Books about habits are easy to find on top-seller lists. The message can usually be boiled down to a relatively simple concept — create positive routines (replacing negative ones) with behaviors that, when repeated enough, begin to occur subconsciously.
I’ll never forget a meeting I had early in my career with a referral. The gentleman was young, approximately mid-20s, so I was expecting to sit down to talk through the basics of financial planning — IRAs, investment accounts and the like. Come to find out after sitting down with him, that in his mid-20s he had already accumulated over six figures into investment accounts.
Somewhat surprised, I asked him how he had managed to accumulate six figures at this age. I figured, maybe an inheritance or a large gift from his parents/grandparents. None of the above. His answer was amazingly simple. His father sat him down at a young age and taught him the importance of spending vs. saving and helped him open an investment account. He started contributing to it and didn’t stop.
I began to learn more about his financial situation. I could tell that the spending vs. savings mentality had snowballed throughout multiple areas of his life. His financial decisions had been prudently based on a few simple financial habits that had been ingrained in him in his youth. Simply starting an investment account helped him see the benefits of investment returns, and in turn, had helped to drive his financial decisions.
One of my college roommates always comes to mind when I am on this topic. I will never forget that night he came home with two brand new pairs of sunglasses that he bought the same day the student loan dollars came in. What did my aforementioned client do when he had extra scholarship money in college? He invested it. Saving mentality vs. spending mentality.
What it boils down to is that my client took money they had and invested it, and has ever since been reaping the growth on those dollars. My college roommate took money that was loaned to him, spent it frivolously, and is likely STILL paying interest on those borrowed dollars. Do I blame him? No. I have no indication that he was ever taught to do otherwise.
So why does this matter? It matters because the earlier you figure this out, the better off you are in the long run. Take for example a client that is trying to accumulate $2 million by age 67 (compounded at 6%)*. If you start at age 20, you must save $639 a month. Let’s say you wait until age 30… that number roughly DOUBLES to $1,226 a month in required savings. Age 35? It TRIPLES to $1,728 a month. Waiting 15 years to start saving towards this goal requires three times the required monthly amount than if you were to start at age 20.
Money is by no means the key to long-term happiness. It’s not the end all be all, and there are so many more important things that we need to learn when we are young. But, that doesn’t mean that basic financial concepts should be ignored. The benefits of learning the basics at a young age tend to have long-term effects and can have a major impact on quality of life.
While the topic might seem taboo, I find that in many clients’ families, it’s just the opposite and is in fact engrained generations back. Talk about it. Don’t ignore it. Regarding my client (he’s a bit older now), I can’t help but think that 20 years from now, he will come into my office, sit down on the couch and have a look at his financial situation, and think to himself, “Thanks, dad.”
*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.
Future performance cannot be guaranteed, and investment yields will fluctuate with market conditions.