Six Financial Mistakes You Don’t Want Your Kids to Repeat
It is not the government, Wall Street or the greedy mortgage companies that are to blame for your financial crisis. The responsibility lies only with YOU. Let’s use this experience as a learning opportunity so the “sins of the father (and/or mother)” are not repeated on your children.
1. Start Saving From Day One We have all heard about the magic of compound interest. The magic ingredient is time. The book SUCCESS for Teens describes The Choice: At the end of 31 days, would you choose to receive a million dollars cash or a single penny that doubles each day during that term? You would be wise to choose the penny. On the 31st day, the payment is $10,737,418.24. This is one of the most important financial lessons you can teach your children—save a percentage of every dollar they earn. The magic of compound interest can make them magically and magnificently rich.
2. Don’t Buy Junk You Don’t Need Retail therapy is not a medical treatment. Notice how houses that are more than 30 years old have small closets and even smaller garages? Now we have colossal closets, attics, 3-plus car garages and have created a new industry that has exploded in the past couple of decades—self-storage. This is so we can store all the needless crud we buy. Stop trying to medicate your woes by buying more stuff.
Here Are Two Financial Questions I Ask Myself Before I Buy Anything: Do I need it or just want it? It’s good to separate need from want. You will be surprised how few fit things into need and how many are just wants.
If I want it—how badly? Is it worth 7 times what it costs? That is what a single dollar is worth invested at 10 percent return for 20 years. So if something is priced at $30, it really COSTS me $210—the actual effect on my future savings and net worth. That $149 impulse buy at Costco just cost your future more than $1,000. This understanding might help ruin your insatiable appetite for needless spending.
3. Don’t Drink From Only One River. We live in the era of entrepreneurship. Regardless of the job or business you have, everyone should be involved in generating multiple streams of income from a variety of enterprises. The opportunities are too abundant, and it is too easy not to do so. Now you will never go thirsty if one of your rivers gets dammed.
4. Don’t Let Your House Be Bigger Than Your Wallet. Mortgage companies use a calculation to determine if you can afford the mortgage payment, it’s called debt-to-income ratio (DTI). This is one of the numbers that became too flexible in the past few years, allowing people to get into houses they couldn’t really afford. This is also THEIR standard and doesn’t have to be yours. Just like you should eat better than the FDA recommended daily allowance, you should also have more prudence in your financial choices.
There Are Two Forms of DTI Called Front and Back Ratios.
Front ratio—The percentage of income that goes toward housing costs or PITI (PITI includes mortgage principal and interest, mortgage insurance premium—if applicable— hazard insurance premium, property taxes, and homeowners’ association dues—if applicable).
Back ratio—The percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments and legal judgments. For a conforming loan, this ratio has to be 28:36 front ratio to back ratio and is a good standard. Any more than this ratio can put you in real financial vulnerability and should not be pursued even if someone wants to give you money above this ratio.
Important Additional Tip: You should always have at least six months of monthly living expenses, including your new mortgage, in an easily liquid savings account before you make the financial plunge into a debt obligation. This single discipline can prevent 99 percent of temporary financial crises in your life.
5. Don’t Leave Your Eggs Exposed. How many times have you heard you need to have a diversified investment portfolio? Even though that mantra has been repeated throughout our financial culture, most people have more than 90 percent invested in a single asset class—real estate, the stock market or their own business. If any of these hit tough times, now 90 percent of their financial world is in serious jeopardy (and can lead some to jump from tall buildings).
My philosophy is: Risk on yourself, your business and new opportunities, but don’t put your investment holdings at risk. Be aggressive in earning money and conservative in keeping it. Safe, diversified and long-term investments baskets are where you want to place your eggs.
6. Grow Your Money Tree. The most important investment you can make in securing your long-term financial viability is the investment in YOU and your personal development. In these fast-moving and ever-changing times, the degree on your wall is marginalized within a few years. After graduation, learning should not only continue, but accelerate.
As Jim Rohn says, “Formal education will make you a living; self-education will make you a fortune.” It will be your continual growth and development that will keep your money tree ever fruitful throughout time.