Saturday, September 15, 2007

Finances and my folks

My parents have been pretty good financial role models. They always stressed the importance of spending less than you make. My dad in particular was willing to be quite open about their finances when I started to ask questions when I reached my early teens, and my parents have been fairly sensible with money. They kept a substantial emergency fund. They bought a house with a 30 year fixed rate mortgage when I was in preschool and paid it off when I was in junior high. They contribute the maximum allowed to my dad's 401k (although that is less than the maximum the government allows due to rules that try to ensure that retirement plans don't disproportionately benefit higher paid employees).

They paid me an allowance and took me to the bank to open my first savings account. My dad suggested I read The Only Investment Guide You'll Ever Need and taught me about the wonders of compound interest. My mother explained how to build a good credit history and why it's so important. My mom and dad taught me all of the fundamentals.

It's strange that they now come to me for financial advice once in a while. They know I enjoy reading about personal finance and thus know more of the technical details of some aspects than they do. My mother decided to start an IRA last spring before she filed their 2006 taxes, and she asked me for recommendations, had me look over her options with her, and had me do the actual typing to set it up online. She went with my recommendation of the Vanguard Target 2015 fund. Considering that my parents are in their mid-fifties and have all of my dad's 401k in something that guarantees the principal but doesn't have much growth potential, it would have made sense in theory to put it all in stocks. In practice, however, my parents became extremely conservative investors following the tech bust, and my mom is pretty panicky about the idea of losing money. She was reluctant to put any money in stocks at all. Now she's finally becoming a bit more comfortable and not contemplating moving her money every time the fund goes down a bit.

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