Monday, September 24, 2012
How Did We Wind Up Here?
We all make mistakes when we first start out on our own. If you're lucky, you learn quickly how damaging those mistakes can be. If not, you may wake up at 50 with no retirement savings and $40k in credit card debt. My moment of clarity came by accident. I had recently moved in with my fiance, which meant my rent was cut in half and I spent most of my time (and meals) at home instead of going out with friends. I previously hadn't paid any attention to my finances and thought it was exciting when I had an extra couple hundred bucks left over after paying all my bills, so it was quite the shock when I saw that I had $1000 left over from my first paycheck post move-in. I was excited, but I thought it must just be a fluke. Until next month when the same thing happened. That was the moment I realized I had total control over my finances.
But how did I wind up so oblivious in the first place? Mine is the story of an upper-middle class upbringing. My parents built a comfortable life for our family by being very frugal... just not when it came to raising kids. They practically never bought new furniture, appliances, clothing, or cars, and our vacations were usually driving to visit relatives for a few days. But when I wanted to take dance classes, they signed me up. When I wanted to take voice lessons, they signed me up. When I wanted to go to summer camp, they signed me up. I never heard "no." It helped that most of the things I asked for were things they considered worthwhile, but I was certainly given a sizable amount of "going out" money too. So I learned that if I wanted something, I could have it.
My parents did teach me that it was important to never buy something you can't afford, and that you must pay your credit card bill in full every month, but they never taught me (or more likely I was rolling my eyes back when they tried to teach me) that it's important to live well below your means. So when I started earning my own money, I thought that as long as I could pay all my bills every month, I was doing great. And the fact that I was paying my bills while managing to put a whopping 5% of my salary into a 401k was amazing! (Sadly, I think that compared to many Americans, that is amazing.)
Realizing that you're in complete control of your finances is a life changing event. When I met my fiance, I wasn't sure if I wanted children. "I'm too selfish to have children" I thought. But when I saw that I could save $1000/month with no real effort, I realized it wasn't that I was too selfish to have children, I was too irresponsible! Suddenly my future became much clearer. A house and a family were possible. Putting 15% of my salary into my 401k was possible. Being a stay-at-home mom was possible. Early retirement was possible. Over the past 18 months, I've slowly increased my savings from that initial $1000/month. I've set goals for myself that two years ago would have seemed impossible. I found my way out of the financial mess that so many of my peers are still in.
So how can we raise our children to avoid these mistakes, or at least to learn from them quickly? Does it matter how much money we have, or just how we treat it? Should we give them an explicit education, or teach by example? Should we, like my parents, strive to provide everything we can for our children, or should we withhold somewhat from them so they learn that you can't always get everything you want?