The Money Letter That Every Parent Should Write
nytimes.com
nytimes.com
Personal finance should be taught as a math problem. Figure out the cost of the lifestyle you want, and work backwards from there. If your fancy house, car, and dinners out cost $100,000 then you can figure out if your choices make sense... does you career choice match up? does taking on school debt make sense? etc.
Or if you are older and made these life choices already and make $50,000, your math problem is a bit different. Does the honda or tesla fit? You can very easily see if credit card interest of 20% will help or hurt you achieve your goals/lifestyle if you do the math.
None of this generic "avoid debt" or "house are the best investment" (garbage) advice helps and only confuses the matter. I think the only area that has more confusion and bad advice than personal finance is nutrition. In the letter, grandma says "go for a fixed rate mortgage"... what!?
For instance, what I've always done and it has worked very well for me is the following:
1. Maintain constant revenue stream, even if work is part-time or all you have is just an investment paying dividends.
2. Never purchase anything you can't pay for in cash at that moment.
3. Try to save 10% of your income every month - even in low income months.
4. Don't be wasteful and don't blow money on "small crap" you don't need. i.e. junk food, fast food, trinkets, taking unnecessary trips or riding first class, leaving devices/lights on in your house, gym/any memberships or monthly recurring fees you don't absolutely need.
5. Finally, don't purchase things on a whim.
I've tried to live by these rules my whole life, learned them from my Dad, and they've worked very well for me. I spend money, but usually only for high quality things I research into for a long time before purchasing, like a piano, a plot of land, tools, etc.
I have zero knowledge of actual research into personal or home finance so this example is just my gut intuition based on personal experience, so just view it as a biased anecdotal opinion :)
Your general rules are fine and make sense, but sometimes when you do break them, it becomes difficult to see the effect or know when to stop. If you didn't save 10% this month, without the math you don't get any immediate negative feedback. So then maybe a 2nd month with no saving is OK. In fact, with credit cards the feedback will be positive!
I've had a corporate finance career for 10+ years and here's my "math". I take the amount in my accounts today, then add and subtract my expected income and expenses out daily until I'm 80. Tada! Addition and subtraction. Nothing a basic spreadsheet can't handle. I know what my balance will be when I'm 40, 50 or on June 19, 2017. Anybody's well intention advice can be inputted and evaluated.
It's not a budget per se because I don't restrict myself like a budget. It's also a longer term look in detail, instead of just monthly numbers out a few years. I see what my daily overpriced coffee will do to me and I can decide if it's OK. (The daily walk to the coffee shop with the cute baristas is well worth it haha.)
"Dad or Mom advice" does have its spot, but I think it should stay values-based. Many years ago I got a lot of criticism when I bought my expensive new car. Everyone threw out these general rules to me, but I knew it was fine and I really enjoy driving it. I've had it for 9 years now. When it hits 10 years I planned to hand over the keys to my nephew (free). The "Dad advice" kicked in appropriately here when my brother said no way to giving my 16 year old nephew the car with its horse power and tinted windows etc.
So I understand family should teach you the appropriate values and such, but with all the mis-information in the personal finance industry, I wish people would do the math instead of following rules.
Some of the other examples from those letters gave advice (paraphrasing here) like:
- If you can't understand what you're investing in, don't.
- If Alan Greenspan or other experts are not explaining economic concepts clearly, there's probably an ulterior motive.
One bit of advice that I think is pretty critical, that most people are missing is:
Don't live beyond or even at your means. For each dollar you make, you don't need to spend that dollar. Consider a 50% savings rate, or if you can't do that, then 20%.
Is there any scenario where paying 20% interest on credit card debt (or, rather, getting into a scenario that requires that) would help you achieve your financial goals?
I can think of various situations where, if there were no better products available, this might end up making sense.
I'd write a very different letter for a family struggling with one or more dependant/disabled family members. There, conventional saving can be difficult but also dangerous. A big pile of money or other assets can too easily be attached or lost to a horrible situation.
I'd also write a very different letter for wealthy families. For them, asset protection is far more important than savings. They often spend more energy dissociating themselves from their wealth via trusts and other tax-efficient games than they do actually building savings.
I've always found it weird that so many rich people think this way. They should be less risk averse then other people. If you're rich then you should make yourself a safety net and chase a high risk-reward strategy with the rest of your money.
If you're rich you don't need to chase rewards, certainly not risky ones; you've already won and can relax and do whatever you want without worrying about whether it rewards or not. That is the point of being rich, getting to do what you want rather than what other people want.
If you're rich, you don't gain more happiness as you gain more income. So the only thing you really care about in regards to your income, is that it doesn't drop low enough to affect your happiness.
Like many of us, I'm a 2-3 percenter. I care about building wealth for my family, giving my kids a solid financial footing, etc. If I had $10MM in assets (enough to passively generate a 99th percentile income), I don't think I'd only be worried about protecting income.
I'd wager most don't. Sure, some do, but they're a minority.
> If I had $10MM in assets (enough to passively generate a 99th percentile income), I don't think I'd only be worried about protecting income.
But you won't know until you do, anything you say now is merely a guess that's likely wrong. Once you have a work free income, odds are your evaluation of its value will change drastically and you will become very protective of it due to the freedom it provides.
If you can get higher expected returns with an increase in risk, you should probably go for it with the money you can spare, as long as you can spread the risk around multiple fields.
> If you can get higher expected returns with an increase in risk
That's not how risk works. You always get higher expected returns with higher risk. That's the point or people wouldn't even consider it. You also get a higher probability of losing everything.
> as long as you can spread the risk around multiple fields.
Diversification is a strategy for reducing risk. It's irrelevant to this discussion.
High risk as a strategy is sound when you have little to lose. Like when you're young and poor. When you're old and wealthy, it is profoundly stupid regardless of what strategy you employ. It is exactly like being in a casino. You have a ton of cash in your pocket, why would you engage in investments where the probability of losing your shirt is high?
You make investment choices sound like a law of nature. There are risky bets without high returns, and they have a hard time attracting investors.
> Diversification is a strategy for reducing risk. It's irrelevant to this discussion.
The more money you have to spare, the more you can diversify. Having more money means risky bets are less risky to you.
> High risk as a strategy is sound when you have little to lose. Like when you're young and poor. When you're old and wealthy, it is profoundly stupid regardless of what strategy you employ.
This isn't about age. If we talk about 38 and poor vs. 38 and wealthy, I strongly disagree with your argument. Risky betting with half your money when you're poor could make you go hungry for a week. Risky betting with half your money when you have a moderate amount could ruin your ability to have a carefree retirement. Risky betting with half your money when you're wealthy will barely impact your standard of living.
> It is exactly like being in a casino.
But it's not a good analogy unless there is an analogue to the poor person that you say should be engaging in risky investments. Are you saying a poor person should bet their money in a casino?
> the probability of losing your shirt
Oh, there's a bit of a disconnect. The rich person should not be betting all of their money. The reason it's easy for them to invest is that they can spare a big fraction of their money and even if it catches fire they won't lose their shirt.
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I can put it an entirely different way. When you don't have enough money to be comfortable, the happiness/dollar graph is closer to linear. Once you have more money than that, it's closer to a log graph. Someone in the first group has a lot more negative consequences from losing half their money. They should go with somewhat-safe bets and the moderate gains will help them a lot. Someone in the second group isn't impacted much if they lose half their money. But they need huge returns if they really want to improve their state of life. They are a much better fit to the risky high-value investment.
Let's do an experiment!
Take $2K out of your savings account. Put $1K in one pocket and $1K in the other pocket. Your left pocket is your safety net and your right pocket is your "get rich" fund. Now go to a casino. Play a little. After that, let me know what you think about rich people "investing" their money, my analogy, and how they should really do it.
But if I assume I'm rich, and I spend my $1K at the casino... well I probably have some alcohol and have fun, so great? I still have tons of money left?? I'm really not sure what this is supposed to demonstrate.
If I'm poor then I lose it all and I'm sad because I needed that money.
The very fact that you call it a "get rich" fund is totally against my argument. I said you should not use risky bets to try to get rich. Only risk your money if you can spare the money. (And only risk your money on things with high expected returns, duh.)
Because you've never been to a casino. Because you've never gambled and won. Because you don't understand human nature. Because you're trying to rationalize your way to the answer through logic, but people don't invest or live that way.
If you try what I asked you to do, you'll understand. You'll also understand why those who are wealthy invest the way they do and why I said what I did.
I'll repeat what I said. It makes perfect sense for those who are wealthy to invest conservatively. If you find yourself with lots of money at the casino, the best course of action is to leave.
And if you find yourself with not much money at a casino, the best course of action is to leave. The casino provides no insight into who should bet on investments with positive expected returns.
I'm talking about how people should invest anyway. Actual behavior is largely irrelevant to that.
> If you try what I asked you to do, you'll understand.
Physically going to a casino and winning or losing fifty dollars is not going to explain anything.
> I'll repeat what I said. It makes perfect sense for those who are wealthy to invest conservatively.
Sure, it's a fine strategy. But it's even better for poor people to invest conservatively, in my book. How about you explain why you think it's a bad strategy for poor people?
I'll put that again, to make sure nothing is misunderstood: I think investing conservatively is an okay strategy for everyone. But I think the wealthy should be more inclined than the poor to pick up risky bets with high potential rewards, with part of their money.
Not sure why someone voted you down for that.
A long time ago, Venrock[1] invested in a startup I was part of. They're a "venture" capital firm established by the "Rockefellers". Hence the name. Clearly they agree with your advice, which is to pursue some "high risk" investments.
If you're trying to say "different people in different situations have different requirements"...
Yes, we know that. And?
The children would have experienced the outcomes most of what the letter describes, it's just filling in the blanks.
Most people see their own upbringing as an ideal to follow so this is giving a rule book on how to do that.
School debt is not normal. That used to be for only the classic professions: teacher, lawyer, doctor. College was either paid for by family, by grants, or you worked your ass off but had no debt after the undergraduate degree. Now everyone thinks debt is sane.
If I were a parent, I'd plot with the kid how bankruptcy is part of their normal college education. Not debt.
The difficult advice I would offer is this: If you are not a top X% student, and the only way for you to pay for your education is to take on debt, you are making a mistake. Full stop. Find a cheaper school. Find another way, work part time and go to school part time. See if your church/mosque/community group/etc will give you even $500/semester toward school. Live at home or with a relative. If you still get gifts for Christmas, ask for money instead and put that toward books for Spring semester. Stop eating out, learn to make your own food, the meals on campus are too expensive. Find something that you can buy in bulk and sell one at a time on ebay. And of course, the best choice is to go back in time and be born into a wealthy family.
You can make it work, but you have to be willing to set aside whatever vision you have about how college should be. Take what is available and make it your own.
It’s difficult to process just how expensive school is becoming, how quickly. Right now, California community colleges charge $46 per semester unit, or $1,104 full-time for 1 year, plus maybe $40 in miscellaneous fees. If you want a heavy course load, 17 units all year, that rises to $1,564. A bunch of students qualify for the Board of Governors Fee Waiver, but that generally means the their families have poor financial situations, too. How much did community college cost when you were a young adult?
And that’s just the community college, in-state fees. 4-year colleges and private colleges are becoming ever more expensive, too. Adjusting for inflation, Stanford increased from $10,600 per year in 1960 to $59,600 now, just tuition, not counting miscellaneous fees or the cost of living in Palo Alto. And then there’s financial aid, of which there are nice grants for the destitute, enough to cover books and stuff, but mostly it takes the form of bankruptcy-immune student loans. Is it even possible to work part-time, go to school part-time, and graduate without debt, anymore?
It certainly doesn’t help that most of the kids learn fantasy-world liberal social policies, and increase their own fees. For example, I watched the students at UC Santa Cruz protest the wages and working conditions from the prison-food multinational that ran the cafeterias, and they “won” when UCSC agreed to turn the service workers into UC employees. The next year, instead of cutting the salaries of the executives, UCSC made cafeteria meal plans mandatory for everybody. And then these kids grow up into adults who vote for every bond and regressive tax that plagues my ballot.
As a caregiver and mentor, I’m not sure I can tell my kids to go to college.
Right now, the community college that one went to is $100/credit hour. The private school is $1200/credit hour, although they charge a flat rate for full time admission. There are a lot of fee waivers in there that lower the actual amount to about $700/credit hour. For both, books ran about $500/semester, and that reflects strategically not purchasing some books.
For all of the above, the targets were 30 credits per year.
For my personal experience, the answer was yes. I went to a Midwestern in-state school and worked IT jobs part time (full time in summer) to pay for my school.
Get your degree, file for bankruptcy. Since they can't take your degree away and you have no collateral, there wasn't much they could do.
The inability to relieve debt through bankruptcy is a result of that scam.
You are correct Student loan debt can not be discharged in bankruptcy.
A better approach is to reward the portfolio with the highest Sharpe ratio, but even that is flawed because it ignores systemic risk and confuses historical volatility with actual risk.
Anyway, these games teach nothing about the essential habits of delaying gratification and living within your means. Those habits are far more likely to make you rich (and keep you rich) than any particular investment strategy.
Here is what I was told:
* The value of your home doubles about every 7 years. I was told this in 1994. I then asked if my father's salary doubled every 7 years. I was immediately grounded and sent to my room.
* I was told to, without question, borrow money for the best college I could. When I asked on how I would pay that back, the question was dodged.
* How much money to save? Never came up. 401K? My parents didn't have one. Credit card interest? I was told to get it as low as I could -- but never told to avoid it.
* We always seemed to buy new cars. We had a basement full of junk. Seemed to be a nice setup for a guy working at a landfill and a stay at home mom in a city that had been in non-stop decline since the end of World War II.
I ended up going against my parents' advice. Something that got me kicked out of the house, for refusing to borrow 150% of their homes' value (I got a scholarship, but far from a free ride) with my own future money I hadn't yet earned, to attend Carnegie Mellon (and instead taking a job to pay for state school, which I ended up leaving after 3 semesters). When the dot-com bubble was about to burst. Result?
At age 22 I moved back in with my parents. Not because I needed help, but because they tapped their savings after Dad was unemployed for 6 months, despite unemployment insurance, and desperately needed help (and I wasn't giving them a handout while also renting my own apartment). I was the only person in the immediate family that had a decent job. This was exasperated by the fact they took a huge HELOC (at 10.5%) to help my sister pay to attend Cornell, an offer that wasn't extended to me, but was now burying them alive. They had to help my sister because she dropped BioChem for Psych, which for 2 years hadn't yet landed her anything better than working at a Hollywood Video store.
I ended up giving them the third degree. Their books I forced open. So much credit card debt (nothing insane, but significant, and lots paid in interest). So much garbage. So much useless crap. ZERO ever saved in a 401K (it wasn't until 7 years ago that I forced my father's hand on contributing to one). Virtually no savings to draw on. Never mind the extreme animosity considering that I was repaying part of my sister's Ivy League schooling, in addition to my parents' primary mortgage (not paid off after 32 years), and their health insurance.
Crazy thing is, they were far from the biggest financial basket cases in the neighborhood.
We also had the "houses are always a good investment" bit of advice, despite living in a much smaller house in a much crappier town than we could afford. They're currently back at about mid-90s levels value wise, and my family did a horrible job of maintaining our home, so the value is actually less now. This covers basically what happened: http://infographics.economist.com/2015/uscitieshpi_11_2015/?...
Needless to say, getting out a few years back was the best decision I could have made for my life and career in tech.
If you're a parent considering writing one of these letters, how can you fact-check yourself to ensure that you're not giving your children a huge disadvantage with terrible advice? I personally learned a lot from Investopedia and from messing around with Bitcoin in the early days (another opportunity where I could have made tens of thousands of dollars had I hung onto the 20BTC or so I had mined instead of selling them for $12/btc, happy to have paid for a new GPU I got just for the task).
I'm unclear - is this your parents' fault?
No, it's hindsight and regret. It's funny because it would be similar to picking that stock, yet the same poster says his parents lost a lot by picking stocks so apparently that's a bad idea. It's easy to get confused about that when "you worked there" as if that automatically should have given you insider information about a 15x increase in the stock price. No, picking individual stocks is not usually a good idea and Enron taught the lesson about investing in your employer - if they go down you have no income and no savings.
the truth is that your parents don't know anything about economics and investing, they are simply people that had children
Me: "People sure have a lot of stuff these days. These self-storage places are huge."
Dad: "Yeah. I figured it was a growing industry, so invested in one back ten years ago. The company made a lot of money, but management were a bunch of crooks. They spent all the revenue on overpriced purchases from their friends and family.
No matter how good the fundamentals, you can't win if you're dealing with crooks."
As a millennial, we're probably the last generation to learn how to write a letter in elementary school (as well as how to use the Dewey Decimal system to find a book in library), yet even I find the concept of writing a letter silly and more about nostalgia for the parent than the child who will probably wonder why you just didn't use email or IM.
After reading this article, I'd rather have the couple minutes back in my life than trying to wonder why applying archaic communication to perennial concepts suddenly makes it relevant for the NY Times to cover.
Unless you forget to log into your account with the important emails for N days and GMail/Hotmail/Outlook/Yahoo recycles the account.
This actually happened to me before I was in tech (i.e. properly understood the value of backing up my data). After my dad passed I kept an otherwise useless Hotmail account because it contained a lot of email conversations with him. I went to log in one day only to find the account and emails had been deleted. Hard way to learn that particular lesson.
TL;DR physical possession of important things isn't an entirely obsolete idea.
Reminds me of the Young Lady's Illustrated Primer of Neal Stephenson's Diamond Age.
So much profits. :)
The NYT is archaic communication.
https://github.com/nickgieschen/investingguidelines
Feedback welcome.
1.) The letter itself is excellent and full of great advice.
2.) I especially love that you open it up with "Hello from beyond the grave.
Nice work - you've not only convinced me to write my own similar letter, but you've also given me a great template to follow.
Thanks!
But there were some things that they didn't know about, because for example their generation didn't buy stocks and shares, and had a pension provided by the state. So there are many things I've had to learn the hard way, in some cases too late to get the most benefit. For example, I bought a lot of BP shares on 15 April 2010. That was 5 days before Deepwater Horizon, which not even the world's best financial experts could have predicted. After decades of investing in individual stocks that's when I finally realised that investing in individual stocks is too much of a gamble, and began investing in things like index trackers instead.
I've actually been making notes over the years, initially to help crystallise what I've learned in my mind, but possibly also pass on to my children. It's things I'd have liked to have heard from a trusted source myself a long time ago. So while I hadn't heard of the practice of either a money talk or a money letter, I might consider it now. Judging by the other comments I might be one of the few people here who thinks this is a good idea. But it would be alongside the usual practising what you preach, given that the best way to teach is by example, and that education is continuous.
http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-a...
Reading some of those letters made me realise how different risks families have and take in the US and the EU.
Assuming the state pension system will still be running by then and won't be totally broken due to birth rates < 2.
At least in countries such as Germany they are currently facing issues because of the low amount of young payers in the next few decades. And politicians are just ignoring this to get votes from the mostly elderly population (recently in Germany: pension raise of >5% while inflation is at almost 0%).
Sorry, but I think depending on the pensions in the EU is waay to risky. It'll probably fail like a ponzi scheme in few decades. I guess US-citizens are actually better off, because they have more money to save on their own.
if I hadn't that, I could have had access to welfare. instead, working hard and saving money put me squarely in the 'have to spend for everything' class, without any benefit.
so here's the advice letter I'm gonna write to my gc:
hide everything. dodge as much as you can without breaking the letter of the law. go find the most skilled practitioner in tax evasion and have them hide whatever you earn so much you can qualify for welfare, free tuition, college scholarships for low income family for your children etc.
being middle class sucks.