“Do as I say, not as I do” doesn’t work in most scenarios — and it certainly doesn’t work when teaching children about finances. Join Peter and Jonathan as they share personal stories and practical financial literacy lessons that can help the next generation learn fiscal responsibility.
Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jonathan: This is Jonathan Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle.
What’s the greatest threat to your financial future? It could turn out to be something that’s rarely mentioned, children who grow up to have bad financial habits. The fact is, if your adult children land themselves in financial difficulty, it’s awfully hard to say no when they ask for help, at which point their problems are yours. So what should parents do? More than anything, I believe, they should try to raise money-savvy kids, and the hard work comes in the teenage years. So Peter, I imagine this is a particular issue for Creative clients who are raising children amid affluence. What advice do you offer clients? Let’s start with some practical suggestions. What advice do you offer around issues like allowances and teenagers getting jobs?
Peter: Well, I divide, as you did, in two very big different categories. So first, when it comes to allowances, I remember when my kids were little, I did a lot of research around this. I observed what a lot of clients were doing, and I kind of follow what the research says is the best thing to do, which is you should give your kids an allowance because it teaches them, “Hey, there’s money coming in and it’s limited,” it’s not infinite. And that it should not, and this surprises a lot of people, be tied to chores because the logic being that’s just part of being part of the family is you’re supposed to do chores. We’re not supposed to pay you to do chores. It kind of sends the wrong messaging.
I am never going to forget, you have all these years your kids are growing up, and one of my kids was five years old. I don’t know how many moments I’m going to remember from that year, but I will never forget the day I gave her, she had turned five, a $5 allowance, and we went into Target that same day and right at the entrance of Target, they have all these $1 items, trinkets, and you can buy them or whatever. And she walked in and she grabbed something and she goes, “Can I have this? I’m going to buy this.”
And I said, “Sure, you’ve got $5. If you want to use one of your dollars to buy it, you can.” And she looked at it and she looked at me, and she looked at it again and she put it back. I’m never going to forget that. It was the moment for her that, hey, she’s five years old and she knew, “This is my $5 and now there’s scarcity,” right? It’s not just coming from anywhere. And that was her first awareness of budgeting. So I’ve found allowances to be incredibly powerful and watching the decision-making of my kids as they’ve gotten those allowances.
Jonathan: Peter, let me jump in with a story from bringing up my kids. When my kids got to 10, 11, 12, what I did was I stopped giving them a weekly allowance. Instead, what I did was I took their allowance and I gave it to them quarterly and just deposited into a local bank where they had an ATM card. And at that point, I felt that instead of having to ask me for money, they had to ask themselves. And not only did they have to ask themselves if they wanted the money, but then they had to troop down to the local ATM. And I really felt that that shifted the dynamic a little bit so that the responsibility to spend or not spend rested more firmly on their shoulders. And I think it helped them to become more savvy as teenagers, who tend to be drawn to every little thing they can see in the shopping mall.
Peter: I completely agree. And when my kids became teenagers, we switched from weekly to monthly and just tried to give them that it’s harder to budget when it’s not coming every week. And so that’s a great way to progress with them. I agree with you on that.
Jonathan: And what about the issue of teenagers getting jobs?
Peter: Well, I’m a huge believer in that. And I think, in a dream world, at some point, your kid is getting a job in some kind of business where they’re learning something. But I’m also a big proponent of your kids working at some point in the service industry and really learning about what goes on in a kitchen and what it’s like to serve tables and how different people are. And some people tip and some don’t, and some are rude and some aren’t. And I can tell you that it is seared in my kids’ minds the first time that they worked in the service industry, just the different way you get treated by some people, good and bad, the different ways you get compensated.
And another very powerful lesson, my oldest went to work during COVID at UPS. I just remember he came home one day and he’s like, “Dad, lunch was only 10 minutes.” And I was like, “Did you have enough time?” He’s like, “Yeah.” He goes, “Because everything stops.” I go, “What do you mean everything stops?” He’s like, “Literally, the way you know it’s lunch is all the machines stop and people just sit.” And I go, “Is there a bell that goes off when lunch is over?” And he’s like, “No, the machines just start again.” And it was just such a great lesson, that kind of harder type work using your hands. I’ve liked that my kids have done that as well.
I am a believer that kids should be working for the most part all the way from when they’re a teenager on from getting out of college. And if they can do something where they get their hands dirty, do something in a professional environment, and do something in the service industry, they have a much better chance of coming out well-rounded people and they’re definitely going to appreciate money more.
Jonathan: Okay, so let me broach another topic here. I think it’s an important one. What about sharing financial information with your children? Is there a danger in telling too much or in revealing too little?
Peter: I’ve learned so much from our clients from this. It runs counter to everything Creative Planning is about is transparency. Educate, inform, disclose, make things clear. And here I am not a believer in sharing all of the information. I think it’s a burden. Let the kids be kids, let them grow, teach them about money. But I don’t know that they need to sit in a room…
I had a client that was worth hundreds of millions of dollars and their kids became teenagers, their twins became 13, and they thought, “Okay, it’s time to bring them in the annual review.” Never brought them back to an annual review again. So I think there is a time and a place, and I think the time is much, much older. Let kids just learn the value of money from you. Let them grow up in the type of environment you want them to grow up in. Let them go to high school and college and have a few years in the real world at a minimum before everything is disclosed. Now there’s very mixed thoughts on this, there’s very different research on this, but I have seen much more positive come from that than from putting a 13-year-old at a table and showing them everything.
Jonathan: All right, so you limit the amount of financial details you reveal to a teenager, you encourage them to get a job, you have an allowance. What about specific steps to help kids to think about saving and investing? Are there certain things that you and Veronica have done with your three kids?
Peter: Well, whenever they work, if they are eligible, we have them sign up for the retirement plan and we have them automatic deposit. It’s pretty powerful for them to see how much money can accumulate, how quickly it can accumulate if there’s money automatically going in a 401(k) plan. Separately, when they’re working, they now have earned income, so they’re eligible for Roth IRAs. And so we encourage them to contribute to that and then we would match that as well. And so the idea is at the same time you’re teaching them about budgeting, about hard work, about respecting other people, they’re also learning to invest. What’d you do with your kids, Jonathan?
Jonathan: So I did a lot of things that you and Veronica have done. One thing that I did, which was not a success, was back in the late 1990s, I want to say, TIAA-CREF came out with a series of low-minimum mutual funds. And I thought, “Okay, lets me and my two kids each pick a fund,” and it was like $250 to open the account and $50 minimum. And they could pick the fund and we would track the performance and I would show them the account statements and they would learn something about investing and the power of regular contributions. It was a complete flop.
And I think the reason it was a complete flop, beyond the fact that the notion was maybe too sophisticated for the kids at that point, was they were playing with my money. There was not the financial stakes there. So whether they were in first place or third place, it didn’t really matter. And then on top of that, of course, if you go back to the late 1990s, it was a time when taking ridiculous risk was rewarded. So my son, who happened to pick the high-growth fund, did the best, but do I really want him to have all his money in high-growth funds going forward? No. But that’s sort of the message that came through. So after a little while, I pulled the plug on that and I think I rolled the money into some other funds that they had that were better diversified. But that was not something that I would recommend to parents.
Peter: I go speak at high schools, and very frequently I’m coming in in the middle of a stock picking competition where the way they’re teaching kids about investing is everyone’s picking one, two, or three stocks. Whoever gets the highest return for the semester is the winner. And I always explain to the class, you’re learning about how to get interested in investing, but this is definitely not the way to invest and it’s not rewarding the right decision-making process.
Jonathan: So when we talk to our kids about money, that’s not the only way we teach them. I mean, often they learn not from what we say, but from what we do. I’ve become a really firm believer that we need to model good behavior for our children, that if we’re telling them to be good savers and then we’re sitting around sweating over the credit card bill, there’s a real problem. Do you see this going on, this mismatch between talk and behavior, Peter?
Peter: Oh, hundred percent. People look at actions over words all the time. Kids are the exact same. And it’s an interesting struggle I’ve seen with a lot of our clients. They want to live a certain lifestyle, but they don’t want their kids to be spoiled. But there are some that really want their kids to have a very strict financial upbringing, but they’re very flamboyant with their messaging. All the kids are going to remember is the messaging, the actions that they’re observing. Whatever you want them to emulate, you’ve got to be doing it because that’s ultimately going to be the outcome.
Jonathan: Final question on this before we get to the tip of the month. And you had mentioned this in an email to me, Peter. You had talked about this mindset of scarcity or mindset of prosperity that kids can develop depending on how they’re brought up. Is there sort of one or the other is the way to thread the needle here? I mean, what do you want to see at the end of the college years?
Peter: When you look at adults and the struggles that happen around a lot of issues, relationships and so on, and when it comes to money, you can divide the struggles into two categories. And one is a group of people that really, they just spend like crazy. They have a hard time saving. And the other is a group that is very fear-based, money is scarce. Maybe they grew up in a household where they had to choose what sport they were going to play because you can only afford the dues for one sport. Or they saw the parents argue about money, or struggle with money, or had to move, or something like that. Very, very rarely do you have somebody who has a healthy attitude around money. It’s actually the exception, not the rule. And so you’ve got kind of the spending like crazy or maybe not spending on the right things, or you’ve got the scarcity mindset. And trying to raise children that respect money, have a healthy attitude towards it, but are not fear-based either, that’s what you’re trying to accomplish.
I think the things that we talked about are steps in the right direction, but you mentioned the one thing that overrides everything and that’s what are they hearing you say and what are they watching you do? If you’re telling them all the right things and doing the chores and doing the allowances and only sharing things at the right time and making sure they get good jobs, but they’re hearing you worry about money, then they’re going to grow up with a scarcity mindset. If they see you, you’re broke all the time because you’re spending every dollar that comes in, this is the thing that they’re most likely to follow.
Jonathan: All right, Peter, that time of the month, what financial wellness tip of the month do you have for us?
Peter: Okay, so coming into the weekend, I had a client that was really upset. They gift $5,000 a year or something like that to all the people in their family. And they were debating whether they were going to continue. They were very upset about how a couple family members were spending the money, and one got a couch that they didn’t think they should get and they thought they should pay back somebody else first. And one thing I’ve watched over the years with gifting is people really struggle with it. It sounds fun and great, “I’m going to give this person this,” but then people get attached to what happens with that money.
And my tip of the month is, if you’re gifting money to somebody, the second you gift it, that’s it, right? You’ve made the gift. Whatever the other person is going to do with it, they’re going to do with it. You have to embrace that. You have to get the joy out of the gift and move on. You can’t follow every dollar where it goes because you’re probably not going to agree with it. That’s my tip of the month. It applies to a small segment of people that do that. For the group I see do it, I do see a lot of regret around it, and I think that part of it’s just having the mindset a gift is a gift. Once I’ve given it, it’s not mine to decide what happens anymore.
Jonathan: That’s really fascinating, really fascinating. So Peter, my tip of the month is you should ask family members were there any specific personal possessions that they want from your estate? Obviously if you’ve got a Picasso hanging in the living room, that should be in the will. But for everything else, all the sort of minor stuff that you have around the house, that could be handled with a simple list that might be appended to your letter of last instructions. As I’ve learned over the years watching people settle estates, these possessions, it’s often of insignificant value, have an import that’s far beyond their monetary value. And you simply don’t want your family fighting over this stuff after you’re gone. So for goodness sake, find out their wishes now. So this is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
