As the father of seven kids, I often feel like my full-time job is handling minor emergencies.
One day my daughter gets stranded and needs to be picked up from cheer practice. The next our WIFI data plan maxed out and needs to be upgraded. Then the fish tank filter suddenly goes out and the water turned green.
But the other day I was doing my routine check through our family’s finances and I happened upon a REAL emergency. My 19-year-old son David ran up a balance on his credit card. And now he was about to be charged a boatload of interest!
Right then and there I called a family meeting to talk about our money.
As a dad, it’s my job to make sure my kids know how to handle their money. Sure, some lessons have to be learned the hard way. But the more I can help them make wise decisions, the better prepared they will be to live a financially stable life.
I want to open up this meeting and share some of the tips I gave my kids with you, because they’re financial principles that I think anyone can benefit from.
And some of them may even give you an opportunity to pass advice down to the young people in your life who could use a little advice.
Tip #1: Paying interest is (almost) always a bad idea
It turned out that my son David was more on the ball than I thought.
Sure, he had paid for a car repair with his credit card. But he had money in the bank to pay off the balance before the due date. So he had already planned to avoid a big interest charge.
That’s good, because even with market interest rates trending lower, the interest we pay on credit card balances is hitting a new multi-decade high!
One of the most damaging things that people do with their finances is to hold a balance on a credit card. With the average credit card interest rate now over 17%, it’s extremely expensive to have credit card debt. Just think of what you could do with the money if you weren’t paying this kind of monthly penalty!
If you have money in savings or have any other way of getting your hands on cash to pay off credit card debt, it’s almost always a wise financial move to do so.
In short, it usually makes zero financial sense to hold onto debt that you’re paying interest on. Especially if you have money in a savings account that could cover the credit card debt. Typically in this case, you’re earning something less than 2% on your capital while paying 17% or more on your debt. That’s just a bad situation you should avoid at all costs.
I told my kids that the only time I feel good about taking on extra debt is when I’m financing something that will increase in value. And only as long as the interest rate is at a very low rate.
For instance, I’m currently in the process of refinancing our home mortgage. And as part of that refinance transaction, I’m going to be pulling some cash out of our home equity to use for some home repairs that are needed.
These repairs will help increase the value of our house. And with mortgage rates now falling, we’ll get a better deal for paying off this debt over time.
As my daughter pointed out, I could use some of our investment money for the home repairs.
But since our new mortgage rate will be 4.0%, and I can earn much more than that on our investments, it makes sense to pull the cash out of our home. Also, there are tax benefits to a home mortgage when the loan is used to buy a home or invest in renovation projects.
Bottom line, debt can be a helpful tool… but only if used very wisely and very sparingly.
Tip #2: Grow your wealth as efficiently as possible
Since we were on the subject of money and making the best use of our finances, I took some extra time with my teens to talk about investments.
Yep, they rolled their eyes as you might expect. But later, my daughter actually thanked me for helping her understand things a little better.
You’ve worked hard to accumulate your wealth. So it’s important that your wealth continues to work hard for you.
That means making wise investments that can grow your wealth and generate income. The income you generate can be especially helpful as you move through your retirement years. Because that income can naturally offset your day-to-day life expenses.
One of my favourite ways to do this is investing in blue-chip dividend stocks and holding them for long periods of time.
The dividends that these companies pay often grow over time, giving you an increasing amount of income year after year. That helps to offset inflation and can even increase your standard of living as you age.
Meanwhile, the underlying price for the stocks should steadily rise. Sure, there are pullbacks from time to time (which make for great buying opportunities). But in the long-run, these quality companies should have stock prices that steadily grow. This helps the underlying value of your wealth grow over time too!
Talk about a winning combination! Not only does your income increase, but your underlying wealth grows too! That’s the power of compound interest, which Albert Einstein called the “eighth wonder of the world.”
Tip #3: Don’t be afraid of a little risk
On top of steady blue-chip dividend stocks, it’s also a good idea to have some more aggressive growth opportunities. These can carry more risk, but can also give you bigger gains when they work out!
I talked with my kids about taking more aggressive opportunities when they’re young and becoming more conservative as their wealth grows.
One thing to keep in mind is that your more aggressive plays may pay off in a short amount of time. And that means these plays can trigger bigger tax liabilities.
If you sell an investment after holding it for less than a year, you typically pay short-term gain taxes which can be higher than long-term investment taxes.
For this reason, I often suggest buying some of your short-term aggressive opportunities in a tax-free or tax-deferred account like a SIPP. This way, if you realise a big gain in a short period of time, you can sell to lock in your profits. And then you can invest your gains into a new opportunity without having to pay a large portion of your winnings to the government.
Again, this is just being a good steward of your wealth and making sure your money works as hard for you as possible.
There are lots of different ways that you can grow your wealth more effectively and keep more of what you’ve worked hard to earn.
Just remember, living a successful retirement is about way more than just money. It’s about making your money work for you, so you can focus on the things that are truly important to you.