Conversations with my daughter
What should we be teaching our young adult children about money?
The economist, Yanis Varoufakis, has written a very interesting book entitled “Talking to my daughter about the economy, a brief history of capitalism” in which he imagines how he would explain the development of our capitalism system and the important role it will play in her adult life, as if he were talking to his university age daughter.
It started me thinking about what financial conversations I should be at least be trying to have with my own daughter as she moves from university into the real world.
7 things I’d like to teach my daughter about money before her first payslip:
1. THE POWER OF COMPOUND INTEREST
Understand the power of compound interest and discover why Einstein called it the “eighth wonder of the world”. It is a glorious gift given only to the young with the time to really benefit from it. Understand how relatively small amounts regularly invested over a prolonged period and consistently earning a return above inflation, can become life changing. Find (and keep) a compound interest table and see the difference over say 20 years of an investment that returns either 4% or 6%. You will be surprised and will become more interested in how your money is invested.
2. INVEST IN SHARES
Equity investing (shares rather than fixed interest) should be the driver of the investment returns you need to protect your money. Understand the pattern of equity investment returns over the last 100 years. Shares will go up and down but, over the long term, history teaches us that they will rise by more than they fall. Nobody can forecast what stock markets will do tomorrow but, thanks to the wonderful law of averages, we do have a pretty good idea how they will perform over the next few decades which, when you are young, is the only timescale you need to be concerned with.
The value of investments can fall as well as rise. You may get back less than you invested.
3. AVOID DEBT WHENEVER POSSIBLE
However tempting a new car might be, buying a depreciating asset with borrowed money can only ever be a decision you take with your heart and not your head. Credit card debt will always be like a financial millstone around your neck. Don’t use it or, if you have to, get rid of it as soon as possible. The lender wins (they always do), you lose. Borrowing to buy a long-term appreciating asset such as a house is however usually a good financial decision. The lender wins (again), but so do you.
4. PENSIONS ARE NOT BORING
I know you can’t imagine it today, but one day you will have a significant drop in your earned income (it might still be called retirement), either because you want to or because you are forced to by circumstances such as ill health. You will then need to live from the investments you have made (it might still be called a pension). This will happen. Pensions are not boring they are what will allow you to enjoy the lifestyle you want for what will hopefully be many decades of later life. Start saving what you can now, increase it in the future and don’t stop (see compound interest).
5. PROTECT YOUR MONEY AGAINST INFLATION
Inflation is the biggest guaranteed risk to your money. The price of a first class stamp in 1990 was 21p, in 2020 it is 76p, that’s an average annual price increase of more than 4%. In the 90’s it was going up by about 1p every year, by 2016 it was increasing by 3p each year and the last increase in 2020 was 6p! This is just an example of the relentless march of inflation that will erode the purchasing power of your money unless you protect it. This is why investing your money is not a choice. It is not a game that you can choose to play or not. It certainly isn’t an activity just for the “rich”, in fact the less money you have, the more important it is to protect what you have from the inevitable risk that is inflation.
6. FIND SOMEONE TO HELP YOU MAKE THE RIGHT DECISIONS
Find somebody with financial wisdom who you can trust to help you. It is not their money so they can help you make good decisions without emotion, something you will never be able to do on your own, however financially literate you become. They should hold you to account for what you should be doing and tell you what you need to hear and not what you want to hear. Much of what I am telling you I guess you might already know, but that doesn’t mean that you will actually do it without somebody to guide and nudge you. We eat chocolate biscuits for the same reason that we don’t contribute to an ISA. If left to yourself then there will always be a voice that will tell you it is the right thing to do even when it isn’t. Having a voice to listen to other than your own is essential if you are going to consistently make the right decisions with your money.
7. UNDERSTAND WHAT YOU WANT YOUR MONEY TO DO FOR YOU
Just because I am talking to you about money, it doesn’t mean that money is the most important. It should never be the objective. It should only ever be the tool you use to achieve the things that are really important to you and many of those you won’t even need money for.
I know that it is hard to think in decades when you are only used to thinking in years, but a long-term perspective, a gift given only to the old, is the real value of what I am telling you here. All of this will happen but only very slowly so, like the frog in the boiling water, you might not know you are on the wrong track until it is too late, unless you can step back and see the big picture.
By consistently making good financial decisions and understanding what you want money to do for you, then you should be able to live your life without thinking or worrying about it and, if that is the fruit of the seeds I have planted here, then my time and my words have not been in vain.
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