I don’t think it’s unfair to assume that many of us inherited our inclination toward savings and investment from our parents. Like many things we observe our parents do, or not do, our attitude toward finances can be heavily shaped by our parents’ approach. The children of the spendthrift may themselves turn out the same, with an accompanying tolerance for credit card debt and minimal savings balances. The same goes for the thrifty penny-pinchers who live more comfortably on cutting expenses in exchange for a healthy savings account.
The same, too, may go for our attitude toward risk and investments. Those same parents inclined toward savings may also pass along a low tolerance for risk, preferring the security of fixed-interest returns from savings accounts and Certificates of Deposit (CDs) to the volatility of equities.
If you’ve made it this far, you might be asking yourself, yeah and? Are you really devoting an entire post to telling me that I might have some of the same habits as my parents? And then you might be saying: you’ve lost all credibility and I believe nothing else on this site to this point and from here on out, good riddance! I’d say that might be a bit of hyperbole, but having seen internet comments, it might not be a stretch to assume that at least someone has thrown up their hands by now and cursed at the screen…or at least thought about it.
If you’ll hear me out, though, I’ll indulge you. The point is not to state the obvious, as much as it might seem. The point, instead, is merely to identify an issue to which you may not have previously dedicated much thought. Often these parental habits can seep into our subconscious and we perpetuate them without even realizing it.
Do you use your turn signal, or are you, mimicking your equally inconsiderate parents, a boorish, uncivilly callous driver? Do you take 10 napkins when sitting down to eat or do you judicially use your single allotted napkin, two if eating wings? Do you place your toilet paper with the roll on the top, or do you, like a neanderthal, leave it on the underside?
I may have exposed some of my personal preferences in the above, but don’t mind the adverbs – those are merely for humor. Anyway, you might be doing certain things because that’s what your parents did, and you might not pay attention until someone slings mud at you.
So ask yourself, am I overly cautious with my money because that’s the way my parents were? Do you stick your savings into a money-market mutual fund or a high-yield savings account and think: wow, my parents sure would be proud, and look at the return I’m getting! And I probably won’t lose any money!
Or do you buy a new phone every time a new model comes out, live in the most expensive house on which you can still make the payments without having to sell your blood, and at any given time have a few hundred dollars in savings and think you’re flush?
Obviously these examples are the opposite ends of the spectrum, the former overly conservative and the latter a tad over-leveraged. But it does help to think about it, because you may be preventing yourself from saving and investing in the most prudent way possible to build up enough net worth to retire early.
My parents were definitely on the conservative side with their money. My father would not finance a car; he would save up – through CDs and savings accounts – and then purchase the car outright. When he and my mother had a mortgage on the house, they paid it off as quickly as they could. They cut coupons and attended the early bird dinner special – seriously, they ate dinner before 5pm. And this was real life, not an episode of Seinfeld – though when you live like that you understand why the show is so funny. “Do you know how much a steak costs after 4:30?!?!?”
What’s not funny is that my parents made one of the biggest mistakes they possibly could with their retirement funds: they used them to purchase an annuity. Now, as you might know from some other posts, I don’t think annuities are a categorical no. But, as you may also know, there are many better options out there, and my general position is that if you purchase an annuity, it should be at most one part of your retirement strategy.
Of course, my parents took it to the extreme and used nearly all they had to purchase one. Knowing how opposed I was to annuities – and I told them this when they first asked me about it – they actually kept it from me. I only found out years later when I had to dig into their finances for them. I won’t even get into the actual administrative costs that accompanied the annuity, or how much the guy who sold it to them pocketed in commission, but for the sake of storytelling I’ll mention that the annual rate of return was approximately 3%.
And this was post-2009, when the S&P roughly tripled in value in about 10 years. And yes, I understand that the annuity has less risk, and it might be unwise for retirees to sink all their money into equities given the need for security and the lack of a long-term investment horizon. But the stark difference is striking: it’s a gain over 10 years of about 34.4% versus a gain of 200%. Surely there’s a risk balance in there that would have been better.
Finding out about their annuity is when it really hit – I was being way too risk averse with money. I had stashed excess cash in a high-yield savings account while thinking my 401(k) was plenty risky enough. But upon realizing how much my parents needlessly short-changed themselves, I had a moment where I snapped out of it and decided to change course. Not rebel, mind you, but at least to re-evaluate my investment decisions, understand that taking on more risk would be prudent, and implement changes to my approach.
I hope this helps. If just one person reads this and thinks: whoa he’s right!, then I’ve done what I set out to do. Don’t let your parents’ bad habits get in the way of pursuing FIRE or establishing the right balance of risk so that it’s possible to get there.
The FIRE Investor's Guide to Early Retirement 