Financial Foundations

 I believe we have a large problem in this country when it comes to individual money management.  We spend too much money on things we want but likely don’t  necessarily need.  Along with this too many people are living paycheck to paycheck and are unable to manage a change in finances, like a job loss, medical issue, inflation change, etc.  We don’t instill basic money management with our children’s education and the results are staggering.  How many of you had a finance class in high school, or at all?  I did not and it took a while to understand and implement sound financial management. 

As a country we have about $5 TRILLION non home debt according to the New York Fed. https://www.newyorkfed.org/microeconomics/hhdc.html.  This includes $1.62 trillion in auto loans and credit card debt of $1.14 trillion.  This equates to about $4,600 per person in auto loans and $3,200 per person (estimate 350 million people in the US - infants, children and adults)!  These are just averages but very concerning.  For everyone who does not have an auto loan or credit card debt these average numbers go even higher!  

It seems that debt has become part of life and as is the case in many situations too much of a good thing is a bad thing.  There are times when incurring debt can be a good thing.  The top two that come to mind are in housing and education.  Owning a home has numerous advantages over renting for the long term, especially if you can obtain mortgages at low levels.  Warren Buffet, the oracle of Omaha lives in the same house he bought in 1965.  He is also quoted as saying the best investment you can make is in yourself.  You can’t argue with his results.  

One reason that we have this problem is people seem to be concerned with is keeping up the Jones’ as the saying goes.  We accumulate more items than we need, striving for more wants.  How many storage units do you see driving around your neighborhoods? And how many of those hold items people cannot keep in their house?  Speaking of house sizes, they are also growing over time.  According to Property Sharks the average household size in 1910s was 4.54 people and the home size 957 square feet.  In 1975 the average home size was 1,660 square feet.  By 2015 the average household size was 2.58 people and the home size 2,430 square feet.  Larger homes also cost more to operate, keep up and repair.  Larger homes for less people allow us to accumulate more things than we likely need.  https://www.propertyshark.com/Real-Estate-Reports/2016/09/08/the-growth-of-urban-american-homes-in-the-last-100-years/.

So, what can we do about this?  The concepts may be simple, but their implementation takes more effort.  One simple concept is to live below your means.  Most people who have significant savings have lived by this basic principle.  However for a lot of people this can be difficult to do in today’s society with all of the social media pressure, advertising pressure and businesses that want your money.  I recommend a book called The Richest Man in Babylon and it incorporates several principles to achieve financial freedom.  These include saving at least 10% of your income, controlling your expenditures, making your money work through you through investments, owning a home and striving to become wiser and surrounding yourself with wise people.  

As parents we need to show our children how to live by these principles and teach them these basic finance concepts so that they can have more freedom in their lives.