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Tuesday, March 5, 2024

Investing in Parenthood: The Dilemma of Frugality vs. Enjoyment

Most responsible adults who want children will aim to save and invest as much money as possible before becoming parents. But after being a parent for six years, I realize this advice may not be ideal for living your best life.

Everyone knows that raising children is expensive, especially if you live in a big city. From the cost of childcare to preschool, to university. Parents better save a lot of money if they want to give their children a good chance of making it!

But a growing conflict has arisen within me that now seems too big to ignore. It’s the battle between frugal spending to lead by example and spend more to enjoy life.

Children Observe and Absorb Parental Habits

You might not think that your kids are watching your every move, but they are. So if you’re wondering why your kids are always on their phones or iPads, it could very well be that you’re always on your electronic devices.

My parents’ frugal habits have stuck with me since I was six. No drinks when we eat out, just water. Wear my hats, shoes and t-shirts until there are holes in them. Eat every morsel of food on our plates so as not to offend the millions who are malnourished.

The great thing about being a frugal parent is that your children will likely adopt frugal habits too. It’s almost impossible not to do it after 18 years of living together.

Once the foundation for frugality is laid, your children will increase their chances of achieving financial independence on their own. In turn this will give parents mental relief and reduce anxiety.

In addition, we want our children to experience the pride and joy of making something of themselves. When everything is given to them, they can feel this way deadly losers without a goal.

But most of us get richer as we get older

Although children are expensive, most households still become wealthier after having children. That’s the nature of investing and working. The more time invested in the market, the more time invested overall increase your wealth. The more time you spend at work, the more raises and promotions you will receive.

Although I don’t have a day job, I did quit my job in 2012 100%+ of my net worth invested in risky assets due to mortgage debt. Thanks to the luck of a ten-year bull market combined with frugal spending, my wealth has grown.

I’m also 11 years older, which means I have 11 fewer years to live. This naturally makes me want to spend more money on experiences and things I don’t need.

Although we, for example Bought a larger house in 2020, I long to buy an even nicer house a few years later. Our car will be 10 years old in 2025. Ideally I would like to buy the latest Range Rover. But that car would cost about $130,000, an absurd amount.

At the age of six, my son begins to understand more about the way the world works. He realizes that some people don’t have a home, don’t have a car and can’t afford to get on a plane to go on vacation. Three years from now, when my daughter is six, she will probably realize the same things.

Buying any of these unnecessary things can jeopardize the thrift habit we try to instill in our children. Owning these items can also make me seem selfish, as there is so much suffering in the world.

The lesson of keeping housing costs low for FI

Instead of buying a bigger house that costs 100% more, it might be better to just live in our current house until both children have moved out (2038). In this way, our current home is the only one my children will ever know.

They will come to understand that even though their parents became wealthier over the next fifteen years, they were frugal and kept their housing lifestyle the same. By middle school they will understand that our housing costs as a percentage of income or net worth continued to shrink over time.

Limiting housing costs to 10% or less of your income is one of the most important strategies for achieving financial independence. Many people spend 30% to 50% of their income on housing. This percentage ensures that they stay on the hamster wheel longer.

Another important strategy is to keep the purchase price of your home the same 30% or less of your net worth. Going through the trouble of buying a house has caused countless financial problems and restless nights.

Following these two housing cost strategies will pay huge dividends after your children are on their own.

At the same time, however, I have advocated that the best time to buy the nicest house you can afford is if you have children. More heartbeats at home make better use of space and amortize costs. And life is more fun when you live in a nicer home in a nice neighborhood.

The lesson of owning a cheap, reliable car

Once a family has housing costs under control, transportation costs are the next issue to be addressed. Americans have a love affair with cars. I have become one myself car addict in his twenties by buying and selling another car eight years in a row!

With the average price for a new car being around $50,000, paying too much for a car is one of the most common personal finance blunders. As someone who deals with the 1/10th rule for car buying. I should lead by example.

The longer we own our vehicle, the lower its value is likely to be as a percentage of our income. This reality can help prevent our children from spending money on transportation. Owning an old car can also help… spirit of stealth wealth.

Drive by leading by example

Let’s say I own my car until 2030, or until it’s 15 years old. It might be worth $10,000 at that point, but my passive income might have grown to $450,000. The car would be worth only 2.22% my passive income. I can afford to buy a $45,000 car, but why bother if my current car is still safe and drives well?

If my kids want to own a car after their 16th birthday, it’s easier for me to tell them to get a job that pays 10x the cost of the car. If they object, I simply point them to our current car, which they have driven all their lives. They will have no choice but to work for what they want.

Then, hopefully, when my kids head out on their own, they’ll think three times about spending money on a car with their first full-time paycheck, like I did. Perhaps they are big proponents of public transportation or autonomous vehicles with safer technology than the average human driver. If so, they can use their savings for that fund their Roth IRAs or maxing out their 401(k)s.

Safety is a big issue for me because a childhood friend died at the age of 15 while driving at high speed. Driving in a big city is chaotic. Teens drink, smoke weed, text and do other distracting things while driving. I don’t like it at all when my teenagers drive.

The lesson of keeping FI travel costs low

The last expense you will struggle with is travel expenses. My wife and I don’t fly first class, so there will be no conflict here. Every hour we don’t fly in First Class feels like making money by doing nothing! The most we’re likely to do for a family holiday is pay for Economy Plus.

Paying a lot of money for a hotel is also painful, because we like to explore all day long. Besides, the main things we do in a hotel are showering and sleeping, so why pay a fortune? A three or four star hotel is good enough.

My wife and I traveled light and cheap for decades before we had kids, and it was so much fun. We long to go on adventures again once our children are old enough to appreciate and remember (8+ years old).

Cover your expenses before and after having children

The more you care about raising financially responsible children, the more afraid you become of spending money on luxuries. I define luxury as anything beyond the basics, for example first class instead of economy, Rolex instead of Casio, etc.

At the same time, you don’t want to suppress your lifestyle too much when you’ve worked so hard to accumulate your wealth. That’s why it makes sense to spend a lot of money on travel, houses, clothes, watches, jewelry and nice cars before having children. It’s a hedge against 18 years of sobriety once you have children.

You just need to plan to have enough money to raise your children comfortably when they come. Have a… target power before having children is one idea. Continuing to work during their student years is something else. Once your children arrive, you can become more frugal while you focus on taking care of them.

The perfect time to splurge after having kids

An alternative solution is to buy the best of everything by the third year after your first baby is born. After all, children don’t remember much from before their third birthday.

Lock up that mansion, buy your favorite luxury car and own the nicest toys. This way, these are all the things your kids will ever know. You can then own these items until they go off to college and never have to spend on anything better until they do.

If your Ferrari breaks down in year 12, you can buy a new one without any problems. Since it’s already one of the most expensive cars, it won’t seem like you’re spending money. In fact, you have many more options to lower the price, like with a BMW, which could be seen as a frugal move by your kids.

The same applies to living in a mega villa. If you decide to downgrade from a 10,000-square-foot mansion to a still-huge 7,000-square-foot house during their sophomore year in high school, your kids may also see this as a wasteful decision.

Ironically, starting your child on a high basis can help them better appreciate the changes you’re about to make, since everything gets old eventually.

Or just feel happy with enough

Writing this post makes me a little more motivated to upgrade my car and my house since my daughter is only three. Enjoy your life from 45 to 60 years! These are the most important years of my life.

But at the same time, it feels great to own a high-paying, eight-year-old car. It has only 42,000 miles on it and could easily last until its 15th birthday, in seven years.

During the 2022 bear market, I found it comforting that our home represented less than 15% of our net worth. I didn’t experience any stress paying for our current house, which is different from how I felt during the Global financial crisis of 2008.

At the time, I had gone all in on a house in December 2004. I only got through a good two years before I started sweating that I might lose it all! After that period I promised that I would never overextend myself that much again.

If my kids and wife are happy in our current home, that should be good enough. Learning how to better appreciate what we have is an important skill.

Be careful when you are young

When you’re on a budget, every dollar spent has a bigger impact. That’s why it’s normal to want to spend more in your twenties and thirties. Just don’t go overboard.

Because of my car addiction in my twenties, growing up abroad for thirteen years and constantly traveling for work until I was 34, I don’t feel like I’ve limited my life too much.

Sure, there were nights in New York City when I turned down invitations to save $100 on food and drinks. But for the most part, I feel like I’ve spent enough to enjoy life.

Further, at the age of twenty-six I bought my first property cost me $464,000 in mortgage debt. So overall I spent way more than I had! And because I loved this two-bedroom apartment overlooking a San Francisco park so much, I felt like my money was well spent.

Balancing our expenses before and after having children is difficult. However, if we have a financial plan before having children, we are likely to live a financially responsible life before and after having children.

It is up to parents to continually educate their children about the realities of life. We need to explain how the decisions we made when we were younger led us to our current situation today. And when all else fails, we can differentiate between our money and their money.

If they want something beyond the norm, they have to figure out a way to get it themselves. Finally, you might get a kick out of the Rich Kids Of Instagram show. I really wonder how these kids feel when the cameras aren’t rolling.

Frequently Asked Questions – FAQs

How can I balance frugality and enjoyment while raising children?

Find a middle ground by instilling frugal habits while still enjoying life’s experiences.

What are the key strategies for achieving financial independence with children?

Limit housing costs, manage transportation expenses, and keep travel costs reasonable.

Is it advisable to spend more before having children or after?

Consider a balance; plan to splurge before kids arrive or gradually upgrade as they grow older.

How can parents teach financial responsibility to their children?

Share life decisions, explain financial plans, and differentiate between parent and child finances.

Why is maintaining frugality when young important?

Early financial decisions impact the long-term financial health; balance spending wisely in youth.

What’s the significance of housing costs in financial planning?

Keeping housing costs low is a crucial strategy for achieving financial independence.

Sources & Idea Inspirations:

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