Allowing your kids to make mistakes with money

One of the hardest things for me as a parent is to watch my kid make mistakes and suffer the consequences. Now, I do my best to stop her from making any really big mistakes with big consequences — I make sure her seat belt is on, I don’t let her talk to strangers online, and I make her wear a helmet when she is riding a bike. However, when it comes to money, I am committed to letting her make mistakes, suffer the consequences, and hopefully learn. The consequences of money mistakes for a tween feel tragic, but they are still fed and have a roof over their heads. The same mistakes at 21 or 41 can get you in a lot bigger trouble.


For the last two weeks or so, the Child has been earning her own money to buy extras with. That includes snacks (we are no longer buying junk food, but of course, she is welcome to snack on apples for free), and in-app purchases. She gets 5% interest on any money she has left at the end of the day. She can earn $2 per day by doing her schoolwork and chores, but she can get overtime for doing extra chores.

With a 5% daily interest rate, the winning strategy is to accumulate some money, say $100, and then “retire,” making $5 per day just in interest. And because of the magic of compound interest, getting to $100 would take her just 25 days of not spending. In just 66 days of not spending, she can accumulate $1000, generating $50 per day and be completely financially independent! (OK, if she really got close to that, I would reduce her interest rate.)


Despite these amazing possibilities, for now, the Child is behaving like a typical consumer. She is doing a good job, “going to work” every day and earning her $2. So far, she has not elected to work overtime. Almost every day, some shiny in-app purchase tempts her, though, so her account fluctuates around $5. At the end of the month, some of her memberships will expire. I am not sure she will have the money to renew them. She also loudly complains about the lack of junk food in the house. Still, because we only shop about once a week, she has trouble accumulating enough money to buy enough junk food to last her the week (not that I am sad about this. I don’t really want her to buy junk food).


Of course, her behavior is very typical for many young (and not so young) adults. I know plenty of 20-year-olds who spend their weekly paycheck on the newest electronic or at the bar, and at the end of the month, they don’t have enough money to pay rent. Or 30 years-olds who have shiny cars but find it impossible to save for a downpayment on a house. Or 60-years-olds who have pulled out the equity in their home so often that they are still looking at another 25 years of mortgage payments and have no retirement savings to speak of.

At each stage, it becomes harder for a parent to watch their child suffer, and we all know of middle-aged adults whose parents still “help” them financially. I don’t want that for the Child. So, I will listen to her complain about the lack of junk food in the house, and I will let her memberships in her favorite apps expire and hope she learns this lesson early so in 10 years, I don’t have to worry about her becoming homeless because she couldn’t pay her rent.

If you have kids out of the house, now is a good time to stop “helping” them financially. That doesn’t make you a bad parent. They will feel better about themselves if they can figure out how to manage their own finances. If you don’t feel you can stop “helping” abruptly, you should plan with them on how you will gradually decrease how much money you give them and stick with the plan. Being a parent is hard work, but ultimately the goal is that your adult child truly becomes independent from you, and financial independence is a key step in that journey.

Teaching money skills to tweens and young teens

As the Child is approaching the ripe old age of 12, it is time to teach her to the skills she will need to be able to manage her money as an adult. As every teacher will tell you, to design a good lesson, you need to start with learning objectives. So what should a tween or a young teen know? Most tweens are ready to be introduced to all the complexities of money that they will need as adults. The amount of money they will earn, manage, and spend is, of course, smaller than those an adult would manage. You will also need to “speed things up” so they can see their money grow in a time frame they can follow. Earning 10% interest per year might be a reasonable return on investment for an adult, but a 12-year-old would have difficulty noticing such growth. Here are some basic money management skills you might want to teach and ideas on how to do it.

To make money, you have to do something. Set up a list of “jobs” that your child can do to earn money. We are allowing the Child to make money for doing each of her school subjects as well as doing chores and getting physical activity. She can earn about $1.50 a day for her “work” (we are probably breaking some minimum wage laws here). Each task she has to do is worth 25 cents. She gets a completion bonus of 50 cents if she finishes all her tasks for the day.

Consider overtime pay to give your tween or teen a chance to earn extra money. We pay double rate for additional chores. Also, consider performance bonuses for jobs well done. We pay significant bonuses for exceptional school performance. The Child made $10 this morning by getting an A on her Spanish test.

Some parenting books will tell you that kids should not earn money for chores but should have a set allowance because they should learn to aim for internal motivation. The child shouldn’t strive to get an A on the test to earn a performance bonus but to get the satisfaction of a job well done. While I understand this argument, I don’t think I can expect more from my child than I expect from grown-ups, and we all appreciate getting paid for our work, so I am OK with the Child being motivated by a performance bonus.

Once you have some money, you can get your money to work for you. There are two ways to think about discretionary income: extra money to spend or a tool to help you on your financial independence journey. Here is an example from the adult world. Two families get a $5,000 end-of-year bonus. Family A decides to upgrade their TV and their cell phones. A year later, they are craving an even bigger TV and even newer cell phones. Family B puts their $5,000 in investments. A year later, they have $6,000. We all know how this goes after 20 years. The family with the new TV will have no financial cushion and will fear retirement. The family who invested every year will be sitting on a couple of million dollars and will be in a position to choose if they want to work or take a trip around the world.

Consider paying interest to your child on the money they haven’t yet spent. For a tween, you might consider paying interest every day. As your tween grows up, you can move to weekly or monthly payments. Our 11-year-old will earn 5% each evening on any money she has left at the end of the day. If your child is a natural saver, use lower interest or longer intervals. The power of compound interest is amazing, so be careful not to overcommit.

You can’t buy everything. An essential adult money skill is the ability to prioritize and save for bigger purchases. To give your tween or teen practice, you need to stop buying everything for them. Of course, you shouldn’t stop buying anything they need, but you should cut back on funding their wants. We have stopped buying snacks and online subscriptions. The Child is generating a very long list of things she wants, and I am sure the list will keep growing as she discovers the power of money. Her many wants create the need for her to prioritize. She will also learn (we hope) that if she wants a $10 membership, she can’t spend all of her daily earnings on candy.

Debt is bad. I know some people will disagree, but in my opinion, all debt is bad. Really, really bad. And consumer debt to buy optional items is truly evil. Unfortunately, for most kids, the only way to teach this lesson is to let them get into debt and experience the pain for themselves. And for the pain to be real, you need to charge interest and have consequences if the debt is not paid on time.

One option is to secure the debt. The kid needs to give you something of value, which becomes yours if they don’t pay you back. I know I am not strong enough to stick to this rule, though, so instead, we are doing unsecured debt like on a credit card. The Child is allowed to borrow money at 10% interest per day. Her credit limit is $10. If she exceeds the limit, she will not be able to use screens or spend anything until her balance is under $5. An older child should have the ability to get into more significant debt which will take longer to get out of.

Those are the four main lessons about money that I think every adult should have mastered. What are you teaching your kids about money? How are you teaching it?

Everything you need to know to start investing

I didn’t start investing for a long time because I found it scary. My family didn’t have investments and I didn’t know anyone I could talk to about investments. My first investments were rental houses – I could see them, touch them, knew I will get a rental check at the end of the month. The stock market on the other hand was a mystery to me. How do you pick stocks that will go up? Seems impossible.

It turns out picking winning stocks is indeed very hard, but fear not – there is no need for you to do that! This is why index funds were created! So, in this blog post, I will tell you everything you need to know to invest in the stock market. Please note that this is not advice about what you should do. I don’t know your personal financial situation and I am not a money manager. This is meant to be a basic introduction to the world of investing.

Owning a stock means that you own a tiny little piece of the company. Not enough to be involved in any decisions that the company makes, but enough to get a little bit of their profits. You get money in two ways – dividends and increase in the stock value. Dividends are regular (often quarterly) payments to you because you hold stock in the company. They are kind of like the rent checks you get when you own a rental property. The increase in the stock value is like the increase of the value of your rental house. You only cash that in when you sell your stocks. Of course you can’t guarantee that your stock will grow, just like you cant’t guarantee that a rental’s house value will go up. The neighborhood your rental is in can go down in value and drag your rental’s value with it. But many stocks, given long enough time, will grow in value.

When you buy a rental house, you actually take quite a lot of risk. Crime could increase in your area and send the value of the house plummeting, a big employer in town can close making it impossible for you to find tenants, the city could redraw the lines of the school district sending your tenant’s kids from the best school in town to the worst. When you buy a single stock, very similar things can happen. Say you buy Apple stock. Seems like a great buy but what if Motorola comes up with a phone that can project a 3-D image of the speaker into the room of their conversation partner. Suddenly, everyone will stop buying the latest Apple phone because they will want a 3-D image projector and Apple stock will fall.

While if you want to own a physical rental, you have to actually buy a house and accept all the risks that come with it, when you buy stocks, you don’t have to buy just one. This is where index funds come in. And index fund is essentially a basket of stocks that represent the entire market the fund indexes. Most people like to buy index funds that index the S&P 500 or the Dow. Owning an index fund means that as long as most companies are doing OK, your investments will grow. Let’s say you get a fund that indexes the S&P. Both Apple and Motorola are components of the S&P so if Motorola comes up with a 3-D image projector, their stock price will sky-rocket. Apple’s stock will go down but because you own a little bit of both companies, you will probably make money overall.

If you believe that the U.S. economy is generally headed up, investing in an index fund is the easiest thing to do. You don’t have to pick stocks, read the Wall Street Journal, or be able to predict the future. Just buy a little bit of everything.

But wouldn’t it be better if you just bought a whole bunch of Motorola stock right before they unveiled their 3-D projector? Yes, it would be better. The problem is that that is impossible to do with any level of consistency. The market prices in new developments quickly and there are professionals whose entire job is to try to beat the market so your chances of accomplishing that are about the same as being the winner of the Boston marathon if your normal exercise routine is walking your dog around the block. You simply can’t expect to compete with the people who make marathon-training their full time job.

How about hiring one of those professional money managers to beat the stock-market for you? Well, it turns out statistically, they are actually not very good at beating the market either. I won’t go into the data on this here but you can read this article if you don’t want to take my word for it. Also, professionals will charge you a percent of your total investment (not just your profits) for their services so they have to beat the market by quite a lot to make up for their fee before you see actual gains.

So, you have decided that you do want to invest in an index fund. How do you actually do that? I recommend Vanguard (they have the lowest fees) where you can set up an account (takes just a couple of minutes) and buy their most popular index funds.

  • Vanguard Balanced Index Fund (ticker: VBIAX)
  • Vanguard Total Stock Market Index Fund (VTSAX)
  • Vanguard Total International Stock Index Fund (VTIAX)
  • Vanguard Total Bond Market Fund (VBTLX)

Remember that an index fund follows that market in whatever the market does. In early 2020, the stock market fell briefly by about 30% so investing has risks. Overall though, given a long enough period of time, the markets have always gone up. Past performance is not a guarantee for future returns but ultimately I have decided that investing in an index fund is safer and much easier than owning rental properties.

Disclaimer: Investing is a personal decision and your investment strategy should reflect your risk tolerance. This post is not professional advice and I am not a professional money manager (remember, I am a math professor). Talk to a financial advisor to discuss your personal situation. Any investment, including the ones mentioned in this post, can lose value.

Our August Spending

Well, it is possible that writing this blog is good for our budget. I have been keeping track of how much we spend for several years now and this is our lowest spending month in recorded history! Which shows that way too much of our spending is really discretionary. Our average monthly spending for 2019 was almost $5000 a month excluding property taxes and donations which we tend to do on an annual basis.

Shopping this month included printer supplies (about $150 worth) due to the fact that we are both working from home and homeschooling, some clothes for me ($110, I did really need the clothes) and homeschooling workbooks for the Child. Kid expenses included the Child’s violin lessons (which she takes over Zoom) and school fees (public school). We made a small amount of donations as our area was hit by a major storm so we donated to some local charities.

One significant reason our spending is down is COVID and the fact that both of us are working from home. That decreases our transportation expenses (normally I pay $6-$7 per day for parking and we both drive to work) but it also decreases my random and totally optional daily purchases. When I am at work, I often end up buying lunch or buying coffee and these things add up!

During the first weeks of COVID, our spending didn’t go down, it shifted. I tried to buy things that I hoped would protect my family from the dangers. I stocked up on food, toilet paper, soap, and Clorox wipes. I also bought various masks that I hoped would be good enough to keep us healthy. I have reached the point where I have bought everything that can possibly be useful. All of these things are sitting in our basement as at the moment we simply don’t leave the house but I feel slightly better knowing they are there.

Our low spending (for us) is of course largely due to luck – nothing went wrong this month. The pets didn’t get sick, no appliances failed, no storms damaged our roof or flooded our basement. It is easier not to spend money when there are no emergencies. Still, I do think that writing about money helps me be more thoughtful about how I spend it. It’s a win!

Can we bring our spending lower and is it worth it? Probably we can and probably it is worth it.

Our main financial goal is to be financially independent. That means to be able to live entirely on the passive income generated by investments. The common rule is that to be financially independent, you need to have investments equal to 25 times your annual income. Making some reasonable (everyone hopes) assumptions about the return on stocks, this should allow you to live on passive income forever. I tend to be more conservative, so I am taking 30 times our annual spending to be our financial independence number. Small changes in your annual spending, can have a big effect on this number. For example, if we can live on $40K per year (an average of $3,300 a month) then we need $1.2 million in investments (this doesn’t count money that is not invested such as the value of your home, cars, or money you like to keep in cash). If we need $73K per year (the amount we spent last year), then we need $2.2 million. That is a big difference! In general, cutting your spending by $1000 a month, translates into a decrease of $360,000 in your financial independence number. And of course if you are spending less, you are saving more to reach that smaller number even faster.

Bullshit jobs

RIP  David Graeber

Many people hate their jobs, and David Graeber, an anthropology professor at the London School of Economics, told us why. David Graeber died today, so in his honor, let’s review the five types of bullshit jobs.

  1. Flunkies serve to make their superiors feel important, e.g., receptionists, administrative assistants, and door attendants.
  2. Goons oppose other goons hired by other companies, e.g., lobbyists, corporate lawyers, telemarketers, and public relations specialists.
  3. Duct tapers temporarily fix problems that could be fixed permanently, e.g., programmers repairing shoddy code, and airline desk staff who calm passengers whose bags don’t arrive.
  4. Box tickers create the appearance that something useful is being done when it isn’t, e.g., survey administrators, in-house magazine journalists, and corporate compliance officers
  5. Taskmasters manage—or create extra work for—those who do not need it, e.g., middle management, and leadership professionals.

In a 2013 survey of 12,000 professionals by the Harvard Business Review, half said they felt their job had no “meaning and significance,” and an equal number could not relate to their company’s mission. Similar polls with similar results have been performed in Europe. These polls help explain why the idea of retiring early attracts so many people. The only reason to stay at a meaningless job is to earn money, and once the need to make money disappears, there is no reason to continue to work.

I find my job pretty meaningful, although I am sure some people believe my job is in the last category. I am in a leadership position at a large public university. I help faculty develop their careers, and I tangentially help students have a productive and successful college experience. Maybe part of the reason I have no interest in retiring early is that I find my job very interesting and fulfilling.

One type of job that doesn’t make it on Graeber’s list is people involved in the production of items that are not needed. Probably everyone’s definition of such items is different. Today I saw a special two-level plate designed for sunflower seeds that allows you to hook up your phone to the plate. Perhaps most people, even those who eat sunflower seeds while watching movies on their phone, will agree that a standard plate and a regular phone stand would suffice.

Our family tends towards minimalism, so to me most things sold in stores are not necessary and don’t actually improve people’s lives. Most of us don’t really need a dinosaur taco holder,

or a light-up toilet.

Many people were involved in the production of these items – starting with the designers all the way down to the people manufacturing the item. And when you are selling an item that is quite useless, you need a significant amount of advertisement to make enough sales. Besides the human work hours put into these products, there is a significant detrimental effect on the environment. The plastic used had to be manufactured, and then those green taco holders will live in the landfill for much longer than they have graced someone’s table.


Wouldn’t the world be a better place if all the people involved in producing and selling dinosaur taco holders or sunflower seed bowls spend more time with their families? If we, as consumers, had fewer things to clutter our lives and empty our wallets so we too could spend more time doing the things that matter? David Graeber has pointed out the things that are wrong with how people in our society earn money. Let’s do something to fix the problems and help everyone have a more fulfilling life.

FIRE

For the novice, FIRE stands for Financial Independence Retire Early. Followers of this movement often save 50%-80% of their income to accumulate enough invested capital to be able to retire early (sometimes as early as in their 30s) and live entirely on passive income. If you hang out in the FIRE circles, you will hear about the 4% rule, which says that you can safely withdraw 4% per year of your investments and, assuming the market doesn’t do anything crazy, your money should last forever. If you don’t like percentages, this means that you need to have 25 times your annual spending in investment accounts to be able to quit your job and never need to earn money again.


There are, of course, variations on this theme. Some people go to great lengths to cut their budget to be able to retire as early as possible (lean Fire), some work longer in exchange for higher spending ability (fat FIRE), and some retire from stressful jobs but still work at some low-stress job they enjoy to supplement their investment income (barista FIRE).
I am totally not interested in the RE (retire early) part of FIRE. I love my job and expect to continue working for many years, regardless of our net worth. I am, however, very interested in the FI (financial independence) part of FIRE.


Sometimes I wonder why to me, FI is such an important goal. My wife thinks FI is a good idea, but she certainly doesn’t obsess about our FI number and how close we are to it. And people around me seem perfectly happy buying stuff they don’t need, so I am pretty sure they don’t even know there is such a thing as an FI number.


I am an immigrant from a relatively poor country. I came to the US for College with $500 and my tuition for the first semester covered. From there, I needed to figure it out on my own. Without even the ability to borrow money (foreigners can’t take out student loans), I was in a pretty tight spot.


At some point in College, maybe in my sophomore year, I got a terrible toothache. I didn’t have dental insurance, so I did the only thing I could – I took lots and lots of painkillers. It lasted for weeks. Much of the time, I was so drowsy from the pills I could barely function. I got a permanent case of an upset stomach. Eventually, I saved about $100 and went to the dentist. For me, at that time, $100 was a huge amount of money. The dentist looked at my tooth, took a couple of X-rays, gave me a proposed plan for how he can fix it, and charged me $100 for the consult and the X-rays. I still had a terrible toothache and no money.

Eventually, I learned about a free dental clinic. I found someone with a car who drove me there. They fixed that tooth and all the other teeth that were rotting in my mouth (I used to have a lot of tooth problems, probably due to very poor dental care in my home country), and I could get off the pain pills.


This is the sort of experience I never want to have again. And so when I have a choice between getting the newest iPhone or increasing our money stash, I opt to add to the stash. The stash is what keeps my family and me safe from at least some of the bad things that can happen in life. The iPhone can’t do that.


Take a minute and figure out your FI number. Imagine having that amount of money and the freedom that would give you. Now, look at the latest gadget you bought. What optimizes your happiness profits?