Monday, October 6, 2014

Three Financial Lessons from my Parents

Growing up in a middle class home headed by two fiscally responsible savers profoundly impacted my views on money. My parents were excellent financial role-models whose influence helped lead me down the path to financial independence. Below are the three financial lessons my parents taught me that most shaped my fiscal persona.

1. Save Some of What You Earn

Starting at the ripe old age of 10, I got my first job as a newspaper boy, delivering papers to over a hundred houses twice a week. My pay cheques were a jaw dropping $29.50 every two weeks, which was more than enough money to fulfill my candy/hockey card buying needs. Enter my parents who suggested I deposit $15 of each pay into a bank account. I had no trouble living large off my pocket money, and never missed the half of my pay that went into the bank.  As I entered my teenage years, and began making bigger bucks as a fry cook at a fast food joint, I continued to save and even increased the amount I set aside knowing I’d have to pay for university down the road.  Looking back, my parents never questioned me when I made purchases with some banked savings…probably since they realized I was an incredibly fiscally prudent child (some less-enlightened folks might say “cheap”).

2. Saving is Good, Investing is Better

Every time my bank account burgeoned to over $500, my parents would suggest I consider buying a GIC or bond. Savings in the bank, even 25 years ago, paid virtually no interest.  Instead of letting money sit idly in my savings account, I could buy a GIC or a bond paying over 5% interest! I remember thinking that I was getting a great deal, as I had no immediate use for the extra money, and was amazed the bank or the federal/provincial government would pay me so much interest just to borrow the money from me for a while.  I’m still a firm believer in putting one’s money to work for them. Beyond maintaining an emergency fund to respond to unforeseen material expenses, I prefer to be fully invested.  Of course GICs and federal/provincial bonds are no longer my investment vehicles of choice, as neither pays enough interest to offset inflation.

3. The Miracle of Compounding

I’m not sure why (my wife would argue that it’s because I have a poor short-term memory), but I have very few vivid memories of my childhood.  Oddly, one vivid memory is of my mom sending me into a bank to buy an Ontario’s Savings Bond at the age of 14. My parents always encouraged me and my siblings to visit banks ourselves, and become proficient in dealing with our own money. On the occasion in question, my sister and I were sent in separately to buy bonds, and were to come back to my waiting mother’s car when done.  I went into the Bank of Nova Scotia, filled out the necessary paper work, but was stumped when the bank teller asked me if I wanted the annual, semi-annual, or daily compounding option. I figured since the bonds paid interest twice a year, I’d go for the semi-annual option. After returning to my mother’s car, when she immediately asked me which option I had chosen, she informed me that I made the wrong choice, and would have to go back to the bank to correct it.  Despite being mildly embarrassed, I corrected my choice at the bank without incident. Later that day I asked the obvious question - why would I want money compounded quicker? My mom informed me that the quicker money compounded, the faster it grew.  My older sister even showed me a compounding table from a math textbook. As a young teenager, very few things with the exception of the opposite sex excited me more than the prospect of compounding interest.  Fast forward twenty-some years, and before I sell any position in my dividend growth portfolio (where compounding returns are the primary objective), I ask myself if it’s worth the opportunity cost of lost compounding.

I’m very thankful that my parents shared their fiscal wisdom with me and wish more kids could benefit from a basic knowledge of personal finance.  When I have conversations about personal finance with others, I wonder how their upbringing contributed to their financial personas.  Despite the tremendous pressure from corporate America and peer groups, I still believe that basic concepts like saving for a rainy day, investing wisely, and letting compounding work for you over time are key to achieving fiscal independence. 

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