbk. : alk. paper) ISBN-10: 0-13-288806-8 (pbk. : alk. paper) 1. Finance, Personal—Psychological aspects. 2. Money—Psychological aspects. 3. Financial security. I. Title. HG179.T5925 2011 332.024—dc23 2011037077 For my family This page intentionally left blank Contents Preface . .xii Introduction . .1 A Behavioral Bubble . 2 Be Money Smart . 10 PART I Draft Your Financial Blueprint Chapter 1 Personalize Rich . .13 Rich: Up Close and Personal . 14 Rich: A Paradigm Shift . 15 Your Formula for Rich . 15 Chapter 2 Establish Goals . .23 Goal Ambivalence . 26 Mastering Goal Ambivalence . 28 Finding Your Will and Your Way . 31 Chapter 3 Craft Your Money Philosophy . .39 The Journey to Creating a Financial Philosophy . 40 Putting Philosophy to the Test . 43 Crafting Your Personal Money Philosophies . 45 Chapter 4 Embrace Your Relationship with Money . .51 The Money Heebie Jeebies . 52 Money Zombies. 53 Money Harmony . 57 Moral Obligations in Your Relationship? . 62 viii BE MONEY SMART PART II Psych It Up Chapter 5 Organize. Don’t Agonize . .77 Getting Squared Away. 78 Let’s Get Physical!. 91 Chapter 6 Be Your Biggest Advocate . .95 The Art of Personal Advocacy. 96 The Composite of Self-Advocate . 97 Chapter 7 Make Your Money Count . .111 What “Worthy” Looks Like. 112 Worthy Banking: Making the Most of Your Earnings . 121 “Worthy” in Action . 127 Chapter 8 Think Five Years Ahead . .135 Know Where You Stand . 137 Know Where You Want to Go . 137 Be Pessimistic Enough . 138 Develop Your Strategy . 139 PART III Raise the Bar Chapter 9 Break from the Norm . .153 Overcoming Risk Aversion . 154 Timing Is Everything . 156 Alternative Places for Your Investments . 159 Chapter 10 Embrace the Entrepreneurial Spirit . .163 A New Era of Entrepreneurship . 164 The Part-Time Entrepreneur . 167 Transitioning to You, Inc. 176 Ironing Out the Finances . 179 Conclusion . .183 Index . .187 Acknowledgments I have the great fortune of knowing encouraging and inspiring indi- viduals who’ve made my career and life an absolute joy, in addition to having helped spring my ideas and this book to life. Thank you to my superb agent, Adam Kirschner, who pushed for this project, just as I was about to give up hope. Thank you to the very supportive and talented Pearson team: Jeanne Glasser, Tim Moore, and Julie Phifer. Thank you all for rallying behind me and reminding me to always think big. Boom! This book could not have been possible without the generosity and brilliance of behavioral experts, teachers, and economists who shared with me their perspectives, theories, and thoughts. Thank you especially to the great Dan Ariely, Jay Ritter, Terri Ciochetti, and Joseph Brusuelas. I am enormously grateful to the television producers who have allowed me to share my perspectives on their airwaves. First and foremost, Patricia Luchsinger, a magnificent producer at the NBC Today Show, who was the first person to take a serious chance on me and put me on live, national TV at a young age. Thanks for the big break and for inviting me back. Thank you to the excellent Katherine Billman, also from the Today Show. Thank you to all the brave and inspiring participants on Bank of Mom & Dad. And of course, mon- strous thanks to my Bank of Mom & Dad family at ABC Daytime and BBC America who helped bring this very important program to life: Ann Miller, Lillian Lim, Marianne Fleschman, Allison Wallach, Bob Kirsh, Shirley Escott, Jerry Kolber, and Tracey Finley. My deepest gratitude to all the individuals with whom I’ve had the opportunity to collaborate in the past year, who’ve helped me extend my reach in educating everyday people about money. I’m especially thankful for Christine Schirmer, Jen Garcia, Jen Fellner, Scott Gulbransen, Chelsea Marti, Kathryn Zambito, Courtney Leddy, Chris Lee, Kathleen McGraw, Katie Grafer, Denise Vitola, Kristen Ronan, Colleen McCarthy, and Naomi Borno. x BE MONEY SMART I have wonderful friends who keep me brave: Kate Dailey, Bethany and Tim McGee, Ariel Gornizky, Kathryn Ricker, Tim Chan, Kafi Drexel, Margie Fox, Brian Maloney, David Dapko, Annika, Michael, Luke, and Blake O’Looney, Susan, Michael, Allison, and Amanda Beacham, Kathy Braddock, Kelly and Eric Tiedeken, Chris- tine and Mike Rzasa, Tim Hedden, Kristin Bentz, Susie Banikarim, and Dan Arnall. Thanks to all of you for your unconditional friend- ship and support. Thank you to Dean Jim Thomas and Joyce Matthews and the entire Smeal College of Business at Pennsylvania State University, my alma mater. A great thank you to my Lancaster, PA family for their love and support: Eileen and Phil Jaquith; Kate Dussinger; and Doug, Jean, and Bradley Dussinger. Speaking of family, much love and a great big thank you to Aunt Sheren, Uncle Nasser, and my AZ cousins Alex and Allen. Thank you to Adam and Sheila Torabi, my amazing parents—to whom I owe pretty much my entire life. The greatest gift they ever gave me—besides guidance, unconditional love, and trust—was my brother Todd back in 1991. With Todd, there is inspiration and joy. And the future always seems brighter. Finally, I am blessed for my best friend and steady Tim Dussinger. Thank you for all the all. About the Author Farnoosh Torabi is a personal finance expert, author, speaker, and TV personality. The New York Times calls her advice “perfectly prac- tical.” Her first book, You’re So Money, was widely acclaimed for its candid, tell-all advice for young adults seeking financial independ- ence. Farnoosh’s latest television work includes SOAPnet’s Bank of Mom & Dad, where she coaches young women struggling with debt. She was also the resident finance expert on TLC’s REAL SIMPLE. REAL LIFE. You’ve seen Farnoosh on Larry King Live, The View, Today, Good Morning America, The Early Show, Tyra, Fox News, MSNBC, and CNN. She was formerly a Senior Financial Correspondent and host of Wall Street Confidential with Jim Cramer for TheStreet.com TV. Farnoosh’s work and advice have been profiled in The New York Times, The New York Post, Real Simple, Glamour, Marie Claire, Seventeen, Cosmopolitan, Money Magazine, AOL, People, and Entre- preneur Magazine. Farnoosh attended Pennsylvania State University, graduating with honors in finance and international business. She also holds an M.S. in journalism from Columbia University. Preface The arrival of this book and its message, I suspect, could not have been better timed. We’re more than two years into this great reces- sion, and many of us are more confused than ever about our personal finances. With the financial and employment landscapes evolving before us, it’s difficult to return to the old, prescriptive advice we’ve grown accustomed to. Emotionally, we’ve got a lot going on; we’re angry, hurt, confused, and we’ve lost confidence. Our emotions have (and continue to) run high. By now we recognize that we need to change our ways, but not in a knee-jerk, reactionary way. After all, economic volatility is cyclical and will likely return in a new form in the near future. What’s needed is advice that doesn’t just stem from the rules and regulations of the banking, credit, and financial world but is rooted in our behavior and habits.