A little over three years ago I sat down and wrote my three daughters a book about the fundamentals of money and some of my philosophies on life.
The book is titled, A Parent’s Gift of Knowledge. That comes complimentary as part of the Gowdie Family Wealth service.
At the time, our two eldest daughters were at university and the youngest was in her final year of high school. Their knowledge of the real world — earning an income, paying taxes, funding living expenses, superannuation contributions, personal insurances, etc. — was limited.
Three years later and they have all flown the nest — two are living in Sydney and one in Melbourne. They are paying taxes, rent, utility bills, motor vehicle expenses, grocery bills and all the other joys that come with living in a modern society. Between you and me, I’m very proud of their efforts to forge independent lives.
The lure of big city living does come with a hefty price tag. Rent and transportation costs are, in my humble opinion, mind-blowingly expensive.
In spite of these costs, they assure me they’re still having reasonably active social lives and the real bonus (from my perspective) is that they’re managing to save a modest percentage of their weekly income.
Over the years we’ve had numerous family discussions around the dinner table, on responsible money management. It appears the regular chats and lessons learned about how people have succeeded and failed financially may have stuck somewhere in their subconscious.
However, it’s too early to ‘count the chickens’. They have many more situations and shifty people to encounter before their real life education on responsible and prudent money management can be judged a success or not.
It’s my intention to be around for a while to guide them during this learning curve. However, in case life has other plans for me, the book was my Plan B and written as a useful reference source for them.
For any parents or 20-something readers, here are the key points from the discussions with my daughters:
- There is no new way to go broke — it is always too much debt. Therefore you have to control the debt rather than the other way around. Credit card debt is by far the greatest source of grief for the younger (and even older) generation.
This transportable and very expensive form of an unsecured personal loan has proved to be the ruination of many a consumer. Here are a couple of tips. a) When you go out leave the credit card at home — this minimises the chance to impulse buy. b) Keep the credit limit reasonably low to avoid becoming caught in a debt spiral.
- Don’t believe the property or investment industry baloney about good debt versus bad debt. Sure taking out a loan for an investment (shares or property) can be a ‘good’ debt, provided the investment appreciates in value at a greater rate than the after-tax cost of servicing the debt.
However, if the cost of paying off the debt becomes a burden and the asset has to be liquidated at a loss (sometimes this can be substantial), then it was a ‘bad’ debt. Good debt is only good debt if the asset you have borrowed for appreciates in value. The irony is most people take out an ‘investment loan’ to save tax, when in fact a successful ‘borrowing to invest’ strategy should result in you paying much more tax, i.e. you’ve realised significant profit and/or generated income in excess of debt servicing costs.
- Reverse budgeting is so much easier than traditional budgeting methods. Reverse budgeting is the same principle as ‘pay yourself first’. Most people struggle with itemising their spending line by line on the traditional budget planner. Who really knows how much they spend on presents each year or the exact costs of running a motor vehicle?
Reverse budgeting is simple. Work out the amount of money you need to accumulate over a certain period and then allocate this money from each pay cheque and spend the rest guilt-free. For example, if you want to have $10,000 in the bank in two years’ time, automatically transfer $100 per week into an interest bearing account and learn to live on the remainder of your pay cheque. For longer term goals, use an online compound calculator to determine how much you need to save at a conservative rate of return to achieve your desired savings amount.
- Look for opportunities to increase your income. This could be in the form of part-time employment. However, in the spirit of working smarter and not harder, improving your skill sets would be the preferred way to improve your chances of stepping up a pay grade or three.
Another option could be starting up some form of online business — blog, buying and selling on eBay, etc. However, improving your skill sets is only half the equation. One of the many sayings I’ve impressed on our daughters is: It’s attitude not aptitude that will take you to your altitude.
Approach life with a pleasant attitude, a friendly smile and good manners, and you’ll have an edge over 90% of the workforce. So many people seem miserable with their lives — I hate my job, my boss is a moron, they don’t appreciate me, this job would be great without customers, that’ll be $10 (with no please or thank you attached at the end of the sentence).
Perhaps their frustration is borne from not knowing how to take control of their lives. Having savings is a liberating feeling. If you are genuinely not appreciated in your workplace, money in the bank gives you the luxury to pursue other employment options.
- Be wary of those with vested interests. Ask yourself, what does the person giving me advice have to gain from this transaction? Perhaps their intentions are honourable and the transaction is of mutual benefit. It pays to ask the question rather than make a potentially costly mistake. Develop a BS detector, it’ll stand you in good stead. Remember the old but oh so true adage, ‘If something seems too good to be true it usually is.’
Do the little things right — incremental savings, live within your means, modest debt levels, adopting a habit of learning and having the common sense to avoid a slick sales presentation are all steps in the right direction to responsible money management and taking control of your life.
A saying I read once sums it up perfectly, ‘We are who we are because of three things, the choices we make, the habits we keep and the disciplines we have.’
Put the above lessons into practice and you’ll be amazed at what it does for your confidence levels. I wish you ‘Good Fortune’.
for The Daily Reckoning Australia