How do you teach your children to be smart about money? New York Times personal finance columnist Ron Lieber seeks to answer that question in his new book, The Opposite of Spoiled. He joins us to discuss how to instill values and the value of the dollar in a younger generation.
Read an excerpt from the book.
Why We Need to Talk About Money
The responsibilities we never faced at their age and the power of real conversations
In the middle of 2011, in the space of a single week, I heard from two different parents struggling with uncomfortable questions about money. A national conversation about inequality—about who had money, and how much and why—was beginning. A presidential campaign the following year was going to turn, in part, on who could best represent all of America.
Nobody knew how large and loud the conversation was going to be. But a bunch of curious middle and high school kids were making inquiries as they read the news and connected it to strains in their own communities. Are we rich? Who do we know who is rich? Why did you choose your job when you could have chosen something else that would have let us have a nicer home and go on better vacations?
Their parents didn’t know how to respond, and I knew right away why they had come to me for answers. Schools aren’t good at dealing with questions like these. If teachers answer them by talking about government and taxes and policy, the responses can start to sound political (and boring). If they respond by addressing individual behavior and ambition, the answers start to seem like moral judgments. No matter how it comes up in the classroom, kids come home and start sensitive conversations and the administrators’ phones start ringing the next morning with parental complaints. At private schools, where there is more freedom in the curriculum, talking about money and social class is particularly complex. There, most families feel lucky to have enough money to send their kids to the school or receive financial aid to attend, but parents and administrators get flustered if anyone brings up the topic of affluence and its effect on children.
Big Questions, Strong Feelings
Journalists, though? We love uncomfortable questions. And starting the year before I heard from the two parents, I’d been collecting the gnarliest ones that kids of all ages were asking about money. Each time I heard a good one, I’d put it up on The New York Times website. Why is that person asking us for money at the red light? Shouldn’t we give our second home to someone who doesn’t have one? Why don’t we have a second home? Do you make less money than Daddy? Are we poor? Are people without nice clothes lazy? Will we run out of money now that you have no job? I suggested an answer for each one, readers pitched in with improvements, and everyone found it plenty useful. My own daughter, who is now 9 years old, was asking some of those questions herself, so I was testing the answers at home as I wrote.
The two parents who contacted me had been following these conversations online. And they had a challenge for me, disguised as an invitation. Would I speak to two groups of parents at their children’s schools and give them ideas about how to talk to their kids about money? And could I please keep in mind that some of the families with more money than average were starting to feel demonized and those with less were feeling like their noses were being rubbed in everyone else’s affluence? It would help, they added, if I could discuss the issues in a way that would not leave everyone in the room feeling resentful or inadequate.
Instantly, I said yes. There aren’t that many fundamentally new challenges in the worlds of parenting or money, but this felt like one of them. And it was new for a couple of reasons.
In the past few decades, scholars have piled into a field that has come to be known as behavioral economics. If you’ve read any of the Freakonomics books, you know what this is about.
Human quirks and emotions have a profound impact on economic decisions, from governments right on down to individuals. A ton of feelings are tied up in the decisions we make about our money and the amount we earn and have at any given moment. On one hand, there’s often pride and joy and excitement about the things we’re able to afford. But sometimes doubt and shame and embarrassment and envy creep in. Most people who read their credit or debit card statements carefully each month have felt many of these feelings at least once. And as I’ve discovered in my decade of writing about money for The Wall Street Journal and The New York Times, learning to recognize and control these emotions is the most important factor in picking the right mutual fund and shopping for a mortgage. It’s feelings, after all, that drive bad behavior and lousy decision making.
I knew I could help parents with the basics of allowances and teenage spending guidelines. But any conversation about money also had to consider the emotional context—the wave of mixed feelings almost all of us experience about the money we have and what others around us spend. People are not dispassionate about money, and they’re certainly not calm and rational about their kids. This potent mix, then, often makes it incredibly hard for parents to talk openly and honestly with their children about the topic.
The subject is complicated no matter what the socioeconomic level of a family. Affluent parents with more money than they need to live on will, by definition, be setting artificial limits with their children almost every day. As a result, their decisions about how much to spend on the younger ones and when to cut the teenagers off are more emotional than financial. Middle-and working-class parents often grapple with the practical challenge of living paycheck to paycheck while trying to provide their children with as much enrichment and fun as possible. But emotions come into play here, too, when children ask questions about why their family doesn’t have more money, and the inquiries sound like accusations to their parents.
The New World of Money
When considering what to say to the parents who invited me, I wanted to start by reminding them of the fundamentally new challenges that are affecting our kids today and that will continue to affect them in the years ahead. It begins with social media, which is often an engine of envy for middle school and high school students. Children who are still fine-tuning their personalities put the best version of themselves out into the semipublic sphere, and all too often it’s a chronicle of who has what and is doing what cool thing with whom in a locale that not everyone else can afford or may be invited to. Parents want to offer counterprogramming, but it’s hard to fight the torrent of longing that frequent access to social media can inspire.
Our children will also be facing college costs that we could never have imagined when we were teenagers. A college education now starts at $100,000 for a flagship state university and rises from there to at least $250,000. This is an enormous sum even for families who can afford it; it’s nearly unreachable for those who aren’t able to save much money ahead of time. Sure, some kids will live at home or start in community college and end up paying less. Others will qualify for financial aid based on their family’s need or their own merit. Better-off families may not qualify for much aid though. Meanwhile, parents who can’t write $50,000 or $60,000 checks each year (or even $25,000 ones) often let their children decide whether to take on the student loan debt that will be necessary to pay the tuition bills.
It’s easy to see why parents can’t bring themselves to stop their children from borrowing money to go to college. No one wants to deny a child the opportunity to attend a dream university.
Here’s the problem though: The people making the final decision about whether to take on tens of thousands of dollars of student loan debt are mere teenagers. Figuring out how much to pay for a college education is one of the biggest financial decisions people make in their lifetime, and parents often leave the final call to a 17-year-old who has never purchased anything more expensive than a bicycle. There is really only one word for this state of affairs: lunacy.
After college, our children will enter a world very different from the one that new adults entered a generation or two ago. Health insurance and retirement savings are now largely the responsibility of workers and not employers. Instead of employers paying into a pension plan and providing coverage for illness and injury, individuals now save mostly via 401(k)s and other plans and pay for part or all of their health insurance premiums. This shift—moving the risk and the economic burden from employers to workers—has taken decades to unfold, but it’s now nearly complete. What it means for our kids is hundreds of dollars out of their early paychecks to pay for things that the government now requires (health insurance) and that are all but essential (retirement savings), given how little income Social Security ultimately replaces.
For people who graduate from college with student loans, however, the debt payments may also eat up hundreds of dollars each month. While federal programs exist that reduce student loan payments and health insurance premiums for people with lower incomes, saving any money for retirement on entry-level salaries is extraordinarily difficult. And if they can’t afford to save anything during their 20s, the effect of those lost savings can mean many more years on the job when they’re in their 60s or 70s.
This shift in the burden has created an increased urgency around winning in your 20s financially, of not falling so far behind on retirement savings or a down payment fund that you’ll end up having to work or rent forever. Young adults need to know how to save at 22 and have the habits to follow through with it. And picking the right college is only the first in a series of bewildering choices. They will need to pick the right retirement investments. They will need to select the proper insurance plans. And they will need to do so amid an explosion of products and people seeking to help them navigate this changed world. Many of these advisers do not have our children’s best interests at heart, but by the time they’re in their 20s, we may not be able to look over their shoulder and help them make the right choices.
So what we teach our children about money before then is crucial. It will quite literally count as they struggle to compare the right numbers and set themselves up for adulthood. It’s unnerving imagining them trying to sort all this out on their own absent any help from us beforehand.
As for those parents who wanted me to come speak, those new developments were the things they worried about when they looked toward their children’s future. They genuinely fear that their children may experience downward mobility. One comparison of the earnings of midcareer parents between 1978 and 1980 to what their kids were making between 1997 and 2009 is particularly enlightening: For parents in the top 10 percent of income—about $140,000 in today’s dollars—just 20 percent of their children ended up in the bottom half of the income tables once they were midway through their own careers, earning about $52,000 or less.
Still, parents don’t always have rational responses to those relatively low odds, seeing the one in five chance of slipping instead of the four in five chance of staying in the upper half of American earnings. We all want to protect our kids from every possible tumble down the socioeconomic class ladder. A 20 percent chance of ending up a bottom 50 percenter frightens us, even if they do choose the career that lands them there. Many of us are still shell-shocked from a financial crisis that made it clear how many grown-ups have it all wrong, from the millions of people who borrowed more money than they should have to the mortgage bankers who egged them on to the investment bankers who turned their loans into securities that they knew would blow up. Something had gone missing in the way many of these people were raised. But what was it?