Help the Next Generation Avoid Money Madness: Tens of millions of gray hairs must point the way to MoneySense

It’s up to, seniors, to save the kids or someday they will be miserable, living their last years in poverty.

That’s what I concluded as I returned from a lovely cruise down the Danube with hundreds of other old people. These are people with at least a decent amount of assets or they would not have been able to afford the wonderful, but pricy trip.

I heard numerous troubling stories about the money woes of their sons and daughters.

“My daughter,” said one worried man, “makes a good living but has nothing in savings and assets. Said another: “My son makes $125,000 a year, yet he has some $30,000 in credit card debt,” one woman worried.

I noted that, at 20 percent credit card interest, her son is paying some $6,000 a year in interest.

That needless interest, if it were avoided, could go into building savings and investments. They could gradually take her son down the road toward financial independence. I heard numerous other similar stories of young people. Many otherwise quite intelligent young people are headed for financial woes; maybe not today, but in the years after their parents will be gone and won’t be able to save them.

We Can Make a Difference, but Will We?

Those of the older generation, those of us responsible enough to have reached financial independence, often must provide the financial education for these young people. That’s because most young people don’t learn about money in school. It is a disgrace that most public schools don’t require a young person to take any money management courses.

So, in many cases, unless parents or grandparents or sage elders show young people the responsible ways to spend, save and invest, unless we share with them our experiences of saving and investing, then the worst practices of our generation will be visited on the next generation. What responsible parent or grandparent wants that?

It’s not Just the Young

My generation—the Baby Boomers born between the end of World War II and 1964—has many examples of the same self-destructive policies of this generation. Indeed, I am thinking of the millions of elderly Americans who only have Social Security as their income. They have no personal savings. Living in a place like New York with such a measly income is horrible.

Our goal, as responsible MoneySense people, is to help the young generation avoid the woes of our generation. And this young generation has plenty of money problems.

Generation X Falls Behind

I speak of the millions of Americans, young and old, who have less than $5,000 in cash. I mean the people with modest incomes, yet many of whom have cars they don’t need. This is a tremendous burden when you live in a place like New York City, where city and state officials are constantly looking for more and more ways to cage money from taxpayers, especially those who own cars.

Many of the young people who live in big cities are not building assets. This is partly because they lack the spending discipline needed to accrue assets. But it is also partly because no one has shown them how it is done. Many are headed for financial disaster when their prime earning years are gone.

That would be a tragedy; one that the responsible people of our generation should work to avert by seizing every chance to educate the coming generation. It can and should begin en casa.

An “Oldster” Who Makes a Difference

I want to give an example of a financial advisor I know who is taking steps to educate his children in ways that will benefit them for decades. And putting good habits in place early is really the key to accumulating a sufficient amount of assets to reach financial independence.

As we have said many times here at GregoryBresiger.com, it is the compounding effect—how early it starts and how long it takes place—that is the key to accumulating enough so one no longer has to ride the E-train 10 times a week or get stuck at a horrendous job with a boss from hell.

Anthony Ogorek is a certified financial planner in upstate New York. I have known him for years. He is a commonsense adviser whose comments and analysis I have used from time to time in writing about financial products and advisory issues. He has not only educated his children; he has helped them get started. He is shortening their trek down the road to financial independence by showing them how to get started. When his children had part-time jobs in their adolescence, he had them start IRAs.

A Wealth Secret

So, let us consider the qualified retirement account and the average young person. One of its benefits is that the compounding effect of twenty or thirty years can generate huge amounts even if the rate of return isn’t fantastic. What makes it work more than anything else is the number of years of compounding. Most people, advisors have told me through the years, usually don’t get serious about IRAs or other qualified retirement accounts until their 40s. So maybe they will have 20 or 25 years of compounding before they start drawing down their accounts at age 59.5 (By the way, through the years GregoryBresiger.com has recommended not to touch qualified accounts before age 59.5 to avoid penalties and premature taxes. But one can, and should, leave them alone until age 70.5, allowing 11 more years of compounding).

However, in the case of Ogorek’s children, compounding will not take place for 20 years but for twice as long; for 40 years and maybe longer! Following their father’s advice and assuming moderate market returns will repeat over the next four decades, they will likely never have to worry about living well as they age.

For instance, let us take the average person who starts saving in his or her 40s and does so for 20 years. He or she saves $500 a month, earns nine percent a year—about an average return—and ends up after twenty years with some $336,000. By contrast, Ogorek’s children start twenty years earlier and will have 40 years of compounding.

Let’s say they save at the same pace—$500 a month—and earn the same nine percent a year. In forty years they have a lot more. They have $2.358 million, about two million dollars more because they started sooner. Actually, they could end with somewhere between three million and five million dollars if they continue saving for 50 years, which they might do.

Ogorek’s children will be saved because he is a superb financial educator; someone who doesn’t depend on egregious state schools to provide his kids with the money education every young person needs.

It’s up to you parents, grandparents. Are you up to the challenge?