Rich Kid Redux
In my March Viewpoint I asked readers to please share ideas and anecdotes about how money has affected their families. My goal is to turn that feedback into a short book. I think I have reasonable ambitions for the project. This won’t be the next Harry Potter, and probably not even another The Millionaire Next Door, but I think there could be a gap in the market for a financial wisdom book specifically targeting an affluent audience. With your help my project is moving forward, and this month I’m circling back with a progress report.
I received some terrific feedback. Thank you. It’s not too late to contribute, by the way! Just under 20 responses came by phone and email, slightly beating my minimum goal of 15. Of course, quality matters more than quantity, and many responses were extremely—pardon the pun—rich in insight. If I count the most thoughtful responses double or triple, then the volume of feedback looks a lot more impressive. I still owe a few of you follow-up emails or phone calls, which should contribute more to my volume of notes as well.
Combining notes from your feedback with those from books, blogs, and my own thinking, I’ve distilled about 150 distinct “points” that I want to organize into an overarching argument about preparing your kids to be successful and, ideally, rich.
This effort task took a huge step forward recently thanks to Nick Hill, a University of Michigan undergraduate who came into our office to shadow our jobs for a week. I turned my notes over to Nick and asked him to organize them on post-its on the walls of our overflow office. He threw himself into the project and put together an impressive and well-organized idea map. You can really feel something forming when you walk into that room now.
Let me share some of the big themes that are jumping off the walls of the idea map:
This topic came up in some of my client conversations and is also a major theme of a book I heartily recommend, especially to young parents: The Opposite of Spoiled by Ron Lieber.
Wealthy parents wrestle with the problem of how much to tell their kids about their own family’s means. They often take pains to hide their wealth from their children for fear of spoiling them. Unfortunately, ignoring or hiding the truth doesn’t cut it. Kids get interested and start to dig. They guess. They assume. Uncertainty can make them anxious.
Open communication generally seems like the best strategy, starting as soon as the kids are old enough to start asking questions. Lieber implores parents not to be silent about money and not to lie. He recommends that when your children ask you sensitive questions about money you turn around and ask them “Why do you ask?” Knowing what motivates the question will help you measure out the right answer.
It is natural for kids to assume that when they grow up they will be approximately as rich as their parents. What else should they assume? But it often isn’t realistic. What do your kids expect their future financial means to be? Do they know what income they will need to achieve those means? Do they understand the tax consequences of earning that much money? Do they know what the average college-educated person can expect to earn?
Do they even know how the middle-class lives? I heard a startling story about a boy who visited a friend’s house for dinner. The family was talking about a cousin who was considering various cities he might move to. The town of ‘Springfield’ was mentioned. The young friend interrupted, “Springfield? But they have mortgages there!”
I don’t know what the friend’s financial situation was, but he clearly assumed he would never have a mortgage. Not only that, but he assumed nobody at the dinner table would ever have one either. Goodness gracious.
Parents sometimes worry that any discussion of spending money on anything beyond the barest necessities invites children to become spoiled and materialistic. There is a temptation for parents who spend normally themselves to default to a monkish posture against any and all luxuries and toys for their kids.
But being wealthy isn’t all about hoarding a pile and compounding it over time. Money is there to improve your life. Teaching your kids to spend money wisely, or at least not stupidly, will increase the value of their lifetime earnings, whatever those earnings may be. Knowing how to prioritize needs versus wants and budgeting appropriately for both makes saving easier, which unlocks the opportunity to invest, which is how most rich people get rich.
Money and Anxiety
I mentioned anxiety before in the context of communication. Rich or poor, most people feel anxiety about money. It is a complicated subject, and everybody feels like they ought to know more about it than they do.
Let me make an analogy. I ask how does your car work? Most people would say “I turn the key and the car goes. Sometimes I put gas in.” That’s basically all you need to know. But what if I ask you how your income taxes work? For most people, the answer is “My accountant says a number and that’s my refund or my liability.” That’s enough understanding for most people to function, but it does leave one awfully anxious, doesn’t it? Sorry.
Investing and spending decisions cannot be optimized. You can try to avoid taxes legally, but your strategies will never be perfect. These kinds of problems are too hard. The future is too uncertain.
The best antidotes to money anxiety are experience, education, and a nice, fat nest egg. But most people have none of these things. If you’ve managed to get past your own inborn money anxiety, you can turn your attention to helping your kids do it too. Simply bailing them out of financial trouble won’t be sufficient to cure this anxiety—it could even be counterproductive by sending the message that some problems are just too big to handle without your help.
A few of you turned the tables on me and imparted your own investing wisdom, which was fabulous. I can’t list all the examples here, but the feedback includes such things as using leverage judiciously, the importance of bouncing back psychologically after losses, and recognizing the essential difference between a good investment versus a fun one.
I could go on and on, but I have to save some material for the book itself! My progress has been just a little slower than I originally hoped, but that is probably the nature of any big project like this.
A hearty thanks to everybody who has already responded. My lines are still open, and operators are standing by. If you have any feedback on any of these points, agree or disagree, I would still love to hear from you. Again, you can send me an email at email@example.com.
Miles Putnam, CFA