In this special edition of OppenheimerFund’s World Financial Podcast we focus on financial literacy. Investment strategists Brian Levitt and Drew Thornton discuss ways that individuals and families can become more savvy with their personal finances, including:
1. Having Family Meetings About Money.
People don’t talk about money. Parents don’t discuss financial issues with children either because they don’t want them to worry or hinder their ambition if the family has considerable assets. Spouses often keep financial conversations to a minimum to avoid conflict.
Even among high-net-worth families these discussions are not prioritized. OppenheimerFunds surveyed high-net-worth investors and advisors as part of its Generations Project and found roughly half of these investors were planning to pass on to their children the lessons they received on topics like saving, investing, budgeting, and charitable giving.
One of the ways to get around the aversion to discussing money is to have regular family meetings. The most important topic to discuss at a first meeting is the family’s purpose for their money. Beyond simply accumulating things, families may want to use money to gain experiences or to support causes that are important to them. Whatever the goals may be, having them be clear to everyone will provide a shared sense of purpose and a greater sense of commitment from everyone to contribute to the family’s goals.
2. Deferring Gratification.
Managing money effectively requires making good decisions, big and small, about how to handle your finances. Often it requires delaying gratification. Buying coffee every day may be convenient but if someone at the start of their career chose to invest, rather than ingest, the $3 that a cup of coffee costs, they could have $40,000 after 40 years. That is assuming the stock market delivered an average annual return of 6%, which is a modest assumption given what the U.S. equity market has delivered historically.
Being disciplined enough to delay gratification can be considerably beneficial when one comes into a windfall. Studies have shown that one of the first things people do when they come into a large sum of money is buy a car. Brian and Drew talk about the example of two people who come into a $100,000 inheritance. One person is tempted to spend the whole sum on a luxury sports car. The other person opts to spend $20,000 on a car and invest the rest. In 10 years, the person who spent the entire amount would have a car not worth very much. But the person who invested $80,000 could, after 30 years, have close to an extra half million dollars for their retirement ($459,579 to be exact, assuming, once again, a modest annual return of 6%).
The key, Brian and Drew emphasize, is to be mindful of the opportunity costs of every financial decision. One of the opportunities you could be giving yourself, when you delay gratification, is the freedom to retire when you want and to spend your time with the pursuits you and your family most enjoy.