Mickey writes in:

In the last week, the Dow Jones Industrial average closed at a thirteen month high and, at the same time, unemployment hit double digits for the first time since the early eighties. I thought that the Dow Jones was supposed to represent how the economy was doing, but that’s not the case. What does it mean? What is the point of reporting it if it doesn’t mean anything?

The Dow Jones Industrial Average (often called “the Dow” for short) is an incredibly common piece of news, yet the purpose of it is often really unclear to newswatchers. Is it an indication of the state of the economy? Not really. Is it an indication of the state of the stock market? Not really.

Well, then, what is it? And why does it get reported so often?

What Is the Dow?
The “Dow” usually refers to the Dow Jones Industrial Average. It was invented by Charles Dow, a co-founder of Dow Jones & Company, which is a publishing and information company.

The “Dow” is simply an average of the value of one share each of thirty of the largest companies in the United States. It does not include any of the thousands of other publicly traded companies.

Of course, a bit of math checking would reveal that if you added up the current market value of a share of each of the thirty companies in the Dow and divided by thirty, you would not get a number anywhere close to the current value of the Dow. There are several reasons for this, but the most important reason is that companies sometimes choose to split their stocks, basically exchanging two new shares for one old share (or some similar exchange). In order to make sure that such an exchange doesn’t wreck the value of the Dow (because that would effectively mean one of the thirty companies just had a single share of their stock drop by half), Dow Jones & Company accounts for it by using a scaled average, in which they effectively keep track of past splits and multiply the values of each share accordingly. Thus, even when a company splits their stock, it doesn’t affect the Dow average at all.

So, basically, the Dow is just a quick summary of the current value of shares of thirty large companies.

The Value of a Share
But what is the current value of a share?

In simplest terms, it’s all about supply and demand, just like buying and selling anything. The stock market is basically no different than a giant flea market, with many, many people buying and selling thousands of items, all trying to make a profit. Depending on the news (and the behavior of others), the price of individual items goes up and down.

In simplest terms, if there are more people buying than selling, the price of a share goes up. If there are more people selling than buying, the price of a share goes down.

What causes this shift? Information about a given company or about the economy in general. Predictions about what the future holds. The behaviors of others. All of these affect whether people are buying at the moment or selling at the moment.

The Value of the Dow
In effect, the Dow is just an average of thirty items from this giant flea market. What information can we get from that?

Generally, it’s not ruled by news from one specific company. One company’s bad news can affect it a little, but not enough to make a huge difference.

It’s also not affected too much by how things are going right now. It’s important to remember that when people buy and sell stocks, they’re doing it based on what they think the future price holds. Thus, the value of the Dow will often go down well before real economic news (like the unemployment rate) turns bad, and the value of the Dow will often go up well before real economic news turns good.

To put it simply, at the first sign the economy is slowing at all – or that one sector is seeing real problems – the Dow will begin to drop, and often rapidly. At the first sign that a recession is slowing even a bit, the Dow will begin to go up, and often rapidly (and that’s what’s happening right now).

So, look at the Dow as a predictor, nothing more, nothing less. It’s a predictor of the general direction of the economy over the next year or so. If the stock market is going up – as it is right now – the economy will generally improve from its current state over the next year.

Quite a few readers simply tune out when I mention investments. They don’t believe the topic applies to them at all. “How can I possibly worry about investing when I can barely put food on the table?” they’ll ask.

The answer is simple: virtually every single person has the resources with which to begin investing. It may seem impossible for some to believe, but it’s true.

If you make purchasing decisions in your home, you have all you need to begin investing. Choose some generic items instead of the brands you usually buy and start your investing with the dollars you save.

If you ever spend money on entertainment, you have all you need to begin investing. Instead of renting a DVD at the Redbox, stop by your library, check out a movie for free, and put aside that dollar you save. There are countless other little ways to shave just a little bit here and there without changing your lifestyle.

If you use electricity, you have all you need to begin investing. Air seal your home or put in a programmable thermostat and you’ll see a significant drop in your energy bill, with which you can invest.

It all starts with the littlest of of choices.

Here are five simple steps anyone can take with that savings

1. Participate in your employer’s retirement plan. More than 90% of the employers in the United States offer a retirement plan. Many of those plans offer matching funds, in which the employer will make contributions to the plan if the employee does as well. Plus, this money goes in before taxes, meaning for every dollar you put in, it reduces your paycheck by substantially less than a dollar – and it also reduces your income tax at the end of the year. If you have a retirement plan at work and are choosing not to even consider using it, you’re choosing poverty.

2. Start an automatic savings plan. If you’ve found a way to cut your spending by even a quarter a day, you have enough to start. Set up an automatic savings plan and transfer whatever you’ve saved to a savings account each week or each month. Even $10 a month – about $0.30 a day – is a great way to start, as it will add up to $121 or so over the course of a year and continue to earn interest beyond that.

3. “Snowflake” into a savings account. If you discover useful one-time ways to save or to earn a little bit more money, don’t spend it frivolously on something you want in the short term. Instead, take that little amount – the $10 you found in the parking lot, the $7 you saved buyinig toilet paper in bulk – and put it right into your savings account. Even better, just start a jar for it, throw that snowflake right into the jar, then take it down to the bank when the jar is full.

4. Save windfalls instead of spending them. What about when something bigger and unexpected comes along? A relative dies, leaving you an unexpected sum. You get a settlement. You win a large cash raffle. You win at the casino (of course, you’d be far better off just not going to the casino, but that’s another story). Sure, feel free to celebrate with a little of that windfall, but instead of blowing through the whole thing like a snowblower through powder, put most of it into your savings.

5. As your savings grows, buy a CD – and then grow from there. Once you hit your bank’s minimums for purchasing a certificate of deposit, do so. This will earn you quite a bit more interest than you were earning in your savings account, but it will “lock up” your money for a while. That’s a good thing – since you’re not intending to spend it anyway, locking it up is just fine.

Congratulations, you’re an investor. When that CD matures and you couple it with your additional savings, you may have enough to start branching into other investments. Hold onto that money – when opportunity comes your way, you’ll have exactly what you need to jump on board.

A very specific example Let’s say Margaret chooses to start saving just $1 a day for the future. Once a month, she automatically transfers $30 from her checking account to her savings account – she doesn’t even have to think about doing it.

After a year, she has $360 in savings and it’s earned a dollar or two in interest. After three years, she’ll have around $1,100. She can then buy a $1,000 CD – a long-term one that earns a couple percent more than her savings account does.

Three years later, Margaret is still just saving a dollar a day. She can buy another CD and has about $200 left over in that account.

Three years after that, all of her CDs mature. She suddenly has about $4,000 with which to begin looking into more aggressive investments if she chooses. Maybe she buys a Vanguard index fund – they have almost no fees and can easily be purchased via their website. Or maybe she feels safer slowly building her cash reserves.

All this takes is a dollar a day.

One final point Now, I’d like you to imagine a couple more things.

Imagine if Margaret is forty when she begins this plan. By the time she reaches retirement age, after saving a dollar a day, she’ll likely have an extra $30,000 for retirement. Not bad for just a dollar a day that she’ll not miss.

Imagine if Margaret is twenty when she begins this plan. By the time she reaches fifty-five, she’ll have around $50,000 in savings. That’s seed money for a new business – a perfect way to begin her second act in life.

Imagine if Margaret is a newborn when she begins this plan (with a parent or a grandparent’s help). By the time she’s fifty, she’ll likely have (well) over $100,000 built up in that account. That’s an amount that can change a life.

These numbers assume that you never snowflake and that you never sock away an unexpected windfall, either. Imagine the possibilities.

Each Monday, The Simple Dollar opens up the reader mailbags and answers ten to twenty simple questions offered up by the readers on personal finance topics and many other things. Got a question? Ask it in the comments. You might also enjoy the archive of earlier reader mailbags.

What is your take on the cost and necessity of supplemental insurance (disability, cancer, et al) from companies such as AFLAC?

I purchased cancer insurance through AFLAC when I first started at my job because cancer is very prevalent in my family’s medical history, but today I realized that I’m spending $358.80/year on it and wondered if it’s actually worth it. That’s $358.80/year I could be putting towards my debt and/or emergency fund.
- Joshua

In situations like these, I think the real question to ask yourself is what the insurance is actually buying you. Insurance buys you two things.

First, it buys you financial protection against a certain situation – in this case, cancer. The odds of such situations are known to the insurance company and calculated into an actuarial table. That basically means that they believe, on the whole, if thousands upon thousands of people exactly like you paid $358 per year for the insurance, the company would expect to make a profit. You can use that information (and the approximate value of your payout) to make a reasonable guess as to the odds they have calculated for your likelihood of the condition. That’s what you’re protecting against.

Second, and perhaps more importantly, it buys you peace of mind. This has more power than you realize. People with certain psychological profiles are very open to worrying – perhaps excessively – about potential bad scenarios, and knowing that a scenario is protected against can be an enormous peace of mind and stress reducer to those folks.

For me personally, part of the equation revolves around one’s financial state. If you’re very secure and have a lifestyle well below your means, insurance becomes substantially less important.

What I’m trying to say is I can’t give you an answer to your question. That answer comes from you – what kind of person you are, what the real odds are of cancer, and so on.

Foods prices fluctuate so rapidly these days. What are your suggestions for keeping a pricebook for when store prices change so much?
- McKella

I’ve largely given up, to tell the truth.

What I do is about once a year or so, I’ll spend an afternoon in the grocery stores. I just mark down the regular prices on 25 or so of the staples we buy most frequently. Whichever store has the cheapest total for those staples is the one I shop at. The only exception to that is if I notice an enormous sale in a flyer or something to that effect.

For us, that means we do almost all of our food shopping at Fareway, with occasional stops for specialty items at other stores. Jumping from store to store based on price book entries that are outdated in a month just isn’t worth it to me.

Trent’s comments were less than PC but they don’t bother me. Very few people are really PC all the time and at least a large minority are not PC at all any of the time! We just don’t talk about those people any more because it’s not PC to do so!
- Shevy

You know what, I’ll say it.

People are different. People who grew up in different parts of the world see the world in a completely different way. They have different cultures, different behavioral norms, different thoughts, and different ideas. They’re treated differently due to their physical appearance (as much as you might want to wish it away, it’s still true).

There are good traits and bad traits in everyone. There are prevalent traits – both good and bad – in almost every possible slice of the demographic pie.

And that’s awesome. The world benefits from this kind of diversity. I want to get to know everyone I meet because we all see the world so differently. It’s beautiful.

But it’s different when I consider where I want to live – the place where I put my head down on a pillow. I want an environment where I’m not afraid to leave my door unlocked for a half an hour while I go to the hardware store. I want an environment where people will simply leave me alone to do my own things and think my own thoughts. I want an environment where I’m not concerned about random acts of violence beyond an occasional playground fight. I want an environment where I can breathe clean, fresh air. I want to live in an area where politeness and courtesy towards others is a cultural norm. I want to live in a place where neighbors bake each other loaves of bread and don’t mind if they erect a compost bin. I want an environment that has strong winters and hot summers, as I love weather variety. I want to live in a state that has a high standard of education and funds its schools well. This is what I want – it may or may not reflect what you want and, in fact, it probably does not.

Whether you like it or not, that pretty much prescribes that I live in parts of the world that are dominated by certain demographics and underrepresented by other demographics. In the United States, the only place where I’ve found this environment is the rural upper Midwest – a part of the nation that’s pretty accurately described by “A Prairie Home Companion.” Some other regions have come close – the Olympic Peninsula in Washington state is nice, as are some rural areas in New England, but nothing captures it quite like Iowa, Wisconsin, and Minnesota.

Guess what? The rural upper Midwest tends to have a lot of people of Scandinavian descent. Immigrants from Norway, Sweden, Finland, and Denmark chose this part of the country to settle in because it reminded them of their home country. I’m not of Scandinavian descent at all – I’m part German, part English, part French, and part American Indian – but the places where I most want to live tend to have a large Scandinavian demographic. I recognize that and I’m not afraid to say so. The area near Decorah, Iowa is where I would most want to live – for the reasons described above – and Decorah prides itself on having an event called “Nordic Fest.”

I’ve alluded to this in a variety of ways over the years and been called racist for it. If that is racism, then I’m racist.

If you want someone to be perfectly PC all the time, go to another blog. I speak my mind and my heart here and I don’t waste time mincing words and worrying about whether some group of people will be mildly offended by some comment. Political correctness hurts diversity because it suppresses raw, fresh thoughts and encourages people to filter what they say and think, spitting out milquetoast that destroys the diversity that political correctness is supposed to preserve in the first place.

If you had the option to get a refund on your social security taxes, in exchange for not recieveing SS benifits when you retire, would you take that deal?
- John

Absolutely. I’m already assuming I won’t get a dime from Social Security when I retire, so if I could get a refund of the money I’ve paid in, I’d happily take it.

In fact, I think that’s a good policy for anyone planning for retirement, especially when they’re young. Ignore Social Security. If you do end up getting it, view it as a pure bonus.

Why do I feel that way? Given the skyrocketing budget deficit since 1980 and the huge flood of people Social Security will get in the next twenty years or so, there will come a point when the math doesn’t add up. When that happens, there will have to be major changes. I see that point happening well before I’m old enough to even sniff benefits.

My Wife and I bought a home recently and have determined that we do qualify for the $8K tax rebate on our 2009 taxes. This will likely mean a significant tax refund this year, we’re thinking in the neighborhood of $10K as we always overpay to get a refund (I know, blastphemy to some), and are wondering if you think it is best to put it on the mortgage (5%) or pay off our credit cards completely (11 to 19%)? This seems a no-brainer to me, but it has started a healthy debate at my house and I was curious as to what you had to say on the subject.
- Paul

Credit cards, without a doubt. It comes down to the interest rates above all else, and the interest rates in this case aren’t even comparable.

I can’t think of a case in which someone would think it was better to put the money into the mortgage. Is the logic that one could then borrow from it – via a HELOC – much more cheaply? Or maybe it’s a lock-and-key philosophy – they believe if you pay off cards, you’ll just charge ‘em up again.

Whatever the reason, you’ll be much better off if you just pay off some cards and, if you’re having control issues, cut them up.

Do you have any books you’d recommend on motivation? Particularly on motivating others?
- Kellie

I think perhaps you’re looking too specifically for a solution.

From what I’ve seen, people tend to fall into one of two camps when it comes to personal motivation. Either they have a major well of self-motivation that they can draw from, or they’re motivated by the presence of a great leader or someone else in a position of authority who can tell them what to do.

There’s not a whole lot you can do to help the self-motivated except give them the tools they need and some encouragement. The real value in motivation comes from the other group, and the best way to do that … is to be the best leader you can be. Almost all jobs where you help others revolve around these two roles – giving the self-motivated space and tools, and giving everyone else leadership, direction, and inspiration.

So, I’d look for books on leadership. The one book that’s been recommended to me over and over again on leadership is On Becoming a Leader by Warren Bennis. This is a book I’ve strongly considered reviewing on The Simple Dollar and may yet do so. Why? The skills described in that book are universally helpful in improving your career and your position in society.

What movies and television shows do you allow your children to watch?
- Ellen

Unless there’s a major news event, we pretty much never watch live TV. Instead, we have a DVR and use it to record programs so that we have a large selection of quality stuff on demand instead of having to channel surf.

Most of the stuff we record comes from PBS – Sesame Street, Sid the Science Kid, Caillou, and a few others. I really wish Mister Rogers’ Neighborhood was still showing – that would be an auto-add. So, when we decide to watch television, we choose one of those.

Our DVD collection is mostly Pixar and Miyazaki, with a few of the older Disney films mixed in.

Our one “splurge” outside of this realm is for our older son, who is a huge fan of Spider-Man. We DVR The Spectacular Spider-Man – which is actually quite good, as it focuses a lot on Peter Parker’s internal struggles with right and wrong – and let him watch an episode as a treat every once in a while.

Along those same lines…

What kinds of educational games do you play with your kids?
- Eldon

We play a lot of Memory – that’s the most played game with the children around here.

My daughter just turned two and has a difficult time comprehending games with any level of complexity. With her, we focus on games that are mostly about mastering the idea of a bit of patience and taking turns, with maybe just a touch of cooperation. The big hits with her are Go Away, Monster and hide and seek with highly restricted hiding rules if she’s seeking.

Our son, who is almost four, plays a lot of games and even participates in the games that adults play, at least a little. His favorites seem to be The Kids of Carcassonne, Blokus, and Ingenious.

Do you ever feel like you’re running out of ideas?
- SueB

Not really, and I don’t think I will unless I stop changing as a person and my family stops changing around me.

Most of my ideas come from the things I do in my own life, and those things change over time. I’m becoming better and better in the kitchen. My kids are getting older. My parents are getting older. I’m getting older. I read new things. I push myself into better habits. People come and go in the context of my life. I join different groups. All of these are fodder for ideas.

Beyond that, readers are constantly sending me ideas and suggestions for posts, many of which are angles that I’ve never considered.

Plus, I’m often anxious to tackle topics I’ve already covered in a new way to help out a different group of people – retirees, twentysomethings, parents, teenagers, college students, mid-career professionals, stay at home moms, and so on.

Add that all together and I have mountains of ideas. The trick is often filtering them and figuring out which is the wheat and which is the chaff.

Do you feel guilty when you give erroneous advice?
- Shane

I strive to write accurate stuff, but I don’t feel strongly guilty when I make a mistake. I get called out enough on the tiniest things by commenters on here that it serves as a constant reminder that I’m far, far from perfect – or even good.

If I got bogged down in that, I would pretty much just quit writing – and that wouldn’t do anyone any good.

So, no, I don’t really feel guilty about it. I just try to learn something from my mistakes and move on.

Got any questions? Ask them in the comments and I’ll use them in future mailbags.

Every other Sunday, The Simple Dollar reviews a personal finance book.

Over the years, I’ve professed a ton of admiration for Thomas Stanley and William Danko’s excellent personal finance book The Millionaire Next Door. It was the first book I reviewed on The Simple Dollar and it’s still one I turn to regularly for ideas and inspiration.

One of the most interesting themes in The Millionaire Next Door is the idea that you really can’t judge a book by its cover when it comes to personal wealth. In fact, quite often, public displays of affluence disguise a debt-ridden underaccumulator of wealth, while many exceptional accumulators of wealth possess ordinary, often seemingly outdated things. The underaccumulators of wealth focused on appearance, while the exceptional accumulators of wealth focused on how things functioned.

Thomas Stanley expands upon that single idea here in Stop Acting Rich. The entire premise of the book is simple: lasting wealth and happiness is rarely found through buying expensive things. Throughout the book, Stanley relies on extensive research of people who have acquired financial security – much the same group as in The Millionaire Next Door – to illustrate and reinforce his points, painting a pretty convincing case of the actual buying habits one should adopt if one is seeking lasting personal wealth.

1 – The Difference Between Being Rich and Acting Rich
Stanley opens Stop Acting Rich by defining a group of people he calls “aspirationals” – people who choose to act like the super-rich, but don’t have the financial resources to truly back it up.

The “aspirationals” and the truly rich (people with truly exorbitant wealth) tend to spend a lot of money. Stanley reviews these spending habits in detail here – think yachts, country clubs, cases of vintage wines, private jets, BMWs and the like. To put it simply, “aspirationals” often have to sacrifice every dime they have to appear rich, leaving them incredibly vulnerable to losing everything.

What’s interesting is that this “aspirational” and “truly rich” phenomenon continues all the way down the money scale. In many neighborhood, there are “aspirationals” – people who are pushing themselves into financial ruin to keep up appearances – and people who can actually afford to live there.

The solution to financial success is pretty simple – stop being an “aspirational.”

2 – Everything You Think about Rich Is Wrong
When you step back and look at “aspirationals” from an outsider’s perspective, an interesting phenomenon occurs. Aspirationals are more common than the truly rich by far, so our “pop” idea of what it means to be rich actually comes from people who are financially poor and are making reckless decisions for their future.

Those aspirationals are seeking respect from the wrong group of people. In truth, it doesn’t matter at all what the random person on the street thinks of you, yet it’s the respect of the random person on the street that aspirationals desperately seek.

“But what about dressing for success and the like?” The only people who you should focus on impressing and winning the support of is your professional peer group and community. Their respect is what will actually impact your life. In many – if not most – professional communities, the watch you wear or the car you drive doesn’t matter one little iota.

3 – Do the Shoes Make the Man?
Many people argue that by doing things like dressing for success, they’re creating the groundwork for success. People will trust and respect them and money will flow their way. So they focus on the material elements – they focus on the perfect shoes, the perfect suit, the perfect handbag, the perfect car, and so on. After all, gotta look good, right?

Yet, while that person is focusing their energies and resources on appearing rich, others are focusing their energy on building the skills that will pay the bills. While one person is buying expensive shoes and keeping up appearances at the country club, the other person is practicing their speeches and coming up with a better business plan.

In the end, one of these two people will find lasting wealth. Will it be the glossy suit with nothing underneath, or the person who put in the time to prepare?

Don’t put the appearance of success before success, or else someone who is actually putting in the footwork will grab that brass ring away from you, leaving you with nothing but a mountain of debt. Focus on the skills that pay the bills, not on the bills that bring more bills.

4 – Brother, Do You Have the Time?
Want to know why you’ll often read articles or hear about people who wear expensive things getting extra attention? It’s because having high-end items makes you a target for people who want to drain even more of your money.

Think about it. If two people walk into a jewelry store, with one person dressed in normal clothes and another person dressed to the nines and wearing a $10,000 watch, which one do you think will get more attention from the salespeople – and thus more encouragement to buy a more expensive item than he or she intended to buy? Such “attention” is the type of attention that causes you to walk out of a store with an overpriced item.

If you value your money, you’re better off not appearing affluent in public.

5 – Keeping Up with Your Spirits
Here, Stanley focuses in specifically on one type of product – sspirits – to make a greater point about purchasing habits. People who buy high-end wines and spirits do so because they believe that having a particular brand – a brand that’s been built up with a lot of careful marketing – of liquor will somehow enhance their satisfaction with their lives.

In truth, an expensive brand is often of debatable quality as compared to the “bang for the buck” choice. The premium paid for a luxury brand may offer a bit more quality, but the minute increase in quality is rarely worth the extra price. What people pay for is the “cachet” – the idea that this particular brand will contribute more to the quality of their life than the other brand.

And that’s called marketing, my friends. Nothing more, nothing less.

6 – The Grapes of Wrath
Stanley discovered an interesting correlation between the net worth and the amount people spent on wines. Ignoring the outliers, the more a person spent on a bottle of wine, the lower their net worth was.

Why the focus on wine? More than almost anything else, wine is a prestige-oriented product. There are many, many wines with strong tasting scores well under the $10 threshold, yet many people who are “aspirationals” tend to seek out the prestige wines – vintages with exorbitant costs that are only marginally better than the $10 versions and, even worse, actively turn their noses up at the lower cost vintages.

Such snobbery has a dual effect. Not only does it sap you of your financial strength, it also can cause unwanted negative consequences. Stanley relates a tale in which a person thought they were showing off high class and sophistication by turning up their nose at the $12 wine offered to them and brandishing their own expensive vintage, but in the eyes of the wine offerer, the person was being downright rude and his actions cut off a potentially useful relationship. To put it simply, trying too hard to appear affluent can cut off relationships.

7 – The Road to Happiness
Among millionaires, what automobile manufacturer has the highest loyalty rate? The highest percentage of ownership? The most recent buys?

One might expect to hear names like Mercedes-Benz and BMW here, but in truth, the answers are Chevrolet, Ford, and Toyota, respectively. In other words, millionaires aren’t the ones buying the expensive cars. Who is? The “aspirationals” – the broke people pretending to be their idea of what a millionaire is.

You can actually judge people by their cars. If you see a shiny new Mercedes rolling your way, it’s likely that the person inside isn’t rich, they’re just pretending to be rich.

8 – Geeting Out of the Poorhouse
The size of a home is a better predictor of the size of one’s mortgage than the size of one’s net worth.

Stanley actually draws this correlation statistically in this chapter, as well as relating that ratio of financial assets to home value to one’s state of happiness. Guess what? The lower that ratio is – meaning that you’ve got a mortgage so large that your net worth is significantly lower than the value of your home – the less happy you are with your life.

Instead of buying what you think you need, focus on buying what you actually need. We did this very thing at our home, where our two children share a bedroom (and soon the three of them will). They don’t need a bedroom to play in – that’s what the family room is for. Why have that unnecessary extra space? Just so we can store more stuff we don’t need?

9 – All that Glitters Is Not the Millionaire’s Goal
Accumulating wealth is an unhealthy goal in life. A person is much better off with other goals in their life.

Of course, the ability to enjoy all that life has to offer without the need to spend exorbitantly on stuff is a key part of being able to accumulate wealth. Wealth isn’t accumulated on an elaborate European vacation – it’s accumulated by spending a summer vacation camping and visiting museums. Wealth isn’t accumulated with a country club membership – it’s accumulated with a walk in the park with people that you want to be around. Wealth isn’t accumulated from rich mahogany and many leather-bound books – it’s accumulated from a home you feel comfortable in and books you actually read, probably checked out from the library.

Is Stop Acting Rich Worth Reading?
Stop Acting Rich is basically just a somewhat more action-oriented but perhaps slightly less rigorous and thought-provoking book than The Millionaire Next Door. They’re very comparable, as they cover many of the same topics.

From my perspective, it felt like The Millionaire Next Door was broader in scope, while Stop Acting Rich focused in on more specific behavioral issues. For some, that may make Stop Acting Rich more worthwhile; for others, perhaps not.

For me, I didn’t feel like Stop Acting Rich surpassed the original at all. Perhaps it was because the first book introduced the ideas, but this often felt like a re-hash in places, albeit of some excellent ideas. If you’ve never read The Millionaire Next Door, Stop Acting Rich would be an excellent read – if you have, it’s probably redundant.

The Simple Dollar has reviewed hundreds of personal finance, personal growth, and career books. Please check out the full list of Simple Dollar book reviews, alphabetized for your convenience.

Marti writes in with a question about the second step of Your Money or Your Life:

Step two, and I’m sure you remember, is about figuring out what hourly wage you’re actually earning at your job, once you factor in the commute, clothes for the job, lunch food and fast food, etc. I’m looking at the category “Escape Entertainment” and I’m a little stuck. Yes, I have cable. Yes, I have a Netflix subscription. Yes, I follow several weekly TV shows. But I don’t necessarily consider those escape entertainment. I never sit down in front of the TV just to channel surf and zone out. If the TV is on, it’s so I can explore characters and stories of a fictional world that I thoroughly enjoy, much the way I would a good book. “Bones” for example, is a show that I enjoy and watch regularly. “Stargate: SG-1″ is one of the shows that my husband and I have on our Netflix queue because we’re huge sci-fi fans.

Yes, I know that the time spent watching those programs could probably be “better” spent playing a game, or going for a walk, or reading, but I don’t consider them escapist entertainment. Am I wrong? Is TV (or for that matter, a pulp-fiction novel) by its very definition an escape, no matter how you look at it? And what about movies? I’m an avid movie-goer. Not because I hate my job (it’s not perfect, but it’s interesting and challenging and if, at the end of two years, I’ll be moving anyway, so it’s really only temporary), but because I truly enjoy movies.

But am I missing the point? The authors write, “Notice the common phrase, ‘escape entertainment.’ Escape from what? … If your experience of life were consistently fulfilling and exciting, from what would you escape?” (pg. 62 – 1999 ed.) And that begs the question, am I actually using those hours in front of the TV or movie screen to escape, and just telling myself that I want to be doing it?

So what do you think? Should I factor the expenses of those movies and subscriptions and the time of watching them, into my “actual hourly wage” as they suggest, or should I leave them out, because I’m not using them as a way to decompress or escape from my job?

Marti raises several very good points here that are each worth adressing.

Not All Entertainment Is “Escape Entertainment”
First of all, there’s a big difference between escape entertainment and ordinary leisure time One is part of a healthy normal life, while the other can be a sign of significant trouble.

I would distinguish between the two as thus: entertainment contributes a significant positive value to one’s life that’s independent of the other aspects of one’s life. Escape entertainment contributes a short-term positive, but only in the sense that it’s reducing the impact of a negative in one’s life.

The reason this distinction is so confusing is that escape entertainment and ordinary entertainment have a lot of overlap.

Take me, for example. One of my favorite television shows is Mad Men. I often enjoy watching it in the late evening after the kids are in bed. It makes me think about a lot of social and cultural issues: what constitutes a marriage? What impact does advertising have in our lives? The questions go on and on. Beyond that, I simply enjoy the well-written plots and characters in the show.

Yet, for a week in the middle of October, when my book deadline was staring me in the face, I had a tremendous case of writer’s block. I was nervous and anxious about the book. And during that week, I spent quite a few hours watching old episodes of Mad Men.

However, this time, it wasn’t enjoyable entertainment. It was escape entertainment. It was helping me to avoid something I didn’t want to face.

In other words, it’s not about the entertainment, it’s about the context. Why are you enjoying this entertainment? Is it because it fulfills you or is it because you need to unwind? Is it because you’re trying to avoid working on something else or is it because the entertainment itself is bringing value into your life? There’s no cut-and-dried answer for this – it’s one you have to look inside yourself to discover.

Do We Need to Escape?
The next question is whether or not escape entertainment actually fills a role in our life. Do we need escape entertainment to unwind or to reduce the stress we feel from our work?

My belief is that we do need an escape valve of some sort in order to help us deal with stress. Escape entertainment is an easy valve for it, but the problem is that it’s a horribly inefficient valve. Rather than focusing your energy on calming down and unwinding, you split your attention between the entertainment and the valve you’re trying to release. The end result? You don’t get much value out of the entertainment and you’re still stressed out.

As I sat there watching Mad Men, I’d often realize that I didn’t really feel any better. I’d also often realize that I had little idea of what was actually happening on the show. I would space out and think about the work I needed to do or about other things I was avoiding. Afterwards, I didn’t feel much relief at all.

The Cost of Escapism
Another problem with escape entertainment is that it’s often expensive for what you get. A new video game bought as fulfilling entertainment (I’m a big believer that interactive entertainment can be very fulfilling) is very worthwhile. A new video game bought as escape entertainment is money spent just to delay an unpleasant feeling.

Even worse, the time invested in escape entertainment is often immense. I remember countless hours playing Warcraft II in the dorms as I avoided my schoolwork, for example. I remember at one point during my previous job, I would come home and watch two episodes of Lost every single night after work.

Those hours lost are themselves a cost, since they’re not actively fulfilling you nor are they reducing your stress levels. You could likely be spending those hours doing something to actually eliminate whatever it is that is bothering you so deeply.

A Better Solution
If you wish to be entertained, seek entertainment. If you wish to de-stress, de-compress, or escape from the situation, do that. Go into a quiet room, turn off the lights, sit down, and close your eyes. Breathe in slowly and deeply. Try to clear your mind of all thoughts. Let the relaxation wash over you.

For the last year and a half of my previous job, this was my routine when I would arrive home from work. I would literally go in, lay down on the bed for about twenty minutes with my eyes closed, and think about nothing. I’d breathe in deeply, breathe out deeply and slowly, and just let my mind and body drift away. After twenty minutes, I would feel tremendously refreshed.

I also find that this works as a great de-stresser and a powerful way to break through writer’s block. Even better, one can easily do this in the shower. Go home after work, take a shower, and then do this under the water.

Here’s the take-home message: escape entertainment can be dangerously expensive in terms of both time and money. Find ways to split the two and you’re much better off – escape through meditation and prayer to quickly relax, and entertain yourself in ways that truly add a positive value to your life. Both avenues are often far less expensive than pure escape entertainment and leave your life in a better place.

Many newer readers of The Simple Dollar haven’t been exposed to the hundreds of great articles in the archives of the site, so this is a weekly series that highlights the five best posts from one year ago this week, two years ago this week, and three years ago this week. I call it … the Time Machine.

One Year Ago (November 1-7, 2008)
Lessons from that Old Coffee Can over the Kitchen Sink This post makes me feel good because it conjures up one of my few very vivid memories of my paternal grandmother, who passed away when I was seven. Almost all of my memories of her make me feel as though she loved me very much.

A Guide to Winterizing Your House Winterizing your home can be a very powerful way to cut down on your winter season expenditures.

Excuses, Excuses It’s incredibly easy to make excuses. It’s incredibly hard to look past them and realize that often you have only yourself to blame.

The Suitcase Test: The Things You Really Need For me, this was a really powerful thought experiment. I do it every once in a while and it gives me great insight into what’s important and what’s not important in my life.

How to Focus in a Heavily Distracting Time These are the tactics I use when I have to work near the holiday season. For example, it’s two days before Christmas, I’m trying to get some work done, and there’s nothing but chaos around me.

Two Years Ago (November 1-7, 2007)
Revisiting The Happiness Scale This is a pretty interesting revelation about the things that bring us happiness in a given day and how it relates to how we spend monney.

Review: Born to Buy While it doesn’t offer personal finance advice per se, I found that Born to Buy had more impact on my decisions as a parent than any book I’ve read so far (except for perhaps Mindset).

Should I Eliminate Financial Support For My Child After High School? This one really fired up some debate. I’m in favor of eliminating such support, by the way.

Should I Go Without Health Insurance For A Better Career Situation? I really hope that this question becomes a non-factor in the near future. The lack of opportunity to buy health insurance shouldn’t restrict anyone from making a good career choice.

How to Construct a Killer Resume, From Start to Finish The advice here still generally holds. I’ve long thought about making an updated version of this article with a real-world example in it.

Three Years Ago (November 1-7, 2006)
Turning Off The Financially Irresponsible Mindset This article includes five really simple and straightforward tactics for changing your financial mindset. I really like how some of the earliest articles on The Simple Dollar reveal nascent versions of many of the values I’ve come to rely on in my life.

Liquid Laptop Accident? 9 Steps To Save Your Laptop I still remember this horrible, gooey mess like it was yesterday.

14 Ways Your Computer Can Put Money In Your Pocket I believe a home computer can be one of the greatest resources for saving money in a home.

The Road To Financial Armageddon #5: Love and Marriage This is a partcularly painful entry for me to read now, because I see that our shared love didn’t have to be signified with a spending orgy.

The Road to Financial Armageddon #7: Here Comes Baby That baby wound up being the inspiration for our financial turnaround.

If you’d like to browse through more of the archives, visit the chronology, where all posts are listed in chronological order.

Nine Ways to Get More out of The Simple Dollar
This is kind of a FAQ for new readers and is posted each week along with the Time Machine. Here are nine great ways for new readers to dig deeper into The Simple Dollar.

1. Subscribe by email or RSS. Visiting The Simple Dollar’s website is great, but for many people, it’s more convenient to receive the articles in another form. It’s easy to join 60,000 other subscribers and get The Simple Dollar’s content by email or in your RSS feeder (if you’re unfamiliar with RSS, check out Google Reader.

2. Comment. Each article on The Simple Dollar has lively discussion. Just click on the green square in the upper right of each article on the website and join in!

3. Read my story of financial meltdown and recovery. The Simple Dollar isn’t based on what I’ve read in books or learned in school. I’ve made a lifetime of financial mistakes – The Simple Dollar is a record of what works for me during the process of getting my life on a better track.

4. Download my free 49 page e-book. Everything You Ever Really Needed to Know About Personal Finance On Just One Page is completely free. It summarizes all of the key lessons I’ve learned along the way about personal finance in one tidy package – in fact, all of the main principles can be found right on the cover.

5. Follow me on Twitter – or other social networks. I post tons of interesting articles, quotes, follow-up material, commentary, and other material on Twitter. Follow me! If you’re unfamiliar with Twitter, it’s essentially an open discussion forum for people to share ideas and thoughts with other like-minded folks – you just choose the people you want to listen to and their ideas and thoughts are all delivered to you on a single page.

I also participate on several other social networks. Feel free to check me out on del.icio.us (it’s where I collect links, from which I select the ones that appear in my weekly roundups), wakoopa (what software I use), GoodReads (what books I’m reading), Facebook, and FriendFeed (which aggregates everything). I also have an irregularly-updated personal site, TrentHamm.com.

6. Dig through “31 Days to Fix Your Finances.” 31 Days to Fix Your Finances is an article series that outlines how you can get a grip on your finances over the course of a month.

7. Send me your questions and suggestions. Send me an email and let me know what you’re thinking, what you’d like to see, and any questions you might have. I try to respond to as many emails as possible and I read them all. I may even use your question in a future article!

8. Become a “Friend of The Simple Dollar.” If you find the stuff on The Simple Dollar valuable and are willing to spend five minutes or so a month to help me out with small things, please consider signing up to be a “Friend of The Simple Dollar”.

9. Email a great article you find to a friend. Find an article that you think your friend would love? At the bottom of each article, you’ll find a link that says “Email this” – just click on that, type in your friend’s address, and send it right along to them!

About a year ago, my mother decided to re-do the guest bedroom in her home. Before starting out on the project, she outlined her project to several of her friends, not asking for a single thing beyond advice. The end result? One friend gave her a crib. Another friend gave her a children’s bed. Another friend gave some paint to help refinish the room.

A few months ago, I needed some small cloth drawstring bags for a small project. Instead of just heading to Hobby Lobby, I told several people that I know about the project and mentioned that my next step was to get the drawstring cloth bags. Within a week, I had more such bags than I needed.

These two stories have an obvious connection in common. By exerting a bit of patience on projects and talking to others about those projects, we found success without having to ask for it.

Why did this happen? There are several factors at work.

First, in neither case did we ask for anything but advice. The items we received from people weren’t as a result of a specific request or out of greed. They were delivered out of goodwill.

Second, most people want to help others, particularly if it’s convenient. When a friend tells you a story that’s easily solved by a simple action, most people will respond by fulfilling that simple action. They won’t go to extraordinary lengths to make it happen (at least not normally), but if there’s something a friend can conveniently do to help you, they often will. Plus, they’ll feel great about being able to help.

Third, even if a friend can’t help materially, they’ll often help with good advice. Your friends will see your situation from a different angle than you do. They might know of opportunities, techniques, or other such information that can transform your project.

Fourth, the person actually working on the project showed patience. Instead of just throwing money at the problem and rushing around to complete it – something many of us do in the rapid-fire modern world – patience was exerted. They sat back, asked around, and found a better solution.

Fifth, such value exchanges strengthen friendships on both sides. Not only does the giver feel good about being able to help a friend, the receiver feels good as well because of the generosity of their friend. It’s the type of value exchange in which both sides win.

To put it simply, it’s well worth putting the word out in your social network if you’re working on a project of any kind. Simply tell your friends about the things you’re doing and seek their input. Time and time again, they’ll be happy to give their input, whether you choose to use it or not, and quite often they’ll provide someting of great value to you.

Of course, the reciprocal is true – when your friends ask you for advice and you can easily help them, you should provide the same help. If you have useful advice or information, provide it. If you have an item that could easily solve their problem (and you have little need for it), give it.

After all, in the end, what is a friendship beyond a long series of value exchanges? We are constantly doing things for our friends that lift them and our friends constantly do things for us that lift us.

The real lesson here is the value of patience. The utilization of one’s social network is just one piece of the puzzle. Without patience, both stories would have ended with a trip to the store, less money in hand, and a shallower connection with the people in one’s social circle.

If there’s a project you’re working on that’s not incredibly urgent, be patient. Put out the word about your project. Gather input. You might be surprised at the things you discover and the value you find.

In the past, I’ve strongly advocated for families to introduce their teenagers to financial reality as early as possible. I know that in my own case, I went off to college with almost no idea of how to manage my money and it really showed in the spending decisions I made over the next ten years of my life.

Over the past decade, I’ve had the chance to intimately watch other families raise their children through the teenage years with lots of success and some failure. I’ve been impressed with some of the young people that are the core of Generation Y coming of age. Two in particular, my niece and my first cousin, are the kind of people that are a big net benefit to the world, and I would be incredibly proud if my own children turned out as well as they have.

At the same time, though, I’ve seen many tweens and teenagers spending money with reckless abandon, spending hundreds of dollars on completely unnecessary things and acting repeatedly as though money has no consequences at all. These people, I’m afraid, are headed down the same painful path that I went down.

When my children approach their teen years, what can I specifically do to teach my children the value of managing their money? This is a topic that’s left me thinking for a long time and I’ve been jotting down ideas and findings all the time. Today (finally), I had a chance to read through quite a few of these things and I was able to pull out several strong tactics that seem to work together to teach teenagers the value of managing money.

Start young. You’re better off starting too young than you are starting too old. Introduce an allowance as early as possible. Encourage their entrepreneurial behavior early. Introduce them to basic budgeting early on, too. You’re better off starting before they can fully understand all of the meaning than later on when their ideas for what’s normal have already been set, because it will take far more work to undo bad behaviors.

Don’t tie a basic allowance to specific chores. A basic, small allowance should be given without strings attached. It’s not a tool to leverage for good behavior, it’s a tool to teach basic money management. There should be certain behaviors expected in the home, but the allowance should not be a bludgeoning tool to force those behaviors.

Offer extra allowance in exchange for specific extra tasks. If you have extra tasks that go above and beyond normal household duties, you should offer a separate payment to your child in exchange for the task. Allow them (or even encouraged them) to negotiate for the exact amount so that they can learn the art of negotiation.

Make basic budgeting part of the equation from day one. I’m a huge fan of the Money Savvy Pig for this purpose. A child’s budget should be very simple, especially at first, and that’s exactly what the Pig helps with. It just splits a child’s allowance into four pieces – spending (they can spend it on whatever they want), saving (saving for a bigger goal), donating (giving to some cause), and investing (learning how to invest money). This forms a perfect simple budget for children. Later on, you can work on more complex budgets with them, with multiple savings goals and so on, but this type of thing forms the backbone in their mind.

Open bank accounts when the “investing” portion grows large. When they’ve built up quite a bit in the “investing” portion of their budget, take them to the local bank and open a savings account for them. Have them deposit their money. Then, when there’s an interest statement, show them the interest that’s been earned. As they grow older, you can talk about other investments with them and allow them to try these investments (stocks and so on). Set a very long term goal for their “investments,” such as college or a house down payment (seriously) so that they can begin to get a taste for the long term, plus it allows you to differentiate between short-term savings and long-term investments.

As their money grows, move to a checking account. Migrate toward allowing them to manage their entire budget themselves, incorporating saving, spending, donating, and investing to their own desires. One big step in this direction is their own checking account with a debit card – a great tool for a pre-teen. Make the card only able to access the checking account.

Give them a credit card when they’re teens. Gulp. Many parents avoid this because it seems like a recipe for disaster, but it actually serves a very important purpose. By giving them a low-limit credit card while they’re in your home, they can learn about how to use a credit card – and, likely, the dangers of getting into debt with them – while there’s still a safety net. Ideally, you want them to get into a bit of debt with it so that they can see the pain of interest.

Show them your monthly budget. Seriously. Show them how much you earn in a given month, then how that money breaks down into mortgage payments, car payments, electric bills, food, and so on. This is a firm taste of the real adult world, something that teenagers crave. Let them see the reality of adulthood and how expensive it is. Talk about the choices that you have to make along the way.

Work on distinguishing between wants and needs. This ties in perfectly with showing your children your monthly budget. Some of the items are needs – your housing, your electricity. Others are wants – entertainment. Others are somewhere in the middle – food spending. The better you’re able to distinguish between needs and wants – and to control those wants – the more likely you are to teach them to control their own wants. That’s one of the biggest keys to adult personal finance success.

This is my gameplan for raising my children to better manage their money. Hopefully, you can pull out a nugget or two for your own children or grandchildren.