Timeless Money Lessons for Investors of All Types
In the past couple of years, my two oldest children have entered the adult workforce. My daughter is a special education teacher in Hawaii, and my oldest son works on a utility crew in Colorado. For the first time, they have incomes that are large enough to eventually make them wealthy — if they heed certain rules.
Over the years, I tried to impart some wisdom to them about money. I am finding now that those lessons didn’t really stick. I guess experience really is the best teacher.
My daughter finally understands about tax withholding because most of her colleagues got a tax refund this year — and she didn’t. That led to a lesson about taxes, an explanation of why some people get refunds, and an adjustment to her withholding.
Don’t Build a Life on Credit
Hawaii is a tough place to live on a school teacher’s salary, so she has to budget a lot. She has quickly become a student of my most important lesson for long-term financial success: No matter how much you earn, find a way to spend less.
It’s been a tough lesson to learn, but it’s a valuable one. If you start building a life based on credit, you will always be in the hole.
The difference between spending 1% more than you earn versus 1% less than you earn can easily add up to half a million dollars over a career — assuming you are investing that 1% excess.
So my lessons to her have been about not carrying a balance on credit cards, utilizing at least an employer match in a 401k, and creating a budget and tracking her spending so she understands clearly where there are opportunities to save.
Different Lessons, Different Circumstances
My son is in a very different situation. His utility crew moves from hotel to hotel, and he has almost no expenses. He could easily save 90% of his paycheck. But when he told me how much he has in the bank, it was only about a third of what he has earned in the past six months.
While my daughter would love the luxury of banking a third of her paycheck, my son couldn’t really account for over five figures of income in recent months. He was surprised when we calculated the difference between his paycheck and what he had saved. An investigation into his spending pretty quickly revealed a major culprit: He was eating out every night.
I told him that I know what it’s like to live out of a hotel, but eating out every night can quickly chew up discretionary income. I advised him to stock up on some groceries and forego eating out as much. It’s the same advice I would give to anyone struggling to save money. Scrutinize your budget, determine where your money is going, and adjust accordingly.
The real lesson here is to maximize your incoming cash flow. That is done by 1) Increasing your income to the greatest extent possible; and 2) Minimizing outgoing expenses, especially parasitic ones like ATM fees and credit card interest.
Invest for the Long Haul
As I stressed to my son, nobody is saying you can’t enjoy life. But the future is coming whether you plan for it or not. Small sacrifices today can lead to huge rewards once that future inevitably arises.
Now that my kids are saving some money, the conversations have turned to investing. I have explained stock market investing by highlighting companies that are familiar to them.
I explained how a $1,000 investment in Walmart (NYSE: WMT) when shares were first public would have grown to more than $7 million and would currently pay about a quarter million dollars in annual dividends.
I also plan to introduce them to options. I’ll show them how options allow you to buy stocks at a discount and also add a few percentage points of returns to those you already hold.
How will I explain to my adult children the power of options? By introducing them to the trading methodology of my colleague Jim Fink. As chief investment strategist of Options for Income, Jim has developed a proprietary (but simple) trading system that reaps huge gains in short periods of time.
Want to tap into Jim’s secrets right now? Click here for a presentation.