We Had a Family Discussion About Our Finances

The four of us recently had “the talk.” No, that talk. We sat down to discuss our family’s finances – salaries, investments, etc. I’d read where two-thirds of Americans who have at least $3 Million of investable assets have not spoken to their children about their wealth, and never will. The article described the many excuses people give for not discussing the subject, including parents’ desire to maintain their kids’ motivation to succeed on their own and not expect a large inheritance. While I understand that sentiment, it seemed pretty ridiculous for a guy who blogs about personal finance and investing to avoid the same subjects with my own kids. So, we did it…and it was terrific!

First, we talked about both my wife’s and my compensation. When you make $8 an hour plus tips at Graeter’s, a professional salary sounds like we’re LeBron James. I will assure you, we’re not, with the possible exception of Lisa’s jumper, of course. So, we took the opportunity to talk about how our compensation roughly compares to other professions. We also talked about how taxes impact take-home pay and how total compensation also includes benefits, such as health insurance and employer contributions to retirement accounts.

That discussion enabled a smooth segue to retirement savings and investments. Now, our kids have known for several years that we’re good savers, but we had never shared the actual numbers with them and what that means. So, below are the lessons we learned and shared with them:

• Save early: We weren’t born with wealth but we were both extremely fortunate our parents paid for our college educations so we could avoid student loans. That enabled us to start saving for our futures at early ages and take advantage of the magic of compounding. Get this:
  • $250 per month starting at age 25 turns into over $656,000 by age 65 if it earns 7% annually, on average.
  • $250 per month starting at age 35 turns into just over $304,000 by age 65 if it earns 7% annually, on average.
• Live beneath your means: This lesson has been drilled into our kids’ heads since they were little but showing them the result of that lifestyle was enlightening for both of them. We own a nice home and have enjoyed nice vacations but only after first contributing to our retirements. Pay yourself first!   
• What does retirement cost? Social Security will pay a portion of our income during retirement, but it won’t come close to maintaining our standard of living, especially our desire to travel more. So, we will supplement that with withdrawals of no more than 4% of our retirement savings each year. Withdrawing more than that can deplete one’s savings too fast, leading to one’s savings dying before you do. That quick calculation also helped put our investment totals in perspective for them. 
• Invest wisely: We also shared exactly how our savings is invested and why. We have a certain percentage of our assets in income mutual funds, some in stock mutual funds, etc. How our entire portfolio – all of our accounts together – is structured is different than when we were 40. How you invest is important.
• Give back: We’re not Warren Buffett but sharing our time, talents and, yes, our treasure with those who can benefit from it is important to us. We hope it will be important to them as well.

I believe our talk increased our kids’ knowledge of real-life finances and, rather than quell their motivation, helped them understand how most of the world builds its wealth. They probably won’t launch a $1 Billion business or gain sports stardom, so will build their wealth the old- fashioned way, saving and investing over a long period of time for what is important to them. They now have a better idea of what that means.

If you haven’t already done so, I highly recommend you have this conversation with your family. The more knowledge your kids have the better off they will be.

Steve Byars, CFP®