Taking Care of Mom and Dad: Savers and Spenders
Some financial planners insist there are two kinds of people: accumulators of wealth and distributors of wealth. The two are different sorts -- different attitudes and inclinations. Accumulators are savers and planners; distributors are builders and spenders.
Of course, there are exceptions to that absolute stance. It seems more accurate to say that different people -- at different stages in life -- may be savers or spenders. It's certainly easier to accumulate when you're single and unencumbered than when you're putting a couple of kids through college.
And even incorrigible distributors of wealth want to leave their worldly goods to the people they care about most. After all, someone who's spent more than he or she has saved over the course of a lifetime should have a lot of cool stuff.
You can be a spender and a planner. In fact, if you are a spender, you need to make a concerted effort to plan...precisely because it may not come naturally to you. If your parents were planners, hopefully you followed their lead and are ahead of your game. Knowing how to manage money will help you best assist your parents when they need you.
Instilling the right attitude about family money in family members requires a certain aggressiveness about using resources and financial devices. Instilling it in your parents can be an Oedipal battle.
Although there may not be any profound moral distinction between spenders and savers, savers have one key tactical advantage over spenders. They tend to be on the winning side of compounding.
Compounding is the most important financial tool anyone can use. If your parents have been compounding money over their lifetime, then surely you have an idea of what this means. In short, it's the progressive effect that earning interest (or, on the other hand, paying interest) has over a long period of time.
For the saver, incremental growth is the key to accumulating wealth. Usually, the effect of compound earnings over 20 or 30 years of steady investment will mean as much -- if not more -- than any individual investment decision.
For the spender, the flip-side advice is: Avoid debt. Compounding can work against you as steadily as it can for you. The paths to many personal bankruptcies are paved with finance charges. And financing finance charges. If your parents are moving balances from credit card to credit card or to equity lines or other loans...stop them. Balance shuffling is never good, but it may be a tolerable necessity when you're 30. It's a sign of serious trouble when you're 65.
If your parents don't have enough money to pay their bills at the end of each month, there are only two ways to fix the problem: They have to make more or spend less. If they're borrowing to support their lifestyle...stop them. You may need to help them make lifestyle adjustments to lower the amount they pay out each month. Earning more is tough and usually relies on external factors (the job market or investment market).
Spending less is the best way to improve their financial health. Start by asking them: Where does all of your money go?
Answering that question takes a bit of work, but it's a key step to building -- and maintaining -- their financial well-being.
