Paul Winkler: All right, we’re back here on “The Investor Coaching Show.” I am Paul Winkler. Paulwinkler.com is the website, and we talk about money and investing there too. We’ve got a lot of video and audio right there on the website.
And of course, the podcast lives there. You can go there and then what happens is you get a little bit of a message every, oh, I don’t even know how often my messages come in. This is what I’m talking about, and you can check out the podcast right there on your phone. It’s nice and easy to get all this stuff.
Financial Literacy at an Early Age
So the investor and author Alexa von Tobel has written about this. She was talking about children, and I thought I would just make a little comment about some of the things being talked about in there and add to it. They were talking about how kids can usually grasp financial information at an early age, and I found that a lot of parents that really make sure that they teach their kids about finances at an early age end up with kids who do fairly well.
I mean, one of the things I think about with my own kids is how they do investing. They have money set aside. They’re really good at saving and keeping things on the side and not going and blowing it on things.
Part of it is just teaching, but part of it is just understanding money and having some kind of literacy at an early age.
They say as early as age six they can actually start to get this stuff and they can form their permanent habits really by about the age of seven.
A lot of what is in our development as children, really, really early on, is actually cast at those early ages. So it’s really important to get to kids early. And not that you can’t teach them something a little bit later — you can — but it’s just a little bit more difficult. That’s why one of the things that they pointed out here is that we want to make sure that we do some of this teaching at an early age.
If you look at some of the baseline knowledge that people have, you look at the studies that have been done of people in older adults, you may ask, “Hey, what’s their financial literacy?” It’s amazing how low it actually is.
Understanding Investing
As a matter of fact, I was talking to some of the folks at Trevecca, and we were talking about coursework. I’m talking about putting together something for the university, and some of the things that we’ve been discussing are a little bit more advanced, but they were just talking about the baseline education that they do and how popular the courses are. As soon as they do any kind of talk about an investing course, people sign up, younger people sign up and they really, really go after that kind of thing because a lot of them really do understand that they need to know this stuff.
If you don’t understand anything about investing markets — you don’t understand anything about how investing works or you’re given a lot of the bad information that is out there and the information that you get is from the marketing organizations like the investment companies — think about it: You go to a local bank and you’re going to learn about investing, but you’re going to learn about the products that they’re selling and it’s not necessarily what you ought to be doing.
You think about when you’re told how to buy mutual funds — how many years have I talked about this on this show? — how bad the advice is to look at a 5- and 10-year track record when you’re buying mutual funds. Because what do markets do? They go up and down.
What follows up? Down.
What are you doing when you’re buying on track record? You’re buying after something has done well. It doesn’t make any sense whatsoever, but it sells mutual funds.
Or what if you’re looking at a period of time where the economy’s been rough or you’re hearing bad news or you’re hearing scary things going on? What’s the first thing you hear from the investing world?
“You need to load up on fixed income. You need to start to add a little bit more bonds in your portfolio” or “That’s why you need this guaranteed product.”
“You need this guaranteed product because you don’t know what’ll happen in the markets.” Well, when do they come out with this message? After stocks have gone down.
So that’s a track record in reverse. The track record was negative or bad and they’re enticing you to buy something that will hold up or should hold up if things continue to be bad.
Well, what you’re doing is you’re assuming that the track record negative is going to continue and that’s not the way markets work.
I said markets go what? Up and down, up and down, up and down.
What follows down? Up. You’re going and locking in losses.
Emotion-Driven Decisions
The investment firms love it because you buy the product; you will buy it because you’re scared. You will buy some other product because you’re euphoric and you feel great about things. It’s all about what you will buy.
Well, teaching kids this at an early age is something that they really need to understand, how they’re being played. That’s exactly what’s going on.
People are playing you when they’re playing on your emotions. They’re looking at what a person will respond to.
“What can I get them to do? Well, I know I can get them to respond to fear or I know I can get them to respond to greed.”
And some ages were more prone to one versus the other. Younger ages were more prone to being pushed. Well, I say that, but sometimes younger people are also fear-driven a lot of times.
I think back to some of the articles that I had used for years and years — and still use some of them — about teaching the basics of investing. And it was amazing to me that the younger people were being driven by fear back in the late 1970s. In the late 1970s, after there was some roughness in the market, younger people were just basically running away from stocks. So it’s not always the case that just older people are driven by their fears.
But older people are quite often driven by fears. “I can’t afford to go through another market downturn.”
They don’t recognize that market downturns historically don’t last that long, but they hear it. They hear somebody talking about how you could lose everything.
Well, if you look at it, if I lose everything, what typically creates that situation where somebody loses everything happens when I buy just a couple of stocks — I’m not diversified or I’m not investing in enough different markets. I can diversify within a market, in large companies, or I can diversify across them, or I’m not diversified enough.
Now if stocks go down and never go back up, as I always point out, that means that earnings never came back for the companies. And if earnings never come back, then you don’t have any taxes. You don’t have any taxes, you don’t have any government. You don’t have any government, you don’t have any FDIC.
Thinking Through Your Fears
So the point is that people are driven by fears without thinking through what they’re afraid of. And that’s so often what I try to get people to do.
When they’re anxious, get them to think, What is it that I’m anxious about? What am I fearful of? How likely is that to happen? What’s the evidence that it won’t happen?
Has it happened ever before in history? And if it does happen, then what might else follow? If stock markets go down and they never come back, what else is going to follow? Well, as I just walked through, government failure will follow.
Well, if everything fails, did my little scheme to avoid the risk actually help? Did it work? No, it did me no good. And it just enriched somebody else who was selling something that was a fixed investment product like an annuity, an insurance contract, a money market, a CD, or something like that.
Now, there are places for these investments — there are places — but what happens so often is we’re driven to move all the way up. And the funny thing is that investors themselves are not even the ones I’m talking to.
A lot of times it’s the advisors that are pulled in and sucked in and scared and make moves that they shouldn’t be making. The market timing is not investors, but quite often with the general public, it’s the investment advisors that are so pulled in.
That’s what we see in the research and what we find is that the investors don’t even realize the advisors are doing it. That’s why I often have these little things, and I have videos on my website about how to sneakily check up on your advisor and things you can look at. Go look at the videos there. I give little tutorials on how to check up to see if the advisor is breaking the rules of investing.
Understanding Debt
But anyway, younger people, this is why I think we want them to understand this stuff. Now, the big area that I try to get them to understand first is debt.
When we’re looking at debt, we’re looking at typically buying something before we’re ready to have it.
I mean, I think about how when I was a kid, Converse sneakers, if you were going to be cool, that’s what you needed to own. You needed to own those sneakers. You needed to have a nice car.
As I got a little bit older, it wasn’t just sneakers. You got to have a really nice car.
And I remember the people being envious of the people in my class that were able to go on ski trips and I couldn’t do it. Well, more about that later.
Yeah. For younger people, the type of things that you teach them, of course, includes getting out of debt. There was also in this article by Alexa von Tobel, I guess that’s the way you pronounce her name, her talking about how the tone is important that you employ with kids when teaching them.
But there are some good lessons here for older people too that I just want to impart as I go through this because I think there are a few things that need to be mentioned. I hesitate when I’m recommending any kind of materials because so often, materials tend to indoctrinate kids into thinking that is not necessarily helpful from an investing perspective. There are so many myths about investing that I get really frustrated when I read materials and I wouldn’t be teaching.
Like for example, teaching about individual stock investing. Those types of things can be problematic.
Money as a Tool
I was having a conversation with a friend of mine, he’s a professor, and we were just talking about how the average company does not have staying power in the S&P 500 like it used to. It used to be that companies would be in the S&P 500 for 60 years, and now it’s an average of about 18 years.
And he brought up the Dow and said, “Yeah, that’s a really good point.” If you look at, for example, the list of Dow companies in just 1982, which is the year I graduated from high school, those companies that were in the Dow — American Can Company, Sears, Roebuck, etc.
Owens, Illinois, American Telephone & Telegraph, AT&T. Well, they’re still around.
American Tobacco. Think about how politically incorrect can you get nowadays, right?
Bethlehem Steel — our steel companies have been a huge problem in America. Eastman Kodak was in there — bankrupt. The inventor of the digital camera went bankrupt.
Westinghouse. Woolworths. I remember shopping at Woolworths when I was a kid, right?
Who goes to Woolworths now? I mean, really?
We look at how companies change, and the Dow is just 30 companies that are just massive companies, and they’re supposed to be representative of the most important companies of our time. That is really the idea behind the Dow is to be able to look at these companies and go, “Hey, what were the really, really important companies and who should we be paying attention to?” And so often those will be the companies that we typically are going to invest in because they are the important companies.
Well, one of the things that she talks about here says, “Money is simply a tool to help you live the life you want to.” Now, I phrase that a little bit differently.
Money is a tool to help you express what is important to you.
Because if you looked at somebody’s checkbook in the old days, or their credit card statement now, you can look at what people are spending money on and you can tell what’s important to them. What are they trying to express with the way they live their lives?
And if you work hard, she says, you can earn money. If you’re thoughtful about managing it, you can ensure you always have enough to buy what you need.
Saving Up Money
I often point out that if you take different people with different levels of income, one person makes 30,000, one person makes 40,000, another makes 50,000 — why is it so often that they end up with the same amount left over, zero?
It’s because they typically spend everything that they’ve got. They don’t save anything. And that’s why I’m often telling people, “Hey, save 10%, 15%, get up to 20% for retirement savings, but have money set aside, savings, for short-term things as well when the car goes out or when the air conditioning unit or the roof needs replacing or whatever emergencies. Put money aside.”
Somebody was saying to me the other day that they were so glad that I had recommended starting to put 10% of income away just for emergencies. He’s probably listening now, right, because they always text me, so I’m sure he’ll get it. Go ahead, just send me a text.
But the thing was that he was talking about how it was building up for him. I don’t have permission to say the name, but other than that, yeah, it was really cool. He said, “Hey, thanks for encouraging me to do that because it’s starting to build up.”
Now it says that money’s not meant to be worshiped. It’s also not meant to be ignored. Now, some people do that.
It’s like Scrooge. They’re so focused on money somehow thinking it’s going to be their savior. It’s going to be the thing that makes their life better. Maybe, maybe not.
Some of the richest people in the world are some of the most miserable too, right? But you don’t want to ignore it either, to stick your head in a hole and say, “Hey, money is evil.” Because some people come to that conclusion, right?
I used to have this exercise I’d bring people through and I’d go, “Finish this sentence. The rich are what?” And then they would finish the sentence and say, “They’re lucky,” or, “They’re greedy.” And they would come up with some negative word.
And the point that we would make is, hey, you know what? If you have a really negative connotation of finances, chances are really good you’re probably not going to accumulate much because you have a negative connotation of finances or financial freedom, right?
The reality of having money set aside is you go through two phases of life. One, you earn money and then money makes money for you.
And what you’re doing is you’re investing. If you’re investing in stock markets, you’re investing in the companies that make the great things and you’re giving access to capital for companies to make the great products that we all love. And that’s what capitalism is.
You’re able to participate in the growth of companies all around the world, and for companies to be successful they have to be others-centered. They’ve got to be focused on solving somebody else’s problem. That’s the beauty of capitalism.
Delaying Gratification
Now it says, talk to your kids about money in ways that make sense to them. It could mean talking about how much everyday items cost. Like noting the bottle of water, how much it costs at the zoo versus going down to the corner store and buying that same bottle of water.
Recognize that some companies charge way too much for something because they’ve got you as a captive audience. And maybe just think about waiting until you go down to the convenience store to buy it versus buying it at that expensive place.
“This costs $29. Mommy doesn’t have $29 for this today, but we’ll think about saving it and getting it for your birthday.”
What this does is it teaches kids that costs can vary. It teaches them that maybe you don’t have to have that thing right away.
Maybe you can delay gratification, as I always told my kids. Wait till later.
You don’t have to have everything. There’s something about that anticipation of getting that thing that’s exciting. You notice that when you finally get that thing, you go, “Well, okay, that wasn’t as great as I thought it was going to be,” but there’s the anticipation of when you’re going to get it is what you’re going to get, what you’re going to do, and it’s fun. Teach kids that.
Delaying gratification is a really good skill to have in all areas. I always think, Well, I’ve got three things I have to do today. What’s the thing I want to do the least? Okay. I’m going to do that first.
And then I’m going to do the thing that I really can’t wait to do last. That’s a good way to look at life, is the way I look at it. I’ll tell you what, I’m going to talk about a couple other things right after this. This is good stuff.
So often what happens is kids don’t get much of an education about this in the household because a lot of times, the parents aren’t terribly well-versed. But I think a big part about this is something I learned growing up.
My mother would listen to a radio show on finance every single Saturday morning. And guess who was sitting there with her while she was listening to it? Me.
I was sitting there and learning about investing, learning about mutual funds, learning about the investing process, learning about budgeting, learning about any types of investment plans, about 401(k) because 401(k) was brand, brand new, back then. And so that was where I cut my teeth learning about these types of things.
Talking to Your Kids About Money
But we also talked about this stuff. I watched my dad sit at the kitchen table, going through the budget, going through the finances, looking at what our social security benefits were going to be in the future, and then planning his pension because he had a pension and planning his investments.
So when they were able to retire, he was able to retire early. He semi-retired age 55. And then he did little stuff.
Some of the stuff, he loved doing. He loved kids. So he drove a school bus for a while.
Did he really, really have to do that? No, not really. He just liked doing that.
And then he worked at the post office because he loved going and delivering mail and just talking to people and just really enjoyed that. So what he did is he transitioned and phased out of work.
So often, what I recommend to people is just phase out a little by little. Just cutting cold turkey can really be a shock to the system for people so often. Because it’s just like, “I’ve worked all my life and then all of a sudden, bam, it’s over. It’s done.” So with kids, they see that example in front of them.
So often, kids don’t listen to what you say. They’re going to watch what you do. So be that example for them and talk about this stuff.
We often have workshops on the American Dream experience, and we talk about how a lot of people have this no talk rule. “It’s not polite to talk about money.”
Because of that, kids don’t have any kind of a clue about finances. They don’t know anything about what to do, how you do, how you think about it. And it’s an opportunity to talk about your values and what’s really important to you.
Setting Up a Budget
So they talk about budgeting here too, and setting up a budget. And typically, I’m not a great budgeter.
Quite frankly, here’s my budget: Save a percentage of income and then spend the rest. That’s how I operate.
I typically have a certain amount I save and then I spend the rest. And the reality of it is, it never worked for me. It never worked for me going and saying that I was going to save, but I was going to spend first, and if there was anything left over, I’d save it. It just never worked for me.
So I always save first. And somehow or other, everything worked out. Now, some of the people that work with me and the guys that I work with, they’re phenomenal budgeters.
They can tell you exactly what they spend on everything. They can tell you what they spend on their grocery bills. They can tell you what they spend on electric and gas and whatever, and their cell phones and all that stuff.
I don’t have a clue. I typically save first and then everything works out.
And if I don’t have the money left over to spend, I don’t spend it. That’s just the way I’ve always been, and it’s worked out quite well for me.
But have some kind of budgeting conversation with kids. What do you enjoy spending money on? Discuss different ways that you can earn money.
With kids, especially, there are lots of different things that they could be doing. How can they earn money? I like having conversations on what those things are that you could do that would earn more money than other things.
Because again, it’s typically those things that we don’t like to do or tasks that are hard to do, or take some preparation, that earn more money. And kids get that.
They see how people earn incomes. They see what types of careers tend to earn more money than others.
Get them to understand a little bit about making sure that you choose things that not everybody likes to do. Because so often, what people do is they go into careers that they just love and it’s just a passion.
And they get out of school and they spend all of this money on college education, only to find out that there’s no job in that particular area, and that there’s nothing that they can do to make anything. So you don’t want that type of situation where they go to college and all of a sudden, bam, they’re just out there on their own. So that’s one thing.
Saving for Buying a House
Another thing is just in saving in general. Typically, what I get kids to think about is that day that they’re going to have their own place, and they need to make sure that they save up to typically 20% of the down payment on the house. So they avoid the PMI, the insurance on the mortgage. If you have less than 20% down payment, you can end up with lots of insurance costs for making sure that the bank is protected against you defaulting on the loan.
That’s one of the things I think about.
Not necessarily thinking about purchasing a house right away is another thing that I’ll often teach kids.
Hey, look, if you rent for a while, there’s no sin against not owning a house and just renting. Because a lot of times kids don’t end up in careers where they’re going to be living in that place for a long period of time. Or as I’ve found, they get into a relationship with somebody and the person they get into a relationship with is like, “I don’t want to live here.”
Then they have to sell the house. And you’ve got the cost of the commissions on the buy side of the house and on the sell side.
And then you have the difference in homeowner’s insurance versus rents insurance. And you have the taxes — the property taxes you paid. And then you have all of these expenses of owning a home, and then you end up having to sell it and get what you really want.
So sometimes, just renting is okay. And quite often, you may end up in a job in a totally different part of the state or the city or the country even. You don’t want to be stuck there.
So putting money aside for those purchases, paying cash for depreciating items like cars, and having these conversations are important things to do. And of course, I got a financial planning book that goes through a lot of basics of this stuff. It’s “Confident Financial Planning,” available on Amazon. Shameless plug.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
