I love all things money. My kids often see me reading finance books and browsing real estate blogs. They hear me talking about money with my wife. They watch us negotiate deals to buy houses with cash, and they overhear our discussions on retiring early.
I explain what I’m doing with money in simple terms to my kids, but I can’t be sure it’s sinking in. They are 10 and 6. It is my job to prepare them to navigate money and life. I wonder how I’m doing.
Meet Liam and Lacey
I decided to test my son’s understanding of money recently. I asked him a question.
Which is better, $200,000 in the bank and driving an old car, or $1,000 in the bank and driving a new Porsche?
He chose $200k. There is still hope.
I was impressed. I guess I’ve done a great job so far! I asked him one more question.
Why would you take the cash?
Because I want an SUV!
I still have some work to do.
Here is what I hope to teach my kids about money before they head out into the world. They’re not ready to hear all this now, but I can get started.
This is also what I wish I could have told myself when I was starting out financially.
Debt sucks!
The main reason most people are poor and will stay poor is because they use debt to get what they want NOW and pay for it LATER (The American Way!)
When you are young the world is at your fingertips. You want to travel to exotic places, drive new cars, live in a big house, have the newest iPhone, and watch TV on a 70-inch screen. You use debt to get these things, because they cost too much and they make us happy!
These things don’t buy you happiness. It’s the opposite. They weigh you down and trap you. Anyone remember Jacob Marley from Charles Dickens A Christmas Carol? Think of the chains he wore as debt.
Everytime you take on more debt, it’s like adding another one of those chains around your body. Those things look heavy!
Next time you think about signing for some new debt, picture that heavy chain being dropped over your neck and locked onto you. Tear up that credit card application, you wanna be free!
I like to call these the cardinal sins of going into debt. Avoid these at all costs:
- A bigger house than you need
- Buying or leasing new cars
- Timeshare/vacation home
- Boats/motorcycles/recreational vehicles
- Sports cars
- Expensive vacations/cruises
- Jewelry
Society and clever marketing have brainwashed us into thinking we need all this crap! They’ve also told us we don’t have to wait until we have enough money saved.
I’m sure you’ve heard the saying, don’t buy stuff you don’t need to impress people you don’t like. Admit it. You’ve done it!
Remember. No debt. Ever.
If you’re in debt, get out. Those chains don’t look comfortable.
There is no such thing as good debt
Saying there is good debt is like saying there is healthy junk food (I wish).
We can agree credit card debt is bad. But what about student loans? Buying your own home? That’s healthy junk food, right?
Student loans are not good debt. They are just less crappy than credit card debt. Avoid student loans. Go to a cheaper school, online degree, community college, scholarship, grant, work on campus for cheaper tuition, or pay in-state tuition. There are lots of ways to approach this.
Mortgages can be good debt, but it has to be done responsibly, and you have to know what you are doing!
Debt can cause you to build wealth faster, but it can also cause you to lose wealth faster in a down market.
I paid all my mortgage debt off, and I sleep a lot better at night!
Live frugally
Here are things that make me happy:
- Spending time with family and friends
- Pursuing interests such as music, art, and other hobbies
- Being outdoors and staying active
- Not being tied to a boss, job, busy schedule
These things don’t require money. I don’t need debt to get them. Living frugally, however, will allow you to retire early and do these things more often.
Below are vital steps to being frugal. These are things that even people with high salaries do to retire sooner:
- Get rid of your fancy cars. Consider having one used car, or even better, no car!
- Move out of your big house and into something affordable
- Live close enough to work to commute with public transportation or by bike.
- Rarely eat out
- Take cheap vacations
- No new iphones
- No cable
- No gym membership
This does not sound like fun. Everything awesome is off-limits!
Not exactly.
Paula Pant, whose blog is called affordanything, has the perfect quote for this situation.
You can afford anything, but you can’t afford everything.
You can choose what’s most important to you in life and spend money on that. Maybe it’s traveling, owning a vintage ’64 Mustang, or snowboarding.
Pick what’s important to you, budget for that, but then optimize everything else in your life for maximum savings.
Frugalness will allow you to get out of debt quickly, have a high savings rate, and retire WAY faster than you would have.
High savings rate = retire much sooner than you think
The accepted reality that we are supposed to work non-stop until age 65 (or older) is something society has brainwashed us into believing. It’s not true. You can work far less.
The key is your savings rate. This is a simple concept. There are two ways to increase your savings rate. One is raising your income. The other is decreasing what you spend each month.
The difference between what you spend and what you make is your savings rate.
Some of you have heard this argument before. You’ve seen the websites and blog posts where people with six-figure salaries retired in less than 10 years.
Ha! I make way less than that. This won’t work for me!
I’m telling you it worked for me, and I did it on an average salary. In fact, mine’s still not over $100k after 16 years in the military, but I’ve already reached financial independence through a high-savings rate and rental property income.
Investing is the simplest thing in the world
I worked at Fidelity Investments as a stockbroker. I’ve read every investment book out there. I’ve done the research. But most of what I’ve read it pointless.
The best way to invest your money is strikingly simple. Just do what Warren Buffett, Jack Bogle, and Jim Collins recommend. Index funds.
Nothing outperforms investing in index funds. If you put all your money in the S&P 500 Index fund or something similar, you are better invested than anyone you know.
If you ask someone on Wall Street, they’ll disagree. That’s because they want your money.
If you can save half of your income, and live off the other half, you will be able to stop working in 17 years. You can start working at 21 and be done at 38.
Move that up to 70% savings and you stop working in 8 ½ years. Yep, before you’re 30. You may beat your parents to retirement!
If your money is invested in index funds, it is safe to withdrawal 4% of that money per year ‘til the end of your life. This is passive income that can pay your expenses so you can stop working for the man and do what’s important to you.
There is a ton of B.S. on Wall Street
Almost all conventional wisdom on investments is incorrect. Here’s my advice:
- Day trading is insanely stupid
- Never sell when the market is dropping, and never buy when you think it’s coming up. Most of the time, you will be wrong
- Never buy on tips
- Never pay someone to manage your money
- Never pick stocks yourself and never let someone else do it
- Reading the Wall Street Journal and watching Mad Money does not prepare you to beat the market
- No, not the Motley Fool either.
There are mutual fund managers, hedge fund managers, financial planners, and large brokerages that will charge you to let them try to beat the market. They won’t be successful.
They’ll take your money and still be beaten by index funds. Almost no one beats the market on a consistent basis. If they do, it’s largely attributable to luck, and you have no way of knowing who that lucky guy/gal will be. Chances are, their luck won’t last. The best investment is S&P 500 Index fund or something similar.
Investing in real estate is awesome too
I believe in having more than one source of passive income.
Buy rental properties and have them paid off before you retire. I have bought several single family homes with cash. I don’t live near any good rental markets, but that doesn’t stop me. I still find a way to invest. I don’t manage these properties, so it’s truly passive income. No work on my part.
Let’s recap quickly:
- Stay out of debt (even “good” debt)
- Live frugally (anything, not everything)
- High savings rate
- Investing is simple
- Wall Street is mostly B.S.
- Passive real estate income
I hope my kids are able to understand this stuff. It would’ve helped me a lot!
Rich on Money
My blog is about how I got to financial independence on a military salary with a stay-at-home wife, and how it’s possible for almost anyone to do the same (or better). I did it mostly through investing in rental properties.
I have read all your posts but NONE say WHERE in Alabama you are located…
Montgomery, AL
I started my kids on an allowance at age 5. And a debt board. Thus I could say “yes” to everything, and when they said they wanted me to buy it, would say, “I’m not going to spend my money on that crap, but you can spend your money on Anything You Want. Now let’s calculate how many allowances you have to give up to pay for that.” Later I introduced the concept of collateralized loans. “You mean I have to give you my rifle and if I don’t pay you back you’ll sell it?” “It’s worse than you know. If I miss a payment, the bank will take our house away. That’s how the world works.” At 12 I started a family 401(k) and matched what they earned, saved and invested. I chose a mutual fund that paid quarterly dividends, so we could watch the steady increase in payouts as we added more and reinvested and tracked the value via graphs (taught them some Excel, too). At 19 I would send each out with a trusted real estate agent, and when they found a house, went with them to the closing, and set them up to manage it.
They all ended up debt-averse and investment-positive. Having found and helped buy a house at 19 made it a lot easier for them to buy their own houses later than it was for me, who had had no practice. Managing a rental filled with kids their own age gave them a lot more insight than I had at a comparable age into who is a (financial) flake and who is reliable, and into how you work with service people.
To sum it up,
1) I tried to make the family operate financially the way the world operates, and
2) your life goes easier if you learn the elementary rules of money.