I sat down to write a lengthy missive about Donald Trump, the NFL and the controversy over the National Anthem but was interrupted when my oldest son Ben (17) walked into the den and tossed a big pile of cash on my desk, saying, “Can you please deposit this in my investment account, Dad? And don’t forget the match.” Ben recently started a part-time job at Autobell Car Wash where he is paid an hourly wage plus all the tips he can earn. Based on the stack of bills on my desk, I quickly concluded that either he’s selling drugs or he’s doing pretty darn well in the tip department.
Dad: “Wow, Ben, that’s a lot of money! Did you earn all that in your first three weeks?”
Ben: “Yep. It’s $724. You’re gonna match it, right?”
Dad: “Seven hundred dollars? Match? Uhh, did I say I would match it?”
I’ll be the first to say that not all of my children exhibit the same zest for working and saving that Ben does. For one child in particular, it seems chores are to be avoided at all costs, even when the reward is a generous allowance. Many of our clients have made similar observations about their own children. “She’s a saver!” or “He has the first dollar he ever earned.” Alternatively, “He’s not so great with financial decisions,” or “We have to help her out financially from time to time.” While we might discuss whether these behaviors are a result of nature or nurture, I’ll make a strong case that offering our kids a few simple lessons about money can make an enormous difference in their lives.
Start Early (Form Habits Early)
In our business we’ve learned over time that on average, people spend what they make. Someone making $75,000 per year will spend $75,000 per year. Someone making $350,000 per year will spend $350,000 per year. Call it consumption creep or whatever you will, it is just reality. Therefore it is critical that a healthy pattern of saving and investing starts at a young age before “alternative habits” are formed. I remember my first paycheck from my first job at NCNB after college in 1990 (for young readers, NCNB was the predecessor to Bank of America). My salary was $21,500 and my first bi-monthly paycheck (gross) was almost $900—a ridiculously large sum of money for me at the time! I remember sitting there just staring at that figure. Wow! Looking back, this was obviously a great opportunity to form good habits and to avoid the temptation to adopt a standard of living requiring a paycheck of that size.
Start Early II (Take Advantage of Compounding)
Suzie Saver saves $5,000 per year starting at age 22. She increases her annual savings by 3% per year. She invests the money and earns an annualized return of 6.5%. At age 65 Suzie has $1.9 million.
Sam Spender does the same thing EXCEPT he waits until age 32 to begin. At age 65 Sam has $879,000.
Save a Lot
Here are three responses we often hear when we ask the question, “Do you contribute to the retirement plan offered by your employer?” 1) “I’m planning to start once I pay off my credit cards and save up for a new car.” 2) “I only put in what they will match.” and 3) “I always contribute the maximum allowed.” Of course I realize that not everyone can contribute the maximum but obviously, the more you save, the sooner you’ll reach your goal.
Do Your Own Math
Quoting my brother Phillips from an article he wrote twenty years ago, “It’s your paycheck; do your own math and make the numbers work for you. Don’t get caught up in what your neighbor spends or has. For all you know, your neighbor inherited a fortune or is drowning in debt.” Basing your decisions on the actions of others is not a plan that will work.
Over long periods of time, owning a diversified portfolio of stocks has been a far better investment than alternatives like bonds or cash equivalents. Specifically, since 1926, large company US stocks have enjoyed an annualized return of about 10% while bonds have averaged approximately 5%. Cash equivalents have barely kept pace with inflation which has averaged just under 3% for the same period. These are historical returns and there is no guarantee that we’ll see these returns in the future. In fact, when planning for the future, we think it is prudent to assume that future returns will be lower than historical averages. Yes, lower future returns will require saving a lot in order to reach your financial goals. Sorry.
Pay attention to how your money is invested. Consider that over a 40-year period, a lump sum of $10,000 invested at 4% grows to $48,010 while the same amount invested at 7% grows to $149,745. You don’t have to be Warren Buffet to get this right. Whether you do it yourself or pay someone to help you, give your portfolio some attention each year. As demonstrated, it’s worth it!
Be Humble and Never Bet the Farm
You can’t see the future and neither can anyone else. Don’t try to time the market and never make big bets with money you can’t afford to lose. Maintain an investment allocation that is appropriate given your need for liquidity and your need for return. Avoid any investment that sounds too good to be true. The only exception to this last rule is compound interest. While it appears to be too good to be true, it’s not, and you should embrace it! As Albert Einstein is reported to have said (but probably didn’t), “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
At some point Bragg will get around to publishing a book containing many more nuggets like these. These are the CliffsNotes. If you’re reading this, you probably didn’t need the lesson, but I hope it will serve as affirmation of your good habits. If you have a child or grandchild who does need the lesson, feel free to share. And while you’re at it, you might suggest they apply for a job at Autobell.
As always, thank you for choosing Bragg for your portfolio management and planning.