It’s a tale of three families. On one hand, you have my parents; they’ve always lived well under their means, prioritizing education and career above flashy cars and fancy vacations. They kept their debts – and only responsible ones, at that – to a minimum, and their investments to a maximum.
Then you have the parents of “M,” a lifelong friend of mine. He grew up with spendthrifts for parents. On a whim, his father bought a hot air balloon. A later splurge added an in-ground pool to their backyard, which just happened to be so far up north that it was only usable two, maybe three months out of the year.
The third family is my best friend, “J”‘s. To this day, he’s not really sure whether his parents were savers, like mine, or spenders, like M’s. His parents shared precious little about their financial habits with their children.
Of course, I’ll make the argument until I’m blue in the face that my parents’ money lessons gave me the best chances of financial success. They led by example, often bringing me along to the bank or the broker’s office in my teens to show me the importance of having a strong nest egg and diversified portfolio. But the question tonight is, whose parents did them a greater disservice: M’s or J’s?
M’s Finances Today
Today, M’s financial situation is largely the inverse of his parents’ example. He drives a modest car he purchased, lives in a modest home, participates in modest hobbies.
On the surface, he may appear to be fairly secure with his finances. He has a big emergency fund, his debt is under control, and his credit score is high. But beneath the surface, I see problems others might not.
Why is M’s emergency fund so large? Because he’s terrified about putting the money elsewhere, so he continues to build his rainy day savings bigger and bigger.
Why is M’s lifestyle so modest? Because he’s afraid to do anything big or bold, for fear of being labeled a spendthrift or living above his means, like his parents.
Instead of living life to its fullest, I’d argue that M is living his life to its smallest. He’s taken what he learned about money from his parents – which, at its core, only represents what not to do – and turned it on its head. He’s doing everything right, but not for the right reasons. Rather, he’s making these choices out of fear.
J’s Finances Today
When I met J, he was clueless about money. Whereas I knew how to handle the onslaught of credit card companies peddling their wares on my college campus – because my parents had prepared me for their presence – J was overwhelmed. M knew not to apply for these cards because he’d seen his parents rack up big debts; J, on the other hand, was eager to take advantage of this “free money.” Why? He simply didn’t know any better.
By the time J was preparing to graduate from college, he’d taken on tens of thousands of dollars in credit card debt. Terrified by his high balances, he went cold turkey on debt. He used his high-powered career and $80,000 salary to pay down all his credit card and student loan debt in two years. Good for him, right?
Not so fast. After eight years of failing to use a credit card or take on any type of debt – good or bad – he wasn’t any richer. He’d simply started using cash instead of his credit card to pay for an increasingly lavish lifestyle. He had little savings and even fewer investments. Plus, when he decided to settle down, get married, and buy a house, his credit score was too low to get him access to the best loans and interest rates.
Whose Parents Did Better?
If you just heard the money lessons M and J’s parents taught them growing up, you’d likely think J was in a better place to make wise financial decisions. But when you see the impact those money lessons had on their grown sons, I think it becomes clear that M learned from his parents mistakes – and, perhaps, is overcompensating for them – while for J, the absence of financial input from his parents led him down a path of poor decision making due to lack of knowledge.
What lessons about money did your parents pass on to you? What is the legacy of those lessons?