At an annual shareholder meeting, one questioner asked Berkshire Hathaway's Warren Buffett & Charlie Munger what he should tell his children as far as the temptation to “keep up with the Joneses”. Warren Buffett replied: “Yeah, just tell them to keep up with the Buffetts. We have always been big fans of living within your income. And if you do that, you’ll have a whole lot more income later on”. He further said that he believes that to a large extent, children will follow their parents. So, if the parents are coveting every possession of their neighbor – or trying to figure out ways to increase their cost of living, but not necessarily their standard of living – the kids are likely to pickup on it. But you can reverse that effect, too.
Warren Buffett advises that being a spendthrift is bad, but also being too frugal is bad. If the kids live in a repressive environment, they will rebel when they grow up. But the opposite is bad, too. Go on a vacation, even if it means saving less, because you have to enjoy life, too. But spending 105% of your income is absolutely crazy. If you do that, you not only put risk your financial future, you put your kids’ financial future at risk as well.
Warren Buffett says that although he practices extreme frugality, he does not advocate it. However, if you make it a habit to save 10% or 20 or 30% of your pre-tax income, you not only secure your financial future, but also increase the chances that your kids will have a bright financial future. You have to find the right balance and follow the rules that work for you and you want your kids to follow.
Munger agrees that it is obvious that the best method for training your children is to provide proper example. While it does not guarantee that they will learn, it increases the likelihood tremendously. That’s where you have to start. Kids get a lot of their habits from their parents. If parents live extravagantly, kids are very likely to inherit the same destructive habits. You simply have to lead by example.
Kids will learn a lot at their schools. Among the most important things that they will not get is financial education. Many experts agree that school system fails miserably when it comes to teaching kids about finances. It is true that how a person manages his finances is even more important than how much he or she earns. People who save and invest on a regular basis are more likely to end up with a lot more wealth than who don’t manage money wisely. Simple as it is, many people fail to follow this. Parents can play the biggest role in helping their kids learn this. If they don’t, kids are likely to not manage their finances and get into financial troubles when they grow up.
If kids don’t learn about finances from their parents, they are likely to make mistakes and learn simple principles the hard way. The principles are easy to follow: live within your means, save and invest. Value is what you get and price is what you pay. That is the basic ideology that should govern every dollar spent.
Buffett adds: “In the end you want to have an internal scorecard. You are not a better person or a worse person because you live a different kind of life than your neighbors. You live a life that is true to yourself.”
Those are the words every parent must follow and instill into their kids.