Fairy tales can come true. They can happen to you--if you don't watch out.
If you think about it, fairy tale characters were always in a jam.
Jack, of beanstalk fame, stole from the giant because he'd sold the family's last cow for a handful of seeds. Recognizing that he wasn't a good candidate for an MBA, Jack turned to a rather successful life of crime.
Hansel and Gretel were led into the woods--and the clutches of a hungry witch--by parents who had too many mouths to feed. Snow White, a good-looking princess in a day when titles and looks were everything, should have been in the catbird seat. But, alas. Her father, a poor judge of character, died without a will.
The fact is, financial woes that tripped up characters in literature are still bedeviling people today. A look at 10 lessons that classic fairy tales and fables can teach about finance may prove as valuable as a fairy godmother.
1. The Ant and the Grasshopper: Plan Ahead
This is the classic tale of responsibility. The ant works through the summer storing up food. The grasshopper hops, chirps, sings and has a grand time. But come winter, the grasshopper searches mightily--and in vain--for food. He dies, while the ant is comfortable and well-fed.
Planning ahead is the first lesson of personal finance for two reasons. When young, you have more time and opportunity to earn money. Better yet, unlike food, money saved wisely tends to grow. The longer the season, the better the harvest.
Consider: Amy Ant, 25, puts $2,000 a year into a tax-favored retirement account for 10 years--a total of $20,000. At age 35, she stops saving.
George Grasshopper starts putting away $2,000 annually when he's 40. But he continues to make contributions for 25 years, until he retires--a total of $50,000.
They each earn 8% annually on their savings.
Who has more at age 65? Ant has twice as much as Grasshopper--$333,441 versus $158,504, to be exact. How did that happen?
Ant put compound interest to work. Because she started early and gave compounding more time to do its job, her job was easier.
2. The Tortoise and the Hare: Get Rich Slowly
Think you're agile enough to "time" financial markets--jumping in at the nadir and out at the peak? If you are, you're the exception rather than the rule. Even top-notch market timers win only about 10% more often than they lose.
Most people make more by simply plugging along, investing small amounts regularly. In market parlance, the tortoise approach is called dollar-cost-averaging. You sink the same amount of money into your investment account each month--rain, shine, market drop or upswing. When markets are up, your investment buys less. When they're down, you get more. Either way, you keep moving steadily toward the finish line.
You'll rarely have one of those swift gains to brag about. But no one will catch you napping when the market moves. And, when all is said and done, wouldn't you rather win than brag?
3. The Milkmaid and Her Pail: Diversification Pays
Some people like to play it safe. They keep their money in bank accounts so they won't risk their initial investment.
But putting all your money in the bank poses risks too. Instead of principal risk--the chance of losing some of your initial investment--bank depositors face the risk that inflation will cut their buying power faster than interest can increase it.
Savvy investors spread their money around, putting some in deposits, some in stocks, some in bonds and, perhaps, some in global mutual funds. Such diversification reduces risk simply because it's unlikely that several markets will fall all at the same time.
Take a lesson from Aesop's Patty, who balanced a pail of milk on her head while walking to market. Patty daydreamed about using the proceeds to buy a chicken. She would sell the eggs to get a new dress--and that, she figured, would make her friend Polly jealous.
"But I don't care," said Patty. "I shall just look at Polly and toss my head, like \o7 this.\f7 " The pail went flying.
Had Patty divided the milk among three pails, carrying one on her head and one in either hand, she might have had a poultry farm today.
4. The Pied Piper: Pay for Help When You Need It
Somewhere deep inside, there's a tightwad in all of us. That's the voice that tells you not to pay for something you could get for free.
Yet in the financial world, advice that appears to be free often isn't. For example, you don't pay a stockbroker an up-front fee. But brokers earn commissions if they convince you to invest. Insurance salespeople, who spend hours explaining how much insurance you need, also earn commissions--the bigger your policy, the more they get.
If you don't need advice, of course, it's foolish to buy it. But if you insist on "free" advice, you may lose more in principal than you would have paid in fees.
Just ask the citizens of Hamelin. They stiffed the Pied Piper of the 1,000 guilders he'd earned for driving the rats out of town, so he took something more valuable--their children.
