Socrates and the Next Generation of Wealth

To a teenager, 30 is old, 40 is ancient, and folks over 50 made stone arrowheads.

Worse, the gap between older people and younger people has broadened with technology. Our best financial lessons can be as out of step as a senior citizen at a rave: “All you need to do junior, is invest just $100 per month. By the time you’re old enough to wear diapers again, you’ll have a million dollars.” We don’t mention the word diaper, but when kids think of delaying gratification until the seventh decade of life, that’s what they hear.

Rather than trying to reduce personal finance to a 140 character text message, I’d like to suggest an alternative:

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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10 Responses

  1. Eric Johnson says:

    Andrew, I agree that saving is badly marketed and I worry that even your approach is not exciting enough. As you say the problem is people (myself included) don't care about saving for an event 7 decades in the future. I'd love to see you write about this kind of math:

    Several bloggers (like Mr Money Mustache or ERE) have demonstrated going from zero to retired in 5 or 10 years without ginormous salaries. They do it by quickly saving up a largish lump sum and living off the interest. This doesn't require a huge salary and this kind of math is never talked about. Thats disappointing because I think its much more exciting.

    As a weekend side project I created a tool / interactive chart which demonstrates this kind of math. It is a twist on the traditional retirement calculator with the goal of getting regular earners to see they can retire in only 10 years if they pay attention to their savings rate:

  2. Thanks for the link Eric. It's pretty cool. Is there any way to calculate inflation into the equation? And what investment rate of return is being used? When you conclude that a person needs "X" dollars to retire, how do you determine that calculation?

  3. Eric Johnson says:

    If you click the 'More options' link you should be able to modify the 'Withdrawal rate' and the 'Annual return on investment'. The default is a 5% return with a 4% withdrawal rate.

    Inflation and taxes are on my todo list because people keep asking for that. I'm unsure of the value of predicting future inflation, taxes, and investment returns separately from predicting overall future returns. If its one input or three separate inputs its still all a wild guess isn't it? I'm unsure that its more or less accurate…?

    I've been meaning to write up the math somewhere. The actual equations I use are derived from this blog post and from wikipedia. Algebra + natural logs.

  4. I deal with this sort of teaching situation all the time as a high school business teacher. You hit the nail on the head when you talked about them not caring if they were millionaire at 50. We have to try to remember that the teenage brain has a difficult time even understanding the consequences of not preparing for a test a week from now, nevermind 30 years down the road. The example I usually use it to take the cost of a pack of cigarettes (something many of them can grasp as it a reality that either they or a close friend find the money to purchase 2-4 packs a week) and show how various levels of smoking would translate into various investing scenarios. Usually I'll begin by showing that in 7-8 years they could afford the biggest truck on the car low with all the bells and whistles (again, something tangible that they can value in their head). After this we branch out a little more, and start talking about millions etc., but first it has to engage them.

  5. kunwak says:

    Hi Andrew, I agree it's important to understand compounding. However, I think you should mention that the end result is a strong function of the interest rate. You picked 9%, shich may seem very high these days (in particular youth which may be in a "high-interest" savings account at <1.5%). So an interesting question is: What average return does Tim need to be better off than Lisa? It's about 6%. Anything less, and Lisa wins the rat race.

    • You're probably right Kunwak. But I don't think of returns in terms of "these days" rather than looking at long term historical averages. From 1965 -1982, the markets didn't budge for 17 years (with the exception of dividends) yet from 1955-1990 (a duration of a working career) the market returns still averaged about 9%. I would say the same thing from 1985-2012 (roughly a 9% return)….and I think we'll be able to say the same thing from 2012-2040. Current returns are somewhat irrelevant. That said, your calculations are correct.

  6. Oldie says:

    Andrew: we've talked before on the Couch Potato website; I was a complete naive a month ago when I stumbled on your magazine article and bought your book. I have just retired now, and the first part of your book, fortunately I didn't need as I had already learned, more or less, from the Wealthy Barber book 20 years ago. But the 2nd part has changed my life and I am now busily learning the nuts and bolts of passive index investing.

    I agree with you that it is a real challenge connecting with the younger generation, and I can assure you, I am much closer to the diaper age than you lol.

    But when my kids were young, as soon as they had mastered the math skills to understand compound interest, I set them on the task to calculate who ends up ahead: Twin A, who starts investing $100 a year @ 10% interest for 10 years then quits contributing, (but keeps on compounding the accumulated wealth) or Twin B, who starts contributing $100 a year (@ the same 10% interest rate).

    My wife, who also read your book, recommended it to my daughter (she is 27 now), who bought it, and in my discussions with her, she really gets it. She also clearly remembers the Twin A and Twin B puzzle! So it is possible to teach the young, but admittedly it's difficult, and somehow you have to be credible to them. Continued success to you!

    • Hey Oldie,

      Thanks for the kind words about the book. You obviously did a great job teaching your daughter the importance of compounding money early on. I think she remembered its importance because you asked her to figure the answer out on her own. She took ownership of the problem and solved it herself. Very cool! How is your daughter doing now, financially?

  7. Oldie says:

    It's hard to judge because the 20+ generation seems to have higher requirements for "bling" as a group, even taking into account the effect of moderating conspicuous consumption by example and by education. As an example, when she went travelling with University friends in Europe, one friend who did the booking for lodging commented that her parents would be impressed that she was living in such down scale accommodation, my daughter burst out laughing — this was by far the most luxurious hotels she had stayed in compared to the flea bag dives in Asia and the hostels in UK and Ireland that our family had dragged her through on our budget travelling!

    But, she got through University with minimal help, got Alberta Govt subsidies by getting >80% grades last 3 years of high school (our insistence!). Basically had very little encroachment into RESP that we built, so we gave her the excess proceeds, which she invested. Got a year (between 3 & 4th yr) employed (i.e. fully funded) in Zurich, Switzerland as an intern at the Zurich Institute of Technology, but benefited from a year of really cheap travel and I think 6 weeks paid leave!! On graduation as an Engineer in 2007 she got a job right away and lived w her BF who is a computer geek, so they have relatively high cash flow and seem to travel and ski a lot, by my standards. They are just finishing a year travelling in New Zealand, which seems really early in her career to be taking time off, but to her credit, both she and her BF are working 20 h/week on-line during their trip, which was an unexpected bonus, as they had budgeted for no income. I know she makes careful decisions re merits of RRSP's and paying down mortgage early vs line of credit etc. I had a huge inheritance come in and as a considered decision, decided to pay out her mortgage for her. This was a tough decision, but we figured that if she didn't have her financial attitudes right by now she never would be. I told you my wife sent her the title of "Millionaire Teacher — 9 lessons.." which she got and read last month. She sent us an e-mail about the book; I think how she words it herself says it best:

    "I'm a couple chapters into this millionaire book and am really enjoying it! So far he's mostly just reinforced things I already knew (thanks to some wise schooling from my parents) but it's laid out in a really readable and to-the-point manner, with practical ways of applying the knowledge. I've already started a list of things to do when we get back, like set-up automatic investments from each paycheque (Into what? Hopefully future chapters will tell me!). This was something we had already planned to do: take money that was going into mortgage and redirect into investments. But now I'm inspired to set it up asap. Of course, this will first require actually getting a paycheque…we are still owed money from our job since jan! This will hopefully be sorted out very soon.

    Financially, our current adventure in NZ was not a great idea. I have been tracking our expenses to keep us responsible, but although we are trying to live cheaply, many of our activities and the trip itself is quite the luxury. But obviously it is rewarding in other ways, so instead of fretting over the "wasted" money, I plan to just enjoy the rest and start the more responsible saving when we return to regularily scheduled life 🙂 I hope to keep up the expense tracking too, at least to some degree. The book is right in saying how it's easier to spend wisely when you know where your money is going.

    Whenever I read the parts about how giving money to your children will ruin their financial sense, I feel paniced "on no, that's me!" You've certainly given us lots of help, with setting up our mutual funds and helping (name of BF) and I with the house. Would we have "made it" without the help? Hopefully yes, but now we have a huge head start to being debt-free and well-invested. So thank you for that! And I plan to beat the odds and not squander my advantage ungratefully, but instead continue saving and investing wisely :)"

    I think that basically, she's got it; in fact, recognizing your book as a valuable resource is a sign of that solid financial grounding, I hope. So, yes, looks like you got yourself another fan!

    • Oldie,

      I often wonder what age would economic outpatient care not be a hindrance. Thomas Stanley suggests that adult children who receive financial help become less financially productive, but in situations like yours and your daughter's, there's a variable that Stanley didn't isolate. The adult children who receive economic outpatient care likely received it as kids also. Your daughter didn't. So, if her financial habits are aligned, she might benefit, rather than be weakened by your help. We know that when easy money comes to adults (sports stars, lottery winners) the money usually gets squandered. But most sports athletes who become bankrupt and most lottery ticket purchasers didn't value money in the first place, or at least, they didn't know how to manage it well. Your daughter already knows, and for that reason, she'll likely benefit from your help. You raised her well!

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