If the foundation of sound financial habits can be shared with the children of our current clients, before they reach adulthood, our job as financial advisors will be made simpler and our impact on their lives more significant.
I recently had to ponder how to get across the concept of financial planning to a group of young adults in a way that would resonate with them. My 18-year-old son recently finished writing matric and a group of parents chose to give an hour of their time to share their skills with some of the school leavers. Among the parents, one was good at etiquette, another was a braai master, another was a chef and my expertise is financial planning.
I spent a considerable time mulling over how to approach the very broad area of personal financial planning with the young adults. I considered telling them about the different funds and how to open a stockbroking or unit trust account; the importance of investment or tax planning; or the need to have risk cover in place for catastrophic events such as a disability or cancer. None of these seemed particularly inspirational or insightful… particularly to 18-year-olds chomping at the bit for their independence.
I started thinking about the concept of wealth and what it means to people. At the time I was reading a brilliant book called The Psychology of Money: Timeless lessons on wealth, greed and happiness by Morgan Housel. He believes that people’s behaviour with money largely determines how well they manage their finances.
I pointed out how people who achieve success in their work and greater financial means, rush out to buy luxury cars, houses and boats to show off to their family and friends as a demonstration of how well they have done. So many of us believe that this is wealth, but it’s not. This view is compounded by social media.
Housel says this type of spending is driven by EGO and PRIDE and behind it sits a yearning for recognition and respect of family, friends and the broader community. They spend money on material goods to try to earn respect. The irony is that you cannot earn respect this way. Acting with humility, integrity and being respectful to others are more likely to earn you respect.
So I decided to talk to the young adults about the true meaning of wealth.
TRUE WEALTH is the freedom to change your career, country, relationship or job at any time.
It’s about having the financial resources to deal with the many curveballs that life tends to throw at us, such as leaving a relationship that has turned sour or quitting that job with a toxic boss. It is about being able to weather the unpleasant surprises that life will throw at you, such as redundancy, disease, divorce, recession, market dips or a major health upset.
True wealth will also spare you from the severe anxiety of not having the money to deal with life’s blows when they arrive. Wealth gives you freedom to make choices: it allows you to spend time with who you want, where, when and how you want. So how do you achieve true wealth?
You can only build wealth if you can stop the urge to have fun with all your money today. This involves an important balancing act… a balance between what you spend today and what you save for the future. It is built on suppressing the urge to buy something today to have more options/choices in the future.
Many of the school leavers were planning to enter tertiary education and their parents would likely give them an allowance. I urged them to make a budget and stick to it and reminded them that this would involve trade-offs – such as foregoing a night out with friends to pay for books or food. For those that were planning to take holiday jobs, I encouraged them to save a portion of the money they earned. Then, by the time they earned their first paychecks, they would already have built the habit of saving a portion of all the money they earned.
In recent years, there has been a move from quantity in life to quality of life; from spending money on things to spending time with loved ones. In this way you can have fun and enjoy a quality life, without overspending.
Following the talk to the school leavers, I invested some money for my son in a tax-free savings account. I told him that this was the start of his freedom fund. I told him he was not allowed to spend the money on buying a car, or a property or even to pay for a wedding.
This fund is to give him the freedom to make life choices in future.