Financial Literacy

I don’t remember my parents ever discussing money with me, but I grew up knowing they weren’t too keen on spending money. My mother was a traditional homemaker and for every dollar my dad earned, my mother saved 75 cents – and I’m not kidding. If they had lived they would be 87 and 89 today. They were part of the truly “frugal generation.” We see that clients in that age group tend to have a similar frugal nature. My parent’s investment choice was a bank savings account and CDs. They paid cash for everything, never having any debt, even on the homes they owned. My mother spent 10 years in a children’s home because her parents could not afford her. That alone provided the framework for her determination to never be poor again (just like Scarlet O’Hara). Of course, she should have invested in something other than cash for a better long term return.

Later generations have not practiced that same “thriftiness.” We didn’t have a depression era mentality. Of course, there are a lot more temptations to spend money in 2010, with a new “must have” gadget coming on the market every six months or so. Even so, the last 12 months should have provided the impetus for people to save more and spend less. I have decided that having money in retirement is a matter of choice. You choose to live large in your working years and the result is poverty at age 75. You choose to save some (but not enough) and the result is financial stress in your retirement years. To have financial independence in your retirement years is a direct result of adequate savings during your working years.

It is important that we teach young adults that they cannot spend $70,000 a year when their income is $65,000. They must live within their means and start saving at an early age. This actually might involve doing without from time to time, or putting up with a roommate. What a concept! I have just purchased a flat screen television because my children said I was the last person in the US to still have a tube television. There may be some truth to that as I couldn’t even give my old television away even though it worked just fine!

Initially, everyone should establish an emergency fund and that should be a priority. One of the reasons people build up debt is that they must resort to credit cards for unplanned expenses because they don’t have any excess cash. Of course, you should always participate in any retirement plan your employment offers. Beyond that, and after an emergency fund is established, excess cash should be invested. If you started early, a 10% savings rate could be increased gradually to a 20% rate – fairly painless. Truly, not many of us actually did that when we were young, but don’t you wish you had?

Barbara Gray, CFP®

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