I’ve been watching the TV show Downton Abbey.
Although its fun to watch, those of you who haven’t seen it shouldn’t worry too much. The melodramatic plots are only slightly more realistic than Dallas or Dynasty (remember these 80s classics?) and the acting is about as subtle as a course of waterboarding at Guantanamo Bay.
Downton Abbey portrays life in a grand English country house in the early years of the 1900’s, showing the lives of those above stairs (the aristocratic family) and below (the servants).
What is striking to the modern viewer is how regimented life was back then. If you think that the old days were the good old days, you might describe the lives of the family and staff as reassuringly well ordered. But you might equally describe the routine and formality as stifling and soul-destroying.
In a very English way, everyone is emotionally retarded, repressed and puts on a brave front. It was an age where if you got post-traumatic stress disorder fighting in a World War, you would be told to pull yourself together. If you broke a leg, you might be told to just run it off for God’s sake man!
In Downton, status and position in the pecking order are everything. It is hilarious to see how upset people get over tiny nuances of rank and routine. Its not just the toffs that are obsessed with social rank; things really kick off below stairs if the first footman is asked to do a job that is more befitting of the second footman. Of course, we modern humans would never get worked up about such trivia.
Or would we? If you’ve worked in a corporate environment, you may realise how little has changed. At work, I watched grown men and women fight over seating plans, parking spaces, office sizes, who got copied on emails, the order names were listed in, who should be invited to meetings and so on.
My policy throughout this nonsense was always to try to remember the underlying purpose of work…which was to fund getting the fuck out as quickly as possible. People forget that the primary purpose of business is to make money. In the endless negotiations that make up corporate life, I was always happy to surrender points of ego or personal status…just not at the expense of my (or my client’s) money. My advice to anyone in the corporate environment would be to pick your battles wisely. Let everyone else obsess about status….just focus on doing the best job you can, as ethically as you can, and getting paid properly for it.
The other thing that is striking about Downton is how set in their ways the people are. The narrative arc shows social mobility starting to increase but the pace of change looks incredibly slow to the modern viewer. This is reflected in the ingrained attitudes, habits and limiting beliefs of the servants who are, for the most part, blind to the extent of the opportunities opening up elsewhere.
I have to resist the urge to shout to the staff on the TV:
Wake up! Stop polishing his Lordship’s bedpan and get the hell out! Go to London, to America, Australia / NZ, Canada or anywhere with some decent opportunities. The world is yours…but you have to choose to escape to freedom!
The Escape Artist is no aristocrat but did have the occasional peek into the world of old money when growing up in rural England.
For most of the first 10 years of my life we lived in a tiny village. In terms of social structure, the village was little changed since The Domesday book of 1086. At the top of the village hierarchy, there was the landowning family who lived in their country mansion set in parkland. The family had lived there since their Norman ancestors crossed the English Channel looking for opportunities for rape and pillage.
I was always struck by the contrast between my highly leveraged middle class parents with salaried jobs and the aristocrats with a shitload of assets that generated passive income for them.
I could see that there was a division of ownership:
- The posh family owned hundreds of acres of farmland, a mansion, farm equipment, equities, antiques, art, fine wine, gold, silver and horses.
- We owned a mortgage, a 14″ black and white portable television and two cats.
The cats were very nice but I couldn’t help thinking that maybe I was on the wrong side of the fence here. Money isn’t everything but I sensed the aristocracy had the better financial strategy. Interestingly, despite being loaded, they mostly seemed frugal in their spending.
The aristocratic way of getting rich is that one generation (preferably one a long time ago) does something out of the ordinary. Like starting a business, marrying into royalty or winning a land war. The founding generation takes some risks, lives frugally and builds wealth, focussing on growth and accumulation rather than consumption.
With the right investment strategy and tax regime, that family can remain rich for many subsequent generations. As long as the family stay invested in real, wealth generating assets and don’t exceed a safe withdrawal rate, the money need never run out. Compound interest can then work its magic and grow wealth prodigiously over the decades.
The aristocracy may have got rich initially by war, marriage or dirty deeds but most then got richer over time thanks to compound interest.
As a child I was always fascinated with the concept of compound interest. Compound interest is the interest earned on interest, over time. Compound interest plus time is a big part of how Warren Buffet was able to accumulate billions of dollars of wealth, growing like the proverbial snowball rolling downhill.
Growing up, I loved those illustrations of compound interest that said if one of my peasant ancestors in 1487 had saved just one penny – one lousy penny! – and achieved a 5% return each year then this would have turned into £393 million pounds in 1987.
I was 17 years old in 1987 and looking to buy my first car. Frankly those £393 million pounds would have come in handy at that point. So I was a bit annoyed that none of my ancestors had actually put aside that 1p for me. How selfish of them to have spent my inheritance! It didn’t occur to me then that in the Middles Ages, my peasant ancestors might have needed every penny they could lay their hands on to avoid starving to death in winter.
So The Escape Artist was forced to go out to work to achieve financial freedom which was no doubt a whole lot better for me in the long run.
Being brought up “below stairs” meant that instead of going to Eton, I went to a state school where more of the alumni probably ended up in jail than going to Oxbridge. This meant that I received a secondary education that might be described, if we were being kind, as “mixed”.
For example, my maths teacher at school was a nice guy and incredibly hard working. Its just that he just worked hard on things other than teaching us maths. As well as being a maths teacher, he ran a small farm. He never set us any homework, although I suppose if you spent as much time looking at pig shit as he did, then marking the homework of future juvenile delinquents would have been the last thing you’d want to do of an evening.
But whilst the standard of maths teaching seems to have improved since then, most schools don’t teach children anything useful about money or finance. And maybe that is not their job anyway?
So I think we parents have to take responsibility for teaching our children the basics of saving and investing. Our children inherit a money blueprint from us and others around them. So we should think consciously about the messages they are picking up and try to plant the seeds of good financial habits that will take care of them over a lifetime.
Unfortunately, the way of the Prison Camp is for the inmates to spend all their time at work whilst paying other people to teach their children, cut their lawns and cook their food. But The Escape Artist believes that some things should not be outsourced.
All this explains why I have just taught my 14 year old daughter about compound interest myself. To do this I used a simple but powerful illustration of the maths of retirement investing which I lifted from Richard Russell’s classic article Rich Man, Poor Man.
In order to visualise the power of compounding, imagine 2 friends with similar earning power. Both leave sixth form college at 18 and get similar jobs. A year later, the first (Early Bird) opens an investment account at age 19 and starts to save. For seven consecutive years she puts £2,000 into her pension and achieves an average growth rate of 10%*. After seven years Early Bird makes no more contributions — she’s finished.
The second of the 2 (Late Starter) makes no contributions until age 26 (this is the age when Early Bird finished her contributions). Then Late Starter continues contributes £2,000 every year until he’s 65 (at the same assumed 10% rate of return).
At age 65, both of them have a nice nest egg of just under a million pounds to add to their state pension. But what is truly amazing is that Early Bird’s stash was all created based on a rather modest £14,000 of contributions that stopped aged 26.
Remember The Laws Of Learning…we learn best with active learning. Reading is not enough. So to help embed the learning points, I got my 14 year old daughter to create the following killer table in Excel. I think she nailed it.
*10% per year nominal would be 6% real after inflation of 4% per year. It so happens that over the last century, the UK and US equity markets have delivered annualised returns of about 6% real but there are obviously no guarantees this will continue into the future
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