“Working to help parents raise money-smart kids.”
Hello, friends!
Morgan Housel’s The Psychology of Money is a 160-page treasure trove of financial wisdom that continues to inspire me.
In fact, it is my current go-to graduation present, and it was my client gift last holiday season.
So this week, I’d like to riff on three ideas from the book that I hope might help you on your own journey to raise money-smart kids.
— 1 —
Money to the Power of Time:
“Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century [my emphasis]. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.”
– Morgan Housel
I was inspired by the passage above to create the graphic below.
When I showed this image to my daughter yesterday, she jumped so high with excitement that she broke our chandelier.
Okay, maybe not. She just looked up from her computer and said, “Thanks, Dad.”
Also, we don’t have a chandelier. 🤷🏻♂️
Nevertheless, I’m constantly thinking of ways to communicate the power of compounding, or rather, the power of consistency over time.
It’s that consistency element that remains elusive to many of us.
As readers of this newsletter, you may remember I mentioned that my grandfather shared two core money lessons with me when I graduated college: live beneath your means and understand the power of compound interest.
These concepts are the towers that brace the metaphorical bridge taking us from money insecurity to financial independence.
Which is why we should “nudge” our kids to save some percentage, however small, of their allowances and, later on, their wages. (Remember the notion of nudges from last week’s newsletter?)
Reminding our kids to “pay themselves first” from an early age helps to begin or continue conversations that can eventually lead to investing a portion of every paycheck for a lifetime. 🤑
— 2 —
Experiences Drive Behavior: Last week I addressed my concern about the AICPA’s (American Institute of CPAs) flawed interpretation of its 2019 allowance survey results. Here’s that critique.
For starters, it bothered me that the headline screamed, “CHILDREN’S ALLOWANCE PAY IS UP — AMOUNT SAVED ALARMINGLY LOW.”
The AICPA then went on to lament that our kids spend most of their allowances:
“A penny earned is not likely to be a penny saved for children today. A new AICPA survey found that kids are raking in an average of $30 a week in allowance, enough to save around $1,500 in a year.”
– 2019 AICPA survey
Do you save 100% of your income? I certainly don’t!
Thinking kids are going to save their entire allowances misunderstands the purpose: We provide allowances to teach our kids to use money as a tool.
Therefore, encouraging our kids to shunt all their money into savings accounts isn’t practical. Doing so is tantamount to telling them that they can’t be trusted with the green stuff. Such an admission would be counterproductive, as we’re using an allowance as a vehicle to open up (not to shut down) a conversation about money. 🗣
And as Housel relates:
“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
– Morgan Housel
To Housel’s point, although we can provide our kids with plenty of financial literacy lessons, money smarts are largely going to be learned from the proverbial School of Hard Knocks. They need experiences with money, and it’s from these encounters that they discover financial behaviors that either suit them or don’t work out so well.
For instance, one of our daughters was able to visit a friend this summer because she had saved up enough money to cover half the travel expenses. Our other daughter didn’t and, as a result, wasn’t able to take a similar trip. Behaviors matter.
It’s easy for us to tell our kids what we want them to know, like spending smart or saving for goals. Knowledge is one thing, but behavior is another. Experience is the key to learning the soft skill of financial success.
— 3 —
We’re All Born Stupid Investors:
“Let me reiterate how new this idea is: The 401(k) — the backbone savings vehicle of American retirement — did not exist until 1978. […] It should surprise no one that many of us are bad at saving and investing for retirement. We’re not crazy. We’re all just newbies.”
– Morgan Housel
So since, as Housel puts it, “we’re all just newbies,” let’s go easy on ourselves. 😌
And truthfully, as I wrote in this essay, we’re all born stupid investors.
Just last night, I was bellyaching to my wife about waiting so long to internalize the above advice from my grandfather. Specifically, why didn’t I start socking away $50 per week as soon as I entered the workforce?
If I’m being honest, I thought I wanted decorative watches and leather seats. But through the experience of attaining this stuff, I realized these aspirations weren’t my own. I was driven by the powerful pull of mimetic, or imitative, desire. Some very visible models in the media and even in my small town grabbed hold of my brain seemed to tell me what I should want. Experience, though, helped me discover otherwise.
It is the personal knowledge of these forces that inspires me to talk to my daughters and to write to you about setting up systems to help your kids discover what they want and use money as a tool to get it much earlier than I did.
So I guess it’s true that we teach what we most need to learn.
Earlier, I mentioned nudges for young kids. We can (and should) nudge our older kids as well. For example, we might encourage them to start a Roth IRA as soon as they begin working. And if our financial situation allows, then we could consider matching their contributions. This seemingly little nudge might make all the difference down the road. Because time is our friend.
Just ask Warren Buffett.
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.
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