Investing lessons from previous generations

August 22, 2023
a father and son look at an ipad and computer

When it comes to finances, nobody’s perfect. Even the most successful business folks and investment gurus have committed blunders here and there. It’s learning from those mistakes that sets them apart from the others. And honestly, learning from the mistakes of others can be very beneficial.

With that in mind, let’s take a moment to reflect on some of the most common financial mistakes that prior generations made so we can learn from them. You might even recognize some of these mistakes in money moves your parents or grandparents unwittingly made — some of them before you were even managing your own finances.

  • Investing too late. One of the most common mistakes made by past generations was not investing early enough. And it’s not their fault; financial literacy wasn’t discussed as much in prior generations, so they just weren’t aware of the advantages of investing early. By missing out on early investing, they also failed to capitalize on the power of compounding interest (keeping your money in investments and having the interest in those investments continuously reinvested for you). Compound interest is a powerful phenomenon, and could even more than double the amount of money you’ve invested.
  • Depending on Social Security. Another reason our forebears didn’t save enough was that they put too much stock in Social Security solvency. They may have believed that Social Security was a social safety net that would take care of their expenses in retirement. The truth is that Social Security was always meant to be supplemental income — not enough to fully support a person. Can you live off Social Security alone? Possibly, but it would be difficult (especially during times of inflation). And truthfully, there might be a time in the future when Social Security is reduced even more or completely removed from the equation. To learn from past mistakes, don’t count on Social Security to carry you — save enough to survive without it!
  • Saving only for retirement. Your parents and grandparents probably saved for retirement because their workplace made it automatic. But did they save for other goals too? A common mistake with previous generations is that they didn’t save toward other goals such as the next car purchase, family vacations, and emergencies. The common answer for funding these side goals was the family credit card or other high-interest financing. Racking up high-interest balances on bad-debt items (items that depreciate after purchase) created a situation where they paid so much more in the long run for items they could have saved for and paid for outright. And the money they paid in interest could have been invested! Do yourself a favor and save so that you can avoid bad debt.
  • Not investing aggressively enough. It’s a fact that some people are just more risk averse than others, and those who grew up in the aftermath of the 1929 stock market crash and the subsequent Great Depression had it ingrained in them to invest carefully. They taught their kids the same lessons. They might have been too reliant on Social Security as mentioned above, and didn’t understand the cyclical ebbs and flows of the market. It’s always a good rule of thumb to be more aggressive in your early years and reallocate to more conservative allocations as you get closer to your target date of retirement.
  • Saving for college, not retirement. It’s noble to save enough for your kids to attend college, but it’s important not to prioritize that over your own retirement. They knew college tuition was in a dramatic upswing and they wanted to give their kids a leg up in paying for their secondary education expenses. However, if your own retirement account suffers as a result, that’s a detriment to your financial situation. Kids can take out loans for college; parents can’t take out loans for retirement. If you can’t do both successfully, choose your own retirement first.

When you know better, you can do better. Learn from your own mistakes and those of your parents, grandparents, and other predecessors — just as your own kids and grandparents will learn from yours. Hopefully, you commit very few mistakes in your finances, but when you do, grant yourself grace when it happens. After all, nobody’s perfect! Not even Warren Buffett, the Oracle of Omaha himself.

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