Greed Is the Enemy

Christmas always makes me pensive. I think about what Christmas means to me. I think about what's happened this past year (good and bad). And more and more, I find myself wondering about the future. With the holiday becoming so commercial and watered-down, is the wrong message getting through?

I see people spending more money than they can afford on gifts because of the tremendous pressure to buy, buy, buy. I see more going on in the name of greed than going on in the name of good. I see the pressure taking its toll on people, only to have the moment pass by without any lasting effect.

So from a Foolish perspective, what can you do to counteract these things?

Teach your children well
For those with kids (and for those like me who still have a great deal to learn before they grow up), now is a great time to teach valuable lessons about money. And the earlier these lessons can be learned, the more staying power they will have.

Instant gratification is the issue. In today's world, the me-getting-mine-right-now message is pervasive. You need look no further than the wretchedness of reality TV to see it. The problem is that the more we get, the more we want. Covetousness and greed are self-reinforcing cycles that can cause serious problems.

So when Grandma sends the kids some Christmas or birthday money, what should they do with it? Instead of letting them purchase more stuff likely to end up at the bottom of a toy box in the back of a closet, why not teach them patience? Go to Bank of America (NYSE:BAC) or your local bank and open up a savings account with them. They might hate you now, but they'll love you later (hopefully). Actually, I am very proud that my daughter likes to tell her friends about her bank account.

A savings account is a great lead-in to telling kids about investments. You can use it to explain how banks loan out that money to businesses and pay savers interest for doing so. Then you can ask your child what the businesses might do with the money. From there, learning about investing in an ownership position, i.e., a stock, is but a small step away.

Earlier this year, I explained the concept of investing to my daughter using Build-A-Bear Workshops (NYSE:BBW), her favorite store and a potential Rule Breaker, as an example. I don't think she fully grasped the notion completely. Since she's only seven years old, I have time to explain.

After-Christmas sales
Don't worry; I won't forget those who do not have kids yet. If the temptations of the post-Christmas sales are too enticing, I have an outlet for your group, too. Why not invest in the businesses that offer the bargains?

I ran a quick screen using the Yahoo! (NASDAQ:YHOO) Stock Screener. I looked for companies with an enterprise value-to-free cash flow (EV/FCF) ratio between 10 and 20 and a price-to-earnings growth (PEG) ratio between 0.75 and 1.1. The idea behind this crude screen was to find companies trading at a discount to the market's appraisal of their free cash flows and growth rates.

Interestingly, I spotted three well-known retailers from the 100 business returned from the screen: Gap (NYSE:GPS), Limited Brands (NYSE:LTD), and TJX Companies (NYSE:TJX). While these are quality companies, most of the recent reports have been negative and centered on their inability to grow fast enough. But ask yourself: Are these companies likely to substantially outperform savings account returns over the next 10 years? I would think so. Will they return 20% or more a year? No way. But the risk of collapse is small, too.

According to data from the St. Louis Federal Reserves, as of November 2004, the personal savings rate was 0.3%. And as of July 2004, the average household credit card debt was $10,000. So if you want to be a real contrarian to the me-first, instant-gratification crowd and resist the temptation to consume all the time, make a plan to start saving, and use those savings wisely. And don't forget that The Motley Fool has plenty of ways to help you along the way.

Resolutions, schmesolutions
Dayana Yochim recommended starting the new year with a plan for your finances. No disagreement there. But she also pointed out that resolutions fade out around the third week in January (give or take three to six weeks). Here are some things to help the changes stick:

1. Start slowly.
If it's saving and investing, open up a separate savings account and sock away $50 or $100 per month. Use that money to pay off debt first, accumulate a bit o' savings next, and invest last.

2. Find a way to hold yourself accountable.
Join or form an investment club where you meet once a month. Work with your spouse. Work with a friend. Hire an advisor. Unless you are held accountable for your actions, it is easy to slip back into bad habits.

3. Make it fun.
Again, an investment club can be a great vehicle. The Motley Fool discussion boards are a perfect way to have some fun while learning from other investors. As soon as something becomes a chore or a checklist, it is very easy for it to become boring and unpleasant.

4. Make quarterly assessments.
If you are doing better than expected, raise the bar. If you are doing worse than expected, raise the bar. This works best when coupled with No. 2.

Look, none of us is perfect. I get bitten by the greed bug many times during the year. But since I came to the Fool as a reader in 1997, I count my blessings that I have learned so much about taking control of my financial life. I know it's hard, but forgoing instant pleasures can actually bring a great deal of happiness.

If you've mastered the art of saving and are looking to kick-start your portfolio next year, Stocks 2005 contains the best ideas from the Motley Fool analysts.

Fool contributor David Meier does not own shares of any of the companies mentioned. The Motley Fool is investors writing for investors.