Lately, I’ve been thinking a lot about the financial lessons that I’m going to hand down to my kids. They’re finally getting old enough to where they understand how to count and use money. They’ve also reached the age where they’re constantly asking me to buy stuff.
For example, I recently had this charming conversation with Tako Jr. #1 at the grocery store…
Tako Jr. #1: “Daaaad. Can you buy me this candy? It looks soooo yummy.”
Me: “I don’t think so. You’ve got plenty of candy at home. Besides, Halloween is coming soon. You’ll get plenty of candy then.”
Tako Jr. #1: “But Daaaaad, I don’t have this one at home. Can you get it for me? Please!”
Me: “No, that costs money. It’s not free. I need to spend our money on these groceries so we can eat. We also need it to pay for trips. Like the camping trip we took this summer. That was fun, right?”
It might sound like my answer was a little harsh (denying my son some candy), but it’s conversations like these that give me the opportunity to teach lessons about saving money and choosing between ‘wants’ and ‘needs’. I believe these are important lessons to pass on at an early age.
It’s also conversations like these that really got me thinking: How much of financial literacy is simply handed down to us by our parents?
To a certain extent, I believe how we handle and manage our finances we learn from our parents. Thinking about my own parents, they provided me with my very first financial plan — “Get good grades, go to college, don’t waste money, and get a good job with a pension. Then buy a house.”
This Plan was really just a slight variation of what happened to work-out well for my parents. They simply passed on the same lessons that allowed them to reach some version of financial success.
However, The Plan they passed down was vastly different from The Plan my grandparents passed-down to my parents. Times changed, the economy changed, opportunities opened up, and my parents discovered a vastly different financial plan that worked even better for them.
It wasn’t that my grandparent’s model for “financial success” (however modest) was wrong, it’s just that my parents found a better financial path that took advantage of current conditions.
Exactly like I did.
I Failed At The Standard Plan
Honestly, I really did start out following the “standard plan” given to me by my parents — I got good grades in school. I went to college. I graduated (albeit with a bunch of debt), and eventually joined the workforce. Right about here is where the similarities between what worked for me and my parents really began to end.
By the time I joined the workforce, pensions were long-gone from the corporate workplace. Most companies had already shifted to 401k or IRA’s. Retirement was the employee’s responsibility. Pensions still exist, but are mainly limited to jobs in government or the military.
On top of that, there was this huge change in how corporations dealt with and treated employees. No longer could employees expect to work at a company for 20 or 30 years.
Employees are no longer considered to be a valuable asset that a company develops over time. Employees are now replaceable commodities. To be hired and fired as necessary. Easily replaceable. A three to five year term at a company is a more common job duration these days, and I saw no reason why this would change anytime soon.
Because of this, I avoided buying a house for a very long time. Jobs were simply too unstable to have a mortgage for 30 years!
Given these conditions, it was obvious The Plan my parents gave me wasn’t going to work. I failed at the standard plan.
I had to adapt a new plan, and do it quickly.
No Plan Survives A Generation
There’s an old expression that accurately captures the difficulty of executing on long term plans. Maybe you’ve heard it before:
“No good plan survives unmodified.”
Isn’t that the truth! Life is a constant adaptation to changing conditions. Finances and financial plans are no exception.
If you look back into the past, every generation had their own version of The Plan that brought about financial well-being….
Pre-Industrial Revolution: Work on the family farm or in the family trade until you inherit the assets from your parents. At this time, there basically was no retirement. Patricide was popular way to improve ones’ financial conditions. It was also popular to have a bunch of kids to help out with the manual labor, but this also tended to increase your chances of being the victim of patricide.
Industrial Revolution (1760 – 1840): The Plan for many was to work in a factory and try not to die. There were no protections for workers, no child labor laws, no social safety-net programs, and definitely no retirement. The best a factory worker could hope for was to remain uninjured and save as much as possible. Then, if you finally reached a “retirement” age (too old for factory work), you left the city and spend the rest of your days gardening in the country.
1935 – 1970: Social security was invented in 1935, and The Plan becomes contributing into the social security system and working at a company with a pension. Then, when you finally reach retirement age you can have both SS and a company pension to live-out your remaining years. Golf was also invented during this time period, which conveniently gave new retirees something to do besides gardening.
1970 – 2000: Work for a good company as long as you can. Try to get a pension and then save whatever you can into a IRA (introduced in 1974), realizing tax benefits. Buy a house to build equity and have a stable place to live. Between the pension, the house, social security, and retirement savings accounts most “boomer” retirees could expect to live a very nice retired life.
2000 – present (2018): Work at least two years for whichever company pays the best salary. Live at home as long as possible to keep expenses low. Try not to get laid off. Gain experience and then move on to the next job every few years to secure adequate salary raises. Save whatever you can in a 401k/IRA and take advantage of company matching when available. In the retirement fund, purchase low-fee index funds. Also contribute to social security with the hope of one day seeing at least a little of that money again.
See what I mean? Every generation has to come up with a new financial plan to take advantage of changing work conditions, social conditions, new technology, and whatever investment options are available. Whatever plan worked for one generation ends up being absolute rubbish for the next generation.
What works in personal finance today
might not probably won’t work for my kids in the future — Index funds are popular today, but the popular assets the future could be bonds, real estate, timeshare rentals on the moon, or maybe even carbon credits.
Who knows what investment products the future might bring!
So, if each generation has its own version of The Plan that gets thrown-out, then the question for me really becomes:
What financial lessons can I pass on to my kids that will actually aid them in their future?
It seems like a waste of time to give them a plan they’ll eventually have to throw out someday. Any plan I give them is probably going to be worthless. The world is going to change.
Instead, I think I want to try to pass on the most important “tenets of wealth building” that have remained constant over hundreds of years:
- Work smart. Put your work efforts where you’ll see the best returns. Trade your time well. Maybe this means picking a career in the right industry with high salaries.
- Spend less than you make. Do this consistently over your lifetime.
- Grow your spending significantly slower than your income. This ensures you can recover from financial setbacks (such as job loss) when they occur.
- Buy mostly what you need, and only a little of what you want.
- Invest your savings into assets. Assets should provide income AND capital appreciation. Anything else is speculation.
- Be as efficient as possible with your resources. “Use it up, wear it out, make due, and do without.”
- Don’t speculate. Nobody can accurately predict the future. Make a plan that works for multiple possible outcomes.
- Don’t use debt to afford your lifestyle. That’s just asking for trouble.
- Don’t try to “Keep up with the Joneses”. That’s also asking for trouble.
- Don’t make the mistake of believing your income will continually rise. It probably won’t. There will be ups and downs over the years.
- Continue to educate yourself after finishing school. Financial education itself is a lifelong process. Never stop learning.
See what I mean by calling them tenets? You could pick almost any generation in history and most of these ideas would still work.
I could be wrong, but I believe the vast majority of these tenets are likely to keep working well into the future.
If you think about it, Plans are just a set of instructions to replicate success. But the whole point of this post is that I don’t believe you can replicate financial success across generations. History has shown us it doesn’t work. Despite all good intentions, Plans from the past are not the answer for the future.
The Plan I received was something along the lines of “Go to college. Get a good job, keep it, and buy as much house as you can afford.” That was a recipe for failure in my generation and it might be a recipe for failure again in the future. Who knows what the future might bring!
(There’s plenty of people suggesting that even college is no longer worth the required student loan burden!)
The really important tenets are practically timeless. I believe these are financial tools every successive generation has to pick-up and learn how to use for themselves.
Simply put, I’ve decided my job as a parent is not to pass on a financial plan. Instead, I need to teach my kids how to use the tools — So they can eventually build their own plan.
What do you think? Do you have a financial plan for your kids?