Good Intentions But...

07 Apr 2018 12:52
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My daughter is finishing up her junior year of college and has landed a summer internship at a local bio-pharmaceutical company for $20/hour. Being a year away from graduation and starting a career she took advantage of a guest speaker appearing at her college to discuss financial planning for college students starting a career.

She thought the timing was good and the speaker started with a scenario of starting salary of $60K/year. She thought this was perfect as she expects a starting salary anywhere from $55K to $65K a year. But this is where the excitement ends. After talking about the burden of student loan debt (not a bad topic to discuss with college students) the speaker moved on to setting goals for emergency savings and retirement. This is when the wheels started to fall off.

The speaker gave the normal diatribe of 6 to 12 months of salary saved for emergencies. Unfortunately he is telling a bunch of kids who do not have two nickels to rub together that they need to have $30K to $60K in cash just sitting there doing nothing except waiting for an emergency. If that huge amount wasn’t enough to send them into shock he then jumped into retirement stating at 67 years old they would need, get ready for this, $6.8 million! At this point my daughter said many of the students in the lecture stopped listening and broke out their smart phones to do something else other than listen to him. If I was 21 and heard these astronomical numbers there is no way I could wrap my head around it. This advice must have blown their minds into shutdown or even denial. Who can blame them?

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It is not that the lecturer was wrong in his numbers but just the way he delivered the message. Needless to say my daughter was depressed and in her words "felt like she was already financially failing before even starting a career" so she asked me for advice.

This was the opportunity I have been waiting years for. I do not like to give my children unsolicited advice because it comes off as parent lecturing and the advice usually gets ignored but when they ask of their own volition I know they are ready.

I used cash flow as the basis of our discussion because it is simpler to understand, the numbers are smaller, and the needs are more current (not 45 years into the future). I explained how throughout one’s life the one risk you are always trying to mitigate is the reduction or loss of income with retirement being the ultimate 100% loss. I also told her loss of income is nothing too be ashamed of. Most people will suffer from a loss of income at some point in their lives through job loss, lower pay, or rising expenses beyond your control. One of the elements to reduce this risk is through passive income.

The other piece of advice I gave was not to be afraid of investing as everyone makes mistakes investing and that they key to overcoming those mistakes was consistent savings year in year out. I cannot count how many of my past bad investing decisions have easily been covered up in thanks to constantly saving.

After all of the talk we moved on to the important part of what she really wanted out of me, help setting up savings goals that ended up like this:

  • At Age 25 – equivalent of one month rent in emergency cash ($900), have passive income that equals 1.5% of expenses with 50% being generated in a retirement account and 50% generated in a taxable account.
  • At Age 32 – equivalent of one month of expenses in emergency cash, have passive income that equals 3% of expenses with the same 50/50 mix.
  • At age 39+ - have passive income as a % of expenses that doubles every 7 years with the same 50/50 mix, so at 39 its 6%, at 46 its 12% and so on until she hits 100% at age 67.

These numbers were so much lower and easier for my daughter to grasp. The one thing she liked about it was that it still left room for her to save for whatever else she wanted in life. I didn’t put the idea of early retirement into her head because she is too young and it’s a goal she needs to figure out. But, I did give her a few books on dividend growth & passive income investing to help her along and offered up helping with investing decisions when she is ready.

At the end of the day this conversation is the same that her guest lecture just delivered ($6.8M) but in a different way and in smaller amounts. Hopefully she takes the advice and with me leading by example she starts life off on the right foot but time will tell. As a parent I cannot help wanting to protect & help her but if I help too much she will not learn. I definitely underestimated what it would feel like being a parent to an adult child. Though I am proud she made a decision to seek advice so early on in her life and that she respected me enough to ask.

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