Getting to the point of a money pyramid

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Chicago Tribune
By: Eileen Ambrose
October 07, 2010

Most of us are familiar with the food pyramid, the government's guideline for healthful eating. Now, imagine a "money pyramid" for healthy finances.

The Treasury Department is working on such a teaching tool, having sought public input on its proposed list of what adults need to know about five key areas of finance: earning, spending, saving, borrowing and protecting against risk.

The goal is to put those concepts in an easy-to-remember format that can be used by financial education programs across the country and to help us all make more informed decisions.

Some of what the Treasury hopes to impart to the masses is fairly elementary: Gross versus net pay. Saved money grows. If you borrow now, you pay back more later.

But financial experts say many adults need the basics. Most didn't grow up learning them at home or in school.

So, what should every adult know about finances? Here's a sampling of what concepts deserve a plank in the pyramid, according to some financial experts:

Skepticism. We teach children to beware of strangers, but adults must learn skepticism in financial matters, said Lewis Mandell, a finance professor at the University of Washington who has studied financial literacy for four decades.

"Understand the motivation of the counterparty, which is an academic way of saying, 'Hey, the folks on the other side aren't out to help you. They are out to maximize their own profits,'" Mandell said. "I would look at everyone I do business with as my adversary. What is it they are trying to accomplish, and what am I trying to accomplish?"

Need vs. want. "It's a simple concept, but it's a difficult one to get control of," said Jim Godfrey, president of Consumer Credit Counseling Service of Maryland and Delaware. You might want a $300 pair of tennis shoes, though a $30 pair can do the job, he said.

Know what you spend. Budgeting or tracking where your money goes can help you figure out what expenses can be cut to free up dollars to meet your goals. Many consumers don't do this.

"They have no idea how much money comes in; how much goes out. All they know is that there is no money left at the end of the year," said Peg Downey, a financial planner with Money Plans in Silver Spring, Md.

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