“Working to help parents raise money-smart kids.”
Hello, friends!
As we head into the summer months, I have three new concepts to share with you. So let’s dive right in!
— 1 —
The Myth of the Est: As Morgan Housel points out in his essay “How This All Happened,” the US made a conscious choice to become a consumer society immediately after World War II.
Americans weren’t far removed from the Great Depression, so we kept interest rates low to, in turn, keep the cost of financing the war low. Doing so enabled returning GIs to accumulate debt to buy homes, cars and stuff. LOTS of stuff.
Another depression was a real concern, so this approach made sense.
Unfortunately, we became too comfortable with relying on debt to finance our desires. What’s more, our collective competitive nature led us to compete for better things. The fanciest grill. The coolest car. The biggest house.
And now, we are often blind to what I call “The Myth of the Est.” The biggest house is a temporary state. Soon enough, someone builds a bigger one. And what then?
Given time, every “Est” will be bested by an “Er.” A bigger grill. A cooler car. A bigger house.
If we decide to play this game, then we’re constantly “Keeping up with the Joneses.”
Yet the most powerful common denominator, happiness, is simple.
Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.
– Angus Campbell, University of Michigan
And that makes money merely a tool to achieve it.
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.
– Morgan Housel
Which is why we should repeatedly revisit the theme of teaching our kids to recognize and use money in this way.
So if we think of money as a hammer, then let’s find some nails. 🔨
— 2 —
The Buffer Fund: My wife and I don’t talk to our kids about a “rainy day fund.” (And not just because we live in precipitation-starved Los Angeles!)
The Time-Life Guide to Family Finance trumpeted the idea of “saving for a rainy day” way back in 1966. They also promoted piggy banks.
Although both well-intentioned notions, saving for something so abstract (the rainy day) and forcing our kids to put money into ceramic, porcine vessels feel to them like we’re just taking away their spending power. 😬
Admittedly, the concept of “saving for the sake of saving” is useful to teach to our older kids. However, perhaps the a buffer fund might have more utility.
[A buffer fund is] about evening out much smaller (but more frequent) peaks and valleys in cash flow.– Dr. Brooke Struck, “Millennials, Money, and Chasing the Middle-Class Dream“
Whereas a rainy day fund is used to cover major, unexpected gaps, the buffer fund is a more consistently useful reserve your kids can draw upon.
It’s about stabilizing cash flow, a potentially practical concept when we consider the world in which teens are “adulting”: the prevalence of gig work and the likelihood of many jobs. A buffer fund can be particularly helpful if they decide to switch careers.
For example, you could set up a dedicated bank account to receive various payments from gigs, contracts, gifts, etc., which then pays out a stable amount each month to a more standard checking account, which the client interacts with in ways they’re probably already used to.
– Dr. Brooke Struck, “Millennials, Money, and Chasing the Middle-Class Dream“
Of course, there are many ways we can help our kids use money as a tool. Another is the concept of “nudges.”
— 3 —
The Nudge: A simple intervention to get people to eat more fruit and less junk food is to put fruit, and not junk food, at eye level.
“Nudges” are interventions, like the one mentioned above, that help people make better choices. Cass Sunstein popularized this concept in his book Nudge: Improving Decisions About Health, Wealth, and Happiness, co-authored by Nobel Prize winner Richard Thaler.
A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.
– Cass Sunstein and Richard Thaler
Importantly, as Sunstein and Thaler emphasize, nudges maintain our individual autonomy.
These interventions can help build habits. And, ideally, we want our habits to adhere to James Clear’s Third Law of Creating a Habit That Sticks:
Make it easy!
Some examples:
- Your five-year-old must put one dollar into her Save jar. You’re teaching her the habit of paying herself first. (Of course, in this case, you’re usurping her autonomy in the service of habit-building. 😉)
- Similarly, when your kids start working but are still living with you, make sure they save some of their earnings in a Roth IRA. You might even match a portion of this contribution to maintain their autonomy. (Here’s a tip of the cap to podcast guest Bill Dwight.)
- If you have a kid who likes to spend his money, then start your shopping trip at the book store rather than at Walmart. Remember, make it easy!
When my daughters were young, my wife and I sometimes had to drag them to activities we thought might be good for them. We knew that exposure could overcome fear, so we signed them up for dance, soccer, etc. Some of these extracurriculars stuck. Some not so much. But I believe both girls are better off for having at least tried various activities.
The same is true for money. We can “nudge” our kids into behaviors we think will benefit them. Some will stick. Others will not. But I believe we’re better off for encouraging them to build good financial habits.
As always, enjoy the journey!
John, Chief Mammal
P.S. Please consult with a financial or investment professional before engaging in any decisions that might affect your own financial well-being.
Like what you just read? You can sign up for the newsletter here.