Excerpted from Return on Information - New Jersey (ROI-NJ) Magazine's September 25th article.
In our quest to empower high school and college students with financial literacy, and ultimately financial freedom, we have developed the +Club program that seeks to answer the elusive, age-old question: How can one achieve financial freedom and pave the way to a fulfilling and good life? At the heart of our program is the concept of Living Within Your Means (LWYM). To make this idea resonate, we turn to the appeal of popular culture, offering cautionary tales of celebrities who, despite their vast prior fortunes, faced financial ruin by spending beyond their means. We also emphasize the importance of saving early in order to have the “miracle” of compound interest work effectively for young people.
Celebrity Cautionary Tales
Consider Antonio Brown, a potential NFL Hall of Famer who earned more than $80 million through his career plus endorsements. Despite his substantial earnings, financial missteps led him to bankruptcy. Similarly, Toni Braxton, a celebrated musician with seven Grammy awards and over 70 million records sold, declared bankruptcy twice due to unfavorable record deals and financial mismanagement issues. Then there's Nicolas Cage, who earned over $150 million from a highly successful acting career but found himself in trouble with the IRS after purchasing extravagant items like a $150,000 octopus and 15 homes. We also discuss with the students the financial struggles and strategies of local role models who have embraced the LWYM approach, providing tangible evidence that financial freedom is possible for those born and raised in underserved communities.
These stories serve as powerful reminders that no matter how much money you make, failing to manage it wisely can lead to dire consequences. The +Club teaching moment? Even if you make thousands or millions of dollars, if you don't spend less than what you make, you could wind up in financial trouble. Live within your means and you'll have your money work for you instead of against you.
Mastering the Art of LWYM: The Proper Mindset
Living within your means is not about deprivation; it's about understanding your spending habits and making conscious choices. It's about distinguishing between needs and wants and making sure your lifestyle aligns with your income. Purchasing a cherished item may act as a motivator, providing it can be afforded. This approach encourages you to ask critical questions before making purchases: Do I really need this? Will I use it in six months? By being mindful, you can avoid unnecessary expenses and enjoy a more stable and less stressful financial life.
Budgeting: The 50/30/20 and 50/20/20/10 Rules
A common budgeting strategy in financial literacy articles is the 50/30/20 budget rule, which allocates 50% of income to needs, 30% to wants, and 20% to saving. For students, needs might include essentials like a cell phone bill and food, while wants could be aspirational items like saving for expensive sneakers. Savings help build wealth over time through interest-earning accounts or investments.
Our +Club introduces a modified 50/20/20/10 budget rule, which maintains 50% for needs and 20% for savings but reduces wants to 20% and allocates 10% to helping others. This adjustment encourages students to give back once they are financially secure, promoting a sense of community and responsibility. We liken it to the airplane safety instruction: secure your own oxygen mask before assisting others.
Figure 1: The Living Within Your Means (LWYM) Budgeting Framework.
Impressive Generosity in Underserved Communities
In our recent pilot program in Newark, New Jersey, we have been impressed by the willingness of students with limited resources to allocate their scarce funds to the benefit of others. In our pilot program, students pledged to give roughly as much to helping others as they allocated to their personal wants. This generosity reflects the core values of our program: financial stability, community support, and personal growth. Helping others also provides positive mental health benefits for the giver, according to Professor Laurie Santos, who developed the enormously popular Psychology and the Good Life class at Yale University.
Conclusion
By embracing the LWYM approach and the 50/20/20/10 Budget Rule, students can achieve financial independence while fostering a spirit of generosity. Our financial literacy program aims to provide the tools and knowledge necessary for students to navigate their financial futures with confidence and purpose. It is our hope that they achieve financial independence and enjoy a fulfilling and good life.
About the Authors
John Longo is a distinguished professor at Rutgers Business School, investment professional, and author. Mark Pearlman is a business strategist and nonprofit activist. The authors co-founded Intelligent Money (IM) which is a multimedia platform offering practical financial literacy education. Part of the IM strategy includes The +Club which is a High School Financial Literacy and Life Skills program targeted for the underserved communities with a recently completed pilot in Newark, New Jersey.
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