We’ve all had occasion in our lives to come across some money, and blow it on something stupid. You see it all the time with kids – they get $50 for their birthday, and it burns a hole in their pocket. A week later, it’s gone, and there’s really nothing to show for it but a bunch of receipts and empty wrappers.
There’s nothing you can do to stop your kids – or anyone – from blowing money on dumb stuff. It’s going to happen. The best you can hope for is that you can learn the pain of making these mistakes early, so you don’t have to blow a LOT of money in learning the lesson. Jacob Wade over at iHeartBudgets writes a heart-warming (or horrifying, depending on how you look at it!) story of how he learned how NOT to blow a bunch of cash — by blowing a $100,000 inheritance when he was 21 years old. He’s learned his lesson, which is good, but wouldn’t it be awesome to help your kids learn this lesson when they’re still young? (Notice I didn’t say “teach them this lesson” – this is a lesson that cannot be taught. It has to be experienced.)
The necessity of teaching kids to use a budget is a topic we’ve railed on ad nauseum through the rest of our blog and in our book – so let’s just move on to the meat of today’s big idea: what would life be like if we had back all of the money that we’d blown on dumb mistakes? Where could you be today if you knew then, what you know now?
For example, I can look at all of the money I’ve blown on mortgage interest so far in my life. We’re on our fourth house in 20 years now, and if I do some rough figuring, I estimate that we’ve paid about $400,000 in mortgage interest in those 20 years – about $20,000 per year, or about $1700 per month. If I had been able to save and invest that $1700 per month at 5% over these 20 years, I’d have $700,000 right now. More than enough to buy an AMAZING house – or a yacht – or whatever I wanted, and have no debt at all.
It’s easy to see this in retrospect, but not so easy to see it at the time. We live in the moment, month to month and week to week, and it’s easy to pack more into life until we find ways to spend everything we have.
So here’s the exercise: Add up everything you’ve made over your working career. Add in everything you think you’ll make between now and the time you’ll retire. I guarantee the number you come up with will be over $1 million. (If you work just 40 years, and earn $25,000 per year, that’s a cool million right there. Most people work longer, and earn quite a bit more.) What do you have left over from all the money you’ve earned so far? What will you have left over from your “final” number when you retire?
That’s the big take-away, and where you can bring this back to your kids. If you’re giving them an allowance and helping them budget, you’re already off to a good start. Now sit down with them and look at the yearly view. Add up the total allowance they’ve received each year, so they can see how much money they’ve started with. Add up their savings to show them what they have to show for it. And then start talking about the future: what do they want to have in savings at 16? At 18? At 25?
There’s no way they’ll wind up with anything saved if they don’t have an explicit goal in mind in two, five, ten years. Without the goals, they’ll take small windfalls, and blow the cash on dumb stuff without realizing it until later.
Just like us.