Raising Money Savvy Kids -- Control Your Spending

Here are some excellent thoughts on raising money savvy kids courtesy of Marotta Asset Management:

One of the critical concerns of generational wealth management is raising young people to be financially savvy. Many have written to say that they read and discuss this column at the dinner table with their children. If you want to raise kids who can create and manage wealth, there are a handful of critical rules that are foundational.

Here's the main one: Postpone spending.

In economics, "deferred consumption" is the very definition of wealth and capital. So defer your consumption. Everything you don't spend today is wealth. Only what you don't spend today is available for investing. And since money makes money, what you don't spend today can provide a lifetime of income to spend in the coming days.

Wealth is what you save, not what you spend.

Being a millionaire isn't that difficult. On average, U.S. stock investments earn 10% each year. If your investments earn 10% a year, and you contribute $100 per month, you will have a million dollars in a little over forty-five years. So, if you start saving when you are twenty, you can retire a millionaire at sixty-five.

A hundred dollars a month isn't that much. Lots of things cost about $100 a month. Live without that nice cell phone plan and retire with an extra million dollars. Go without high speed internet and you'll have another million to add to it. Reduce your eating out budget by $100 and you'll have a million more dollars. Avoid the average family's credit card interest and you'll have a million extra bucks by the time you retire.

Most of the younger generation is under the false impression that wealth is based on the luck of a big salary. Nothing could be further from the truth. According the book The Millionaire Next Door by Thomas J. Stanley, the affluent tend to answer 'yes' to these three questions: 1.) Were your parents very frugal? 2.) Are you frugal? 3.) Is your spouse more frugal than you are?

So how did they build their wealth? According to The Millonaire Next Door they did it slowly, living well below their means and investing about 20% of their household income each year. And because money makes money, over time, they grew gradually richer and richer.

Imagine you purchase a pair of shoes for $50 every year. The person that makes do with the old ones and only buys shoes every other year will be able to save and invest the difference. After seven years, their savings will be earning enough interest to pay for a new pair of shoes every other year. After eleven years, the interest from the investment will pay for the cost of buying new shoes every year, forever. Being frugal early in life produces great wealth later in life.

Because of the affluence of American culture, it is difficult to learn to distinguish between needs and wants. Very few purchases are needs. Other than food, shelter and clothing, everything else is optional. In the United States, we show our extravagance even in these three essentials.

Practically speaking, you can learn to postpone spending one purchase at a time. When our children were very young, we required them to wait one week before spending money on a toy. Often, after waiting a week, they wanted a different toy instead. Then, they had to wait another week for that purchase. Simply learning to delay and avoid impulse buying can cut your spending in half.

Reuse, recycle, or do without. Turn down all those extra features and services and start on your way to real wealth. Postpone spending, and save and invest instead. 

Comments

[Jeff from LA]

This post ignores the time value of money. $1 today is NOT the same as $1 ten or twenty years from now. A home that you could have bought in CA for $200,000 just ten years ago, you can't buy for $500,000 today. Because of this fact, using a million dollars as a mark of wealth means less and less the farther we project into the future. 20 years from now, being a millionaire will likely mean nothing more than being in the upper middle class.

[tinyhands]

It's not about being a millionaire (or whatever benchmark you choose) it's about raising money-savvy kids. But it's certainly not limited to kids: Adults can also benefit from "delayed gratification." You think I was able to remain unemployed for 3 years AND pay for my own master's degree by buying the latest and greatest cellphones and iPods?