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Wednesday, June 12, 2024

Before Having Kids, Consider Spending Lots Of Money

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

Everybody knows raising children is expensive, especially if you live in a major city. From the cost of childcare, to preschool, to college, parents better save a hell of a lot of money if they want to give their children a good chance at making it!

But there has been a growing conflict inside me that now feels too large to ignore. It is the battle between frugal spending to set a good example and spending more to enjoy life.

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Children Observe And Absorb Parental Habits

You may not think your kids watch your every move, but they do. So when you wonder why your kids are always on their phones or iPads, it might very well be because you’re always on your electronic devices.

My parent’s frugal habits have stuck with me since I was six years old. No drinks when we go out for dinner, only water. Wear my hats, shoes, and t-shirts until they have holes in them. Eat every morsel of food so as to not insult the millions who are malnourished.

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

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

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In addition, we want our kids to experience the pride and joy of making something of themselves. If everything is given to them, they might feel like deadbeat losers with no purpose.

But Most Of Us Get Wealthier As We Get Older

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

Although I don’t have a day job, I did leave work in 2012 with 100%+ of my net worth invested in risk assets due to mortgage debt. Thanks to the luck of a 10-year bull market combined with frugal spending, my net worth has grown.

I’m also 11 years older, meaning I have 11 years less to live. As a result, I naturally want to spend more money on experiences and things I don’t need.

For example, although we bought a larger home in 2020, I’ve been itching to buy an even sweeter home just several years later. In 2025, our car will be 10 years old. Ideally, I’d like to buy the newest Range Rover. But that car would cost about $130,000, an absurd amount.

At six years old, my son is starting to understand more about the ways of the world. He realizes some people have no homes, don’t have cars, and can’t afford to get on an airplane to go on vacation. In three years, when my daughter is six, she will likely start realizing these same things.

Purchasing either of these unnecessary things could jeopardize the frugality habit we’re trying to instill in our children. Owning these items might also make me appear selfish given there is so much suffering in the world.

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The Lesson Of Keeping Housing Expenses Low For FI

Instead of buying a larger home that costs 100% more, it may be better to just live in our current home until both kids are out of the house (2038). This way, our current home is all my kids will ever know.

They will come to understand that despite becoming wealthier over the next 15 years, their parents were frugal and kept their housing lifestyle the same. Around middle school, they will understand that our housing expenses as a percentage of income or net worth continued to shrink over time.

Keeping housing expenses to 10% or less of your income is one of the key strategies for achieving financial independence. Plenty of people spend 30% – 50% of their income on housing. This percentage keeps them stuck on the hamster wheel for longer.

Another important strategy is to limit the purchase price of your home equal to 30% or less of your net worth. Stretching to buy a home has caused countless financial hardships and restless nights.

Following these two housing expense strategies will pay huge dividends after your kids 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 when you have kids. More heartbeats at home better utilizes the space and amortizes the cost. And life is more enjoyable when you live in a nicer home in a great neighborhood.

The Lesson Of Owning An Inexpensive Reliable Car

Once a family has their housing expenses under control, the next beast to tackle is transportation expenses. Americans have a love affair with cars. I myself became a car addict in my 20s by buying and selling a different car for eight years in a row!

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

The longer we own our vehicle, the lower its value will likely be as a percentage of our income. This reality may help prevent our children from splurging on transportation. Owning an old car may also help instill the spirit of stealth wealth.

Driving By Example

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

If my kids want to own a car after their 16th birthday, I can more easily tell them to get a job that pays 10X the cost of the car. If they object, I’ll just point them to our current car, which they’ve ridden in their entire lives. They will have no choice but to work for what they want.

Then when my kids are off on their own, they will hopefully think thrice about splurging on an automobile with their first full-time paycheck. Maybe they’ll be big proponents of public transportation or autonomous vehicles that have safer technology than the average human driver. If so, they can use their savings to fund their Roth IRAs or max out their 401(k)s.

Safety is a big one for me because a childhood friend died while driving at high speeds when he was 15 years old. Driving in a big city is chaotic. Teenagers drink, smoke pot, and do other distracting things while driving. I don’t feel comfortable having my teenagers drive at all.

The Lesson Of Keeping Travel Expenses Low For FI

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

Paying big bucks for a hotel is also too painful because we like to be out exploring all day. Besides, the main things we’ll do in a hotel is shower and sleep, 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 having kids and it was so much fun. We long to go on adventures again once our kids are old enough to appreciate and remember (8+ years old).

Hedge Your Spending Before And After Having Kids

The more you care about raising financially responsible kids, the more you may fear spending money on luxury. I define luxury as anything beyond the basics, e.g. first class instead of economy, Rolex instead of Casio, etc.

At the same time, you don’t want to suppress your lifestyle too much if you worked so hard to accumulate your wealth. Hence, spending lots of money on travel, homes, clothing, watches, jewelry, and nice cars before having kids makes sense. It’s a hedge against 15-18 years of frugality once you have kids.

You just have to plan to have enough money to comfortably raise your kids once they come. Having a target net worth before having kids is one idea. Continuing to work through their college years is another. Once your kids come, you can then become more frugal as you focus on providing for them.

The Perfect Time To Splurge After Having Kids

Alternatively, another strategy to find balance is to buy the best of everything by the third year after your first baby is born. After all, kids don’t remember much before their third birthday.

Lock down that mansion, buy your favorite luxury automobile, and own the finest toys. This way, these are all the things your children will ever know. You can then own these items until they go off to college and never have to splurge on anything better before they do.

If your Ferrari breaks down in year 12, then you can buy another one no big deal. Given it’s already one of the most expensive cars, it won’t seem like you’re splurging. In fact, you’ll have a lot more options to downgrade in price, like to a BMW, which may be viewed as a frugal move by your children.

The same thing goes for living in a mega-mansion. During their sophomore year in high school, if you decide to downgrade from a 10,000-square-foot mansion to a still massive, 7,000-square-foot home, your kids might also see this as a spendthrift decision.

Ironically, starting your kid off at a high base may help them better appreciate the changes you will make since everything eventually gets old.

Or Just Feel Happy With Enough

Writing this post makes me a little more motivated to upgrade my car and my home given my daughter is only three. Why not live it up from ages 45 to 60! These are the prime years of my life.

But at the same time, it feels great owning a paid-off, eight-year-old car. It’s only got 42,000 miles and can easily last until its 15th birthday, seven years from now.

During the 2022 bear market, I found it comforting that our house was less than 15% of our net worth. I’ve experienced zero stress affording our current home, which is different from how I felt during the 2008 global financial crisis.

Back then, I had gone all-in on a home in December 2004. I only had a good two-year run before I started sweating bullets that I might lose everything! After that time period, I vowed to never overextend myself by 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 Being Ultra Frugal When You’re Young

When you have little money, every dollar spent is more impactful. Therefore, it’s natural to want to spend more in your 20s and 30s. Just don’t go overboard.

Due to my car addiction in my 20s, growing up overseas for thirteen years, and constantly traveling for my job until age 34, I don’t feel like I restricted my life too much.

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

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

Balancing our spending before and after having kids is a tricky one. However, if we’ve got a financial plan before having kids, we’ll likely lead a financially responsible life before and after they arrive.

It’s up to parents to constantly educate their children about the realities of life. We must explain how the decisions we made while we were younger led us to our current situation today. And if all else fails, we can differentiate between our money and their money.

If they want something beyond the norm, then they should figure out a way to get it on their own. To end, you may get a kick out of the Rich Kids Of Instagram show. I truly do wonder how these kids feel when the cameras aren’t rolling.

Reader Questions About Having Kids

Are you a parent who is faced with the dilemma of wanting to live it up but also teach your children good financial habits? If so, how do you ensure any superfluous spending by you doesn’t negatively affect your child’s personal finance habits? What is a better way of spending money before and after having kids to maximize your entire lifestyle?

1) To master your finances, sign up for Empower, my favorite free wealth management tool. I’ve used Empower since 2012 to track my net worth, analyze my investment portfolios, and plan my retirement cash flow with ease.

2) If you have children or are thinking of having children, you’ll love reading Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal decisions so you can live a better, more fulfilling life.

3) For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. 

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