How Not to Make Your Parents’ Money Mistakes

by A Manly Guest Contributor on October 10, 2013 · 41 comments

in Money & Career

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Editor’s Note: This is a guest post from Jeff Rose.

I work as a financial planner, a money blogger, and a personal finance writer.

But by all rights, I should not have the career and financial stability that I do.

That’s because my parents were bad role models when it came to teaching me how to handle money. Not only did my mother and father each ruin their financial lives through filing bankruptcy (twice in my father’s case), but my mother also lost her shirt investing in Las Vegas real estate right before the housing collapse. To top it off, neither of my parents saved anything for retirement. For quite some time, I followed their examples without realizing how damaging it could be.

So how did I overcome the negative financial lessons I grew up with?

I can tell you it wasn’t easy. Your parents are your first and most influential teachers, and many of the lessons they impart are subconsciously taught and learned. It can be very difficult to reverse those lessons once you reach adulthood — but it can be done.

My struggles to overcome my parents’ negative financial lessons have shown me that there are several important steps to becoming financially stable after a tough financial childhood:

1. Change Your Thinking

“Debt is just a part of life.”

“The tax refund just came in. Let’s go on a cruise!”

“It’s impossible to ever get ahead.”

Have you ever heard any of these statements from your parents — or from your own mouth?

These are the sorts of thoughts that many individuals who grew up in less-than-ideal financial situations may be clinging to, because it is what they learned at Mom and Dad’s knee. And the fact of the matter is, it can be extremely difficult to even recognize that your thought patterns and habits are in any way unhealthy (or unwealthy).

For instance, Cracked.com contributor John Cheese recently wrote about stupid habits he developed by growing up poor. He discusses many of the ways his childhood is still affecting his financial outlook, even though he has become a successful and financially stable writer and father. He ends the piece with an incredible insight: “Being poor is a mindset. And it’s one that, if given the chance, will make [you] poor again.”

So how do you break free of the poor mindset? How do you change your thinking?

It starts with observation. You may remember the first time you went to a friend’s house as a kid and realized that their family was really different from yours. This realization may have been as inconsequential as noticing that your friend’s family put ketchup on everything from scrambled eggs to roasted turkey, or as life-altering as realizing that some people really do have money set aside to handle life’s emergencies.

Observing that your friends have different rules and habits and expectations than you do is disconcerting when you’re a child. It makes you question what you think of as normal.

Unfortunately, for many people, adulthood doesn’t change that disconcerting feeling. Instead of learning from friends’ different habits, you might instead fall back on resentment or excuses. You might assume that their financial lives are different or better because they have more than you do, and so you can’t possibly emulate what they do.

Instead of living on assumptions you made in childhood about what is possible and impossible, let yourself question your own habits and mindsets. It’s uncomfortable, which is why it can be so difficult to do, but it’s ultimately freeing. By questioning the basic mindset you have about money, you’ll be in a position to restart your own financial education, using positive role models this time around. Which leads to…

2. Find a Mentor

Changing your thought patterns is an important start to overcoming money struggles. However, the learning curve when it comes to finances can be awfully steep, and realizing just how little you know when you are working to change your thinking can be enough to overwhelm you. How do you know where to start in getting your financial house in order? How do you decide between competing financial goals?

This is where finding a good mentor comes in. You might find that joining a site like The Debt Movement or Enemy of Debt, or reading a book by a respected financial expert such as Dave Ramsey or Liz Weston can be a great start in finding the right path to financial stability.

From there, it’s a good idea to seek out more of a personal relationship with mentors who can help you make the decisions that will improve your life. One way you can do this is to start seeing a financial planner — something that I (of course) personally recommend. However, it’s also possible to simply seek out the expertise of individuals who know about the aspect of finance that you need help with.

Art of Manliness community member Liam O. has taken this approach when trying to unlearn the poor habits he picked up from his parents: “I’m learning about mortgages from a loan officer, insurance from an insurance adjustor, and I’m constantly picking the brains of every small business owner and entrepreneur I can find just in case I wind up unemployed.”

Money is often a taboo subject in polite conversation, but often we’ll throw the baby out with the bathwater in trying to mind our manners. Professionals generally love to talk about their field of expertise, and asking questions of loan officers, insurance adjustors, financial planners, and entrepreneurs is a great way to learn — and make your new acquaintance feel gratified at your interest. Liam has the right idea in taking on mentors wherever he can find them.

3. Plan Ahead

When you get right down to it, most poor financial decisions are reactive, rather than proactive. That’s the case whether your bad role models were chasing stock market gains or investment schemes (because they’re reacting to a sense that they must act now), or they were scrounging money because they were unable to set any aside for the 12-year-old family car’s inevitable breakdown. In either case, the reactive response means that money will be wasted and stress levels will go up.

An acquaintance of mine grew up with two financially reactive parents. When things hit the rails, his mother would pull out the credit cards to pay for the emergency, while his father would decide the “answer” was to take whatever money he could get his hands on and invest it in tin mines in Bolivia or other get-rich-quick schemes. Needless to say, between the debt and the waste of money on impossible investments, my friend grew up in a much more financially strained environment than he had to.

That kind of situation is the exact reason why every finance expert, financial planner, personal finance website, and your wealthy Uncle Bob all tell you to have a healthy emergency fund. Planning for life’s inevitable emergencies allows you to take them in stride, rather than react in panic mode.

But planning ahead does more than just shield you from the sorts of bad decisions my friend’s parents made. It also allows you to have the life you dream of, rather than feeling like your life is about constantly putting out fires. You can plan for your vacations and treats — not to mention your retirement — instead of simply allowing things to happen to you. You can take the time to really think about what to do with a windfall, instead of just reacting to the pleasure of suddenly having money. You will be in control of your money, instead of vice versa.

Unfortunately, the tough part about planning ahead is finding money to put aside for the future. If you’ve grown up with a mindset of scarcity, you may feel as though your every dollar is accounted for, and that any extra cash you have needs to be spent right away or else it will “disappear.” If you’ve grown up with parents who taught you to live beyond your means, it can be next to impossible to turn off the spending habit, since you feel as though you deserve all the material things you want.

The trick is to start small and automate. Even if all you can budget for is $20 per paycheck to go into your emergency fund or your investments, that’s better than nothing. Automate that bad boy, so the money comes out of your check without you having to do anything, and it’s less likely that you’ll feel it. Up the savings by a little bit once you’re used to your reduced take-home amount. Soon, you’ll be in a position where you are ready to face a life emergency or plan for something special, without having to whip out the plastic to pay for it.

 4. Get Over Yourself

Parents love their children and are proud of their every accomplishment. That is absolutely as it should be — but sometimes it’s carried a little too far. For instance, the mother of a friend was horrified that the first post-college job interview my friend landed was for a cashier job with Target.

Yes, my friend had just received a Bachelor’s degree from a prestigious school. But the economy had dried up, and there were next to no openings in her field. Rather than simply do nothing, she decided to take whatever position she could find in order to keep money coming in. She knew her student loans weren’t going to pay themselves.

Something that many parents have inadvertently taught their children is that they deserve some specific role in life, some specific job, or some specific standard of living. But just because you or your parents feel you “deserve” nothing less than the best does not make it true.

It’s a far better attitude to recognize that you have to do your part to make your way in the world. The world will not hand you things just because you have a great degree, a brilliant mind, or proud parents.

Understanding that there is no job that is “beneath” you and that there is nobility in any kind of work that you do to support yourself (and your family) will go a long way to not only making sure you stay afloat, but also help you feel content with your life. By accepting that sometimes you might have to man a cash register, wait tables, or dig ditches, you keep your life entirely within your own control.

Refusing to accept anything less than the specific job you trained for (or the one you feel you deserve) means that you are stuck waiting for the world to provide for you. That’s a recipe for frustration and financial ruin.

Eliminating this sense of entitlement is just as important for the other side of the financial equation: spending. You may feel as though you deserve the 4,000-square-foot house and a luxury car — but true contentment comes from living within your means and recognizing the difference between wants and needs.

5. Learn to Say No

Of all the lessons we pick up from our parents, one of the hardest to come to terms with is the lesson on what family owes each other.

For many families, pulling together in tough times is an important part of the family dynamic. And while there is nothing wrong with that when everyone in the family is actually pitching in, the lesson is often more about bailing out a family member who seems bent on self-destruction. If you see your parents pay for your aunt’s rehab over and over again, you grow up thinking that your family is your responsibility — no matter how much they may screw up.

But that sense of responsibility can end up ruining your finances, too.

I experienced this first-hand when my mother decided to invest in real estate in Las Vegas back in 2004. Her credit wasn’t stellar, so she asked me to co-sign the loan with her. Telling her no was one of the hardest things I’ve ever had to do. She felt like I had a responsibility to help her, and it was very difficult to ignore that sense of responsibility, even though I was trying to build my own life at the time.

But we all know what happened in Las Vegas: the market collapsed and all those real estate investors — my mother included — took a major bath. Had I co-signed the loan as she asked, I would have been right there with her.

One of the worst feelings in the world is the sense that you have disappointed your family. You may feel like you owe your parents (or your children, or your siblings, etc.) because they have been there for you many times. But there is a big difference between emotionally supporting your family, and financially enabling them. Learn that difference, and recognize when you need to say no in order to protect yourself. Your family does not love you only because they think you have money they can borrow. So they won’t stop loving you because you say no.

Remember, your responsibility to your family is to love and honor them, not to bail them out.

Living Your Own Life

We grow up thinking that our parents have all the answers, and it can be a rude shock to realize that they are just as fallible as everyone else. While your parents have done everything they can to prepare you for the world, sometimes they themselves might not have the necessary skills to impart to you.

That’s why it’s so important to educate yourself as an adult. You can keep all the important lessons your parents got right, and relearn those that they faltered on.

They ought to be proud to see you succeed, even if it means your life looks different from theirs.

___________________________

soldier of financeJeff Rose, is a Certified Financial Planner and Iraqi Combat Veteran. He is also the author of the recently released book, Soldier of Finance: Take Charge of Your Money and Invest in Your Future.

{ 41 comments… read them below or add one }

1 Sonny October 10, 2013 at 6:37 pm

What an excellent article! Point four really resonated with me, having worked for minimum wage after leaving a prestigious graduate program and unable to find work in my field. Thankfully I finally found work in my area but it was an experience I will always be grateful for.
I don’t have any experience with point five, but I can see it easily being the hardest step to master.

2 Mason October 10, 2013 at 9:16 pm

Loved the article. I think the following passage explains far too many people around today, and particularly my generation (millennials).

“Unfortunately, for many people, adulthood doesn’t change that disconcerting feeling. Instead of learning from friends’ different habits, you might instead fall back on resentment or excuses. You might assume that their financial lives are different or better because they have more than you do, and so you can’t possibly emulate what they do.”

I can’t tell you how many times I’ve gently, respectfully tried to hold someone accountable to an agreement they flaked out on or for self-destructive decisions they have made only to hear, “I’m not you, okay?”

3 James October 11, 2013 at 12:12 am

This, by far is one of the most useful things I have read, in quite some time. I have experienced some of the things that you discussed here.

Thanks

4 Elijah Bee October 11, 2013 at 12:28 am

I’d say you covered everything those 400 page books say about wealth management in one very insightful article.

5 Josh October 11, 2013 at 1:14 am

This is a great article and it deals with something I have gone through. My parents made terrible financial decisions when I was young. They didn’t need to. They were both engineers who were paid very well, but that didn’t stop them from taking out lines of credit to take the family on vacation, or taking out a loan to put a hot tub in the backyard. I realized how unwise their financial habits were about a year before I graduated college. I got smart and read some finance books and spoke with financial professionals. Now, my wife and I have money to take care of emergencies and some flights for fun. We still don’t make much money, we just try to be smart about it. Great article.

6 Simon Elstad October 11, 2013 at 1:18 am

#4 certainly resonated deeply with me. A friend of mine won’t budge and take an available job because he feels its beneath him. I keep arguing that at least its a foot in the door and puts some money in his struggling pockets but he won’t hear none of that.
I hope this statement “The world will not hand you things just because you have a great degree, a brilliant mind, or proud parents.” shocks him back to reality!
Thanks

7 Tony S. October 11, 2013 at 1:29 am

This article resonates 100% with me. Not four hours ago my girl friend and I had a very similar conversation regarding my own upbringing, and in addition, considering I am an unemployed recent grad, it’s comforting to read point four. You and AoM are great mentors. I’m looking forward to reading your book, Jeff!

8 Carl Jesper October 11, 2013 at 2:06 am

I think this is a beautiful comment worth pondering in more aspects of life than personal finances:

“While your parents have done everything they can to prepare you for the world, sometimes they themselves might not have the necessary skills to impart to you.

That’s why it’s so important to educate yourself as an adult. You can keep all the important lessons your parents got right, and relearn those that they faltered on.”

9 Otis October 11, 2013 at 4:16 am

This article really moved something in me, I’ve been feeling so confused and lethargic, this was like a bucket of cold water. Clear, frank and refreshing.

10 JD October 11, 2013 at 4:37 am

A sensible article from someone who’s learned the hardway. Regarding ‘talking to experts’, I’d add an important point from the UK perspective: never presume that the advice you are given is independent or objective if it comes from a financial advisor who stands to make money from you.

Here, advisors are paid in one of two ways: either a flat fee (expensive up front charge), or a percentage of your investment that is paid back through the provider. So advisors are incentivised to offer poorer products with higher fees.

You would do well to understand how markets and advisors work, and consider what’s best for you – Tim Hale’s book ‘Smarter Investing’ is a great starting point.

11 Roberto October 11, 2013 at 7:15 am

I’m sorry to say i’m in disagree with the part about helping your family. If you inherited, as me, a family full of love, but needing help and protection from their financial habits, is a precise moral obbligation to save them.

They save me many times as a child and a teen ager, is the whole sense of the family to save them when you grow up and they are old or just not enough smart to avoid traps.

It doesn’t matter how, or how many victims or damages: there’s no second family, chance or surrending.

For me it’s do it, or die trying…

12 Blair October 11, 2013 at 7:23 am

That John Cheese article was great.

I completely agree with finding a financial mentor. My first boss out of college said that he wasn’t going to give me a project until I signed up for the company’s 401K plan and contributed up to the company match.

He wasn’t really serious, but it showed me that he wanted me to understand that I should be saving for retirement right out of the gate. I went to him with questions around savings, investing, and finances so I could figure out what I wanted to do with my money. At this point, I’m way ahead of where I need to be for retirement because of his advice.

13 Brett October 11, 2013 at 7:58 am

Great article, glad I found it. I just bought the book. :-)

14 Jacob October 11, 2013 at 8:22 am

There’s no telling how much better our country would be if more people took point 4 to heart. I myself have been a little guilty of it at times but at the end of the day, with 3 little mouths to feed, you do whatever you got to do to put food on the table. Another way to put point 4 is “You’re worth only as much as someone is willing to pay you.”

15 33AD October 11, 2013 at 10:27 am

Great article. If you have not already read it, I highly suggest the book “Ordinary People, Extrodinary Wealth” by Ric Edelman. It cuts away at all of the stereotypes of “that’s just for rich people” and also talks about (like this article) the fact that “poor is a state of mind, broke is only a state of wallet”.

Thanks for the read.

16 Spencer October 11, 2013 at 11:37 am

I kind of had a problem with number 4. People like to assume young college age professionals are “entitled” when they have been told their entire life “if you work hard you’ll succeed” and they were raised by baby boomers who got jobs during the most prosperous years in American history. I would like to see some boomers who got laid off working as a janitor, or a bag boy. Maybe it does happen, but I have personally never seen it. Why go to college at all if I am just going to go back to being a janitor (again)? I could have just kept being a janitor and made some money, or gotten a job as a machinist and made good money. Everyone, literally everyone from the lost generation to millennials, believes if “you work hard you’ll succeed” and now that that is proving wrong older generations are saying young professionals are entitled? Hmm… This whole thing seems a little suspect, maybe someone should have told us better… like that older generation. No doubt there are kids who work “jobs” in highschool and feel that manual labor is beneath them after college, but I think there’s a solid number who have simply been fed one line their entire lives, told that “you go to college to get that cushy white collar job” and then when they get out that’s not happening. Instead they are told “take your hard work and your education, stick it where the sun don’t shine, and bag my groceries and clean my mess sonny.” And we’re very angry about this. How does an older generation, raised in prosperity, pull the ladder up behind them, feed their children some lies about what constitutes “hard work and success,” then call their kids entitled when kids get angry about it? This would be entirely different if conversation if people could work a job as a janitor or a bus boy or a ditch digger for a year, then get into their field, or find a real “career” but there is little evidence that is happening. So remind me, why is it young professionals shouldn’t be angry? I thought it was the “American dream” to “if you work hard you will succeed,” but now it’s called being entitled… Interesting.
And that’s my rant, feel free to call me entitled now.

17 Jim Collins October 11, 2013 at 4:45 pm

Esteemed Readers, Jeff, Kate, and Brett,

This subject bears on a pervading theme in AoM since its inception: deriving value from the past without unquestionably accepting the values of the past.

Regardless of the mistakes your parents made with finance, there is value in those decisions. Let’s assume the worst possible case – perhaps you were raised by a parent who drank the money or injected it in their arm. They invested in now, which is all we ever know and there is a modicum of merit in that.

It is incumbent on us to do better. I am about to have ONE glass of an extraordinary wine with a fine halibut dinner with my wife. I will enjoy it now. It is true that the fifteen dollars I spent on the bottle would with median expectation for my life expectancy accumulate to more than a hundred dollars by the end of my life, but I will enjoy it in the ephemeral now.

Money is a high abstraction – token, measure, and store, as the economists tell us, and temporally determined. Let us measure it against our purposes and use it accordingly.

Regards,

Jim Collins

18 Ken October 11, 2013 at 7:52 pm

I’m a baby boomer. I was lucky that my parents were savers rather than spenders and I’ve absorbed that. I was 15 before my parents owned a car and 17 before they had a telephone. i worked some fairly low grade jobs in my youth such as Boy Friday in a car dealer and delivering groceries.

I could give you examples of most of what John Cheese and Jeff Rose have said from my observation of my parents generation, my own and later generations.

Take my colleague who, under family pressure guaranteed a car loan for a Porsche (!) for her younger brother. He defaulted and she wore it. At one point she could not pay her electric power bill. I know that she didn’t want to do it and I advised her not to but – - -.

There is sold and good advice in both columns but Mr Cheese and Mr Rose underestimate the ignorance of many people of the simplest matters of money handling. I worked in a bank for 17 months and saw a woman who could not understand that you could not take more out of a bank account than you put in. “But the bank’s got plenty of money” she said. Some others were not quite as bad.

I’ve been treasurer of a sports and a social club. Some of the “helpers” did not know the difference between a bill and a receipt. When asked to manage a bit of cash while I was out of town they muddled it to the point where I was unable to sort the mess out.

Perhaps the basics need to be taught in schools, because it’s pretty clear that some folk will never get it otherwise.

Ken

19 mike October 11, 2013 at 11:53 pm

Do not get an ARM loan, ever. There is no good reason to get one. People will come up with some narrow set of circumstances where it is okay to get one, but if you are in that narrow space, then you should change your circumstances because you’ll have problems anyway. ARM loans, like gambling, are a stupid test. Don’t be stupid.

20 Jeff Rose October 12, 2013 at 8:11 am

@ Ken

A Porsche, really? Wow!

I promise I don’t underestimate people’s misfortunes of handling money. I’ve been an advisor for 10 years and also spent some of that time working in a local credit union. I see basic money mistakes ALL the time.

Sometimes I get mad and think “How, could they be so stupid!”, but I also realize they are the product of the environment they have been raised in.

It doesn’t have to be that way. In fact, it should NOT be that. My hope is that articles like this, my blog, and my book can help point people in the right direction.

Thanks for your comment!

21 Jeff Rose October 12, 2013 at 8:14 am

@ Sonny

Kudos to you for taking a less desirable job until a better thing became available. I’ve seen so many people hold out for a “better opportunity” which usually doesn’t end well.

22 Jeff Rose October 12, 2013 at 8:15 am

@Brett

Thanks for picking up the book man!

23 Jeff Rose October 12, 2013 at 8:17 am

@ James

Thanks buddy! Glad you enjoyed the article.

24 Brad Felmey October 12, 2013 at 9:32 am

Distinguishing help for family vs. enabling their bad decisions is sometimes difficult to define, but there is definitely a difference. I’ve been helping to support my mother for about 15 years now and it’s painful to scrimp to pay her bills when I show up and see she’s been shopping for all kinds of junk she doesn’t have need and ultimately gives away. I’m about at the point of allowing her to stand on her own feet. I’ve decided that it’s not better to enable her spendthriftiness at the expense of my own secured financial future. I decided this two weeks ago, and I can’t even tell you how much I’m dreading my come-to-Jesus meeting with her.

25 Jeff Rose October 12, 2013 at 12:05 pm

@Elijah

Thanks for the comment and compliment. Glad you enjoyed the article.

And trust me, 400 pages of wealth management would even get boring for me!

26 Jeff Rose October 12, 2013 at 1:23 pm

@ Roberto

I’m not about hanging your family out to dry, but at some point enough is enough.

If a friend, family member, co-worker constantly takes advantage of you and you keep supporting them, how they are going to learn?

It would be no different than a parent allowing a 30 year-old to continue to live at home rent free that isn’t doing anything to advance their career or life.

Eventually, you have to practice tough love and let them learn the hard way.

27 Jeff Rose October 12, 2013 at 1:27 pm

@ Josh

Sounds like you and I both had similar pasts that turned out very bright. I often wonder what would have happened if I hadn’t stumbled into my career of being a financial planner. I’m blessed to have learned so much that have benefited my family and others that I’m able to influence.

28 Jeff Rose October 12, 2013 at 1:33 pm

@Spencer

Being the fact that most of my clients are baby boomers, I’ve actually seen quite the opposite. I’ve had several baby boomer clients that got laid off from good jobs with excellent pensions having to take on jobs where there pay was literally cut in half.

One client comes to mind went from working 40 hours a week to 60+ and still doesn’t make as much money as she used to. While many would complain, she’s thankful to have a job.

I’m sure there’s exceptions out there as there always is.

Either way I enjoyed your rant!

29 Jeff Rose October 12, 2013 at 1:38 pm

@ Tony S.

Thanks man! I hope you enjoy the book. Be sure to let me know what you think.

30 Tim October 12, 2013 at 7:43 pm

“The tax refund just came in. Let’s go on a cruise!”
That one amused me because it was my financial mantra for years! I was a single dad and arranged my W-4 as a “savings account” for travel. Bad advice – I know but the kids and I loved it ha ha. But don’t follow my lead… I worked for the local school district, retired at 48, and moved to the Philippines… loving life!
It is really a god article – I just did not follow it in my life :)

31 bfajeremy October 13, 2013 at 12:34 am

Thanks for the advice, Jeff. I too grew up fairly disadvantaged, parents didn’t have health insurance, retirement, or an emergency fund. It’s been a constant learning experience ever since, but it’s beginning to pay off and it’s very rewarding.

32 Patrick October 13, 2013 at 5:58 am

I grew up privileged with a very stable family.

But I still have to teach myself how to deal with my own finances. My dad is really good with money while my mum is a spender. So for me I have to find a sweet spot.

I love to invest and love to spend. But I am about value and actually making the purchase worthwhile. I hate doing things twice nor buying things twice.

33 danny October 14, 2013 at 11:11 am

“They f*ck you up your mum and dad,
They may not mean to but they do,
They fill you with the flaws they had,
And add some extra just for you”

- Philip Larkin.

GREAT article, thanks!

34 Alex Birkett October 15, 2013 at 5:15 pm

One of my favorite quotes is one by Zig Ziglar: “Rich people have small TVs and big libraries, and poor people have small libraries and big TVs.”

This reminds me of your #1 point to Change Your Thinking.

The way I grew up was similar to the quotes you described. Every tax return brought a bigger TV.

Since I’ve grown up, I’ve done quite a bit of personal observation. I’ve realized that it’s not always what you spend money on, it’s what you avoid. Freeing one’s self from the tyrannical rat race of bigger TVs, more soda, and bigger SUVs, allows one to focus on better investments: books, experiences, opportunities for financial growth (business start-ups, investments, etc.)

This article was certainly illuminating.

35 Scott Cunningham October 16, 2013 at 7:36 am

A few other points:

First: Make yourself smart on the basics of investing. This isn’t waht stock/mutual to buy. Its stuff like “Time Value of Money”, compounding, “DRIP” (Dividend Reinvestment), etc…. To see why even a person on a modest salary can become wealth over time, just run a few scenarios on a bvasic time value of money calculator (Here;s a workable one https://www.americancentury.com/calculator/time_value_calculator.jsp).

As you can see, investing a reasonable amount ($4-5000 a year) in something sensible (like an Index Mutual Fund), and having the discipline to keep it up for a long period and let the money grow will produce huge results.

A 20 year old investing $5000 a year into a fund making 8% over the long term (matches historical stock market performance) and reinvesting all the dividends back into it will have amassed a $1.5million nest egg by the time he is 60. Not bad for a total contribution of $200K

36 Scott Cunningham October 16, 2013 at 8:11 am

Another simple lesson that you can teach your kids: The 50% rule. Teach your kids this. For every dollar they earn, make sure they save .50 cents. When they get a bonus, win something, inherit, get a gift, a raise, etc… same deal. 50% goes to savins. The rest they can use as the like.

This achieves several things. Most obviously it starts accumulating money through savings. Modestly at first, but it will grow and accelerate later in life. More importantly, it teaches the first lessons of money management. It starts a young person on the pathway to wealth, and enforces a disciplined approach. He will become used to saving, and will do it constantly. Also, having some money to manage wil allow him to learn how to invest and manage that investment far better over the long run. Lastly, it also allows for a gradual increase in the standard of living as well. The other 50% can be used for whatever he wants. As he gets older, earns more, and has things he wants/needs, he will still have a gradually increasing amount to enjoy.

Of course you can’t maintain the 50% level of savings all the time (especially when you get older). That’s OK. The percentage isn’t whats important. As long as you have developed the discipline to save something every pay period, (and leave it alone!!! – draining savings every time you see something shiny defeats this whole approach).

37 Grey Reverend October 21, 2013 at 4:34 am

Unfortunately, my folks rarely discussed money with me, so I had to learn these lessons the hard way. Luckily I learned fairly early. My mom’s only piece of advice was to avoid debt, which is a pretty good one, if you’re only going to get one piece. Other than that, we never discussed money. Now that I’m older, I realize she is very bad with money. She doesn’t save, she spends every cent, and has nothing for retirement. I know she will eventually have to live with me and I will take care of her, and I accept that.

38 GD October 22, 2013 at 3:34 am

Great points, Jeff, as always.

From my observations, sometimes parents’ shortcomings in an aspect of life become a particular area of focus for their children. As you mentioned, your father wasn’t the best with money and then you become a financial planner who preaches the value of no debt and saving. Maybe as children, we overcompensate when we notice our parents’ weaknesses.

39 Chad October 28, 2013 at 1:09 pm

Dave Ramsey is another financial planner that is definitely worth a look. He approaches finances from a Biblical standpoint, and you would be surprised to see what the Bible really has to say about finances. I took his Financial Peace University and I think it should be a required course to graduate high school. You can check it out a daveramsey.com.

40 Ben November 18, 2013 at 6:29 pm

To Point #4 –

The Cliff Walk by Don Snyder is an excellent read about a man who lost his job and had to fight his sense of entitlement to find happiness.

41 Diana January 23, 2014 at 3:32 pm

Thanks Jeff for this article. I really enjoyed it. I am young and looking to get my finances together. I want to learn how to use my money responsibly. I was told that handling money is someting you have to learn to do because it often doesn’t come with instruction when its placed in your hands. Thanks for your advice.

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