You're 22 now, kid. You're going to college. You've got your whole wonderful life ahead of you. The cliché "the world is your oyster" was written just for you. In the words of my professional language, you are "individuating" beautifully; you're becoming your own man.
Dad and I have talked to you about personal responsibility, citizenship, education, safety and relationships. One area that we haven't covered in as much depth has been managing resources. As you complete your transition to adulthood, there are a few things you should hear from us. Managing your financial future is about values and choices. These are different for each family. I'm going to tell you about the values in our family-and tell you why other families may have another worldview. Then your job is to define these values for yourself.
One piece of wisdom I hope you have absorbed from us is this: don't confuse "having assets" with "the appearance of having assets." It's a trap. Some of your peers-and even some of our peers-drive brand new cars, live in twice the home they can afford and take exotic vacations. Yet, when many of these same people disclose their financial worries at a vulnerable moment, you will hear stories of debt and despair. Uncle John, our family CPA, has a theory about this; he wonders if all of the home decorating, travel and shopping programs on TV are a kind of "consumer porn," raising the lifestyle bar too high for us all.
Let's talk about houses and cars, for example. Several years ago, when I was an academic adviser, part of my job was to help students think about how to finance their education. I remember one young man, about your age, who wanted desperately to go back to college, but he said he didn't have the money. When I started to ask him about his finances, I found out he had a brand new pickup truck for which he was paying over $300 per month. I suggested that if he sold his pickup and bought a reliable beater, he could afford to go back to school. He looked at me as if I were insane! "Sell my pickup?" It was unthinkable.
His truck cost way over $20,000. With that amount of money back then, he could've earned an entire Bachelor's degree. Then, every year thereafter, his likelihood of being able to really afford a new pickup would get better and better. According to a 2002 report from the U.S. Census, each level of education you attain pays off big time. The average annual salary for a high school grad was $25,900. With a Bachelor's degree, it was $45,400. http://www.census.gov/prod/2002pubs/p23-210.pdf . Look at those numbers. With a Bachelor's degree, my advisee had the potential to recoup most of the cost of his pickup in one year. But there was some reason that driving that new truck was essential for him.
Now compare that situation with that of my dear friend and coworker, Jason Samuels. This young man didn't start life with a lot of money. But through hard work and strategic moves, this Genny Xer is now in an enviable position. He went into the Navy after high school, because he wasn't quite sure what he wanted to do. Then he worked himself through college, waiting tables, as he completed his Bachelor's degree. When he started working at NCFR a few years ago, he was "squeezing his nickels 'til the buffalos squeaked." A couple years ago, as a result, he was able to buy his first starter home.
But to illustrate my point about investment choices, consider Jason's choice of transportation during this period of time. Jason said I could publish this photo of his last car with this article, because you have to see it to believe it. It was held together by rust, BondoTM and prayer. Here's the actual wording he used in the "for sale" ad on Craig's ListTM. You'll want to remember this, Eric, because you'll be able to use the same spiel if you ever need to sell your mother.
"It's old, it's ugly, it has bad skin, a huge trunk, and a couple of hideous dents. It's a 1994 Dodge Shadow, with 130k miles on it. All maintenance receipts kept ... Did I mention this car is ugly? But it's very dependable."
Jason had discovered a valuable truth; in terms of an appreciable asset, cars are a poor choice. In the middle class, a home will probably be a family's most valuable asset. What's in the garage-or inside the house-is less important. When Dad and I started out, the only decent piece of furniture we had was the piano. Everything else came from thrift stores. What we were doing was paying for our house. Almost every month, we sent a little bit extra money into the mortgage company than we needed to. It's astonishing how much you can save over the life of your loan. I asked an accountant friend to run some numbers for me:
In a $200,000 loan over 30 years at 6%, you pay back not only the $200,000 loan, but all of the interest on it ($231,676.38)-more than the amount you borrowed in the first place. If you send in $100 extra each month, you save over $48,000 and your loan is paid off in less than 25 years. If you can send in an extra $200 per month, it gets even better. You'll save almost $80,000 over the life of your loan-and your house will be paid for in 21 years!
Never forget, though, that your financial well-being is predicated on blessings such as good health, secure employment and luck. At any moment, any of these can be temporarily or permanently disrupted. However, if you live below your means, crises are easier to bear. When a mortgage company approves an amount they're willing to lend you for a house, that number represents the risk the lender is willing to take-not the amount that will help you sleep well at night.
This all sounds prudent, but Dad and I are hardly nominees for sainthood. We still make some bonehead choices. We have one particularly stubborn vice. Financial advisers will often tell you that one of the first things you should drop when you need to economize is Cable TV. This is true. But I admit this would be one of the last things we would dump at Casa Gonzalez. We're all news junkies. Our lively political and current events discussions keep us alive. And if I had to spend one Minnesota winter without Comedy Central, I don't think I'd see spring.
These are a few principles for building assets. Throughout your life, however, you will see people who aren't able to prosper. Some have no opportunity. Some have opportunity and then have a devastating setback. Some have the opportunity but never seem to be able to get it together. You've heard me say that a car is a relatively poor investment. But think about the value system of those who believe that a house will always be beyond their grasp? How would a nice car feel to someone who will never own a home? How would having a decent car feel if you had to live in it occasionally?
When I hear fortunate people disparage these folks because they are unable to make use of "delayed gratification," I get angry enough to gnaw on my purse strap. Immediate gratification makes a lot of sense from one point of view. A 30 year mortgage won't seem relevant to someone who won't live 30 years-or someone who believes that he won't live 30 years. Think about a guy who lives in a community where many of his peers end-up incarcerated or murdered. For him, a nice car might indeed last a lifetime.
Another choice Dad and I made was to skip the expensive wedding and spend our money on things that would last more than one day. Our wedding cost $500. But there are some lower socio-economic cultures in the U.S. for which the wedding bash with all the trimmings is a huge marker for "making it." Without this lavish rite of passage, the couple is subject to ridicule. They're considered foolish and not ready for marriage. Never look down on these people. The price tag on dignity is very high for some. What you can do is set a counter-example and bring dignity to thrift. Live cheap and live proud! If we all bragged about being frugal, we might set a new trend. My favorite suit-the one I get the most compliments on-cost $3 at Goodwill. You've grown up watching me give Dad all of his haircuts. Granted, his hair looks like it's been styled by a non-profit administrator, but so what? He's a software engineer-not a talk show host.
Finally, no matter how lean you're living, try to donate something regularly-even if it's not much at times-to a charity that works to level the economic playing field. Pay your taxes cheerfully. Mentor others socially. You were given loving parents, a clever mind and a good childhood. To whom much is given, much is expected, so give back. You won't regret it; somehow the universe keeps track of these things. The goal is not to reach the end of one's life with a pile of money. You can't take it with you. Grandpa always said, "you'll never see a trailer hitch on a hearse."
There's so much to know, but you'll figure it out. It's OK to make some mistakes. We did. Run along and have a great life, Eric. Just one last thing, and it's from the "I've got good news and bad news" department. The good news is that I'm willing to buy you your first car. The bad news? It's going to look like Jason's.