How to Teach Kids about Money (without making their eyes glaze over)Submitted by Financial Planning Hawaii on August 27th, 2014
[The information contained herein is for educational purposes ONLY. Any reference to securities or investment products is not intended to be an offer, solicitation, or recommendation.]
Financial illiteracy is often cited as a leading reason why the vast majority of Americans are far behind in saving for important long term financial goals, such as retirement and higher education funding. Gaining an understanding of basic investing concepts, especially at a young age, can be an incredibly valuable life skill – a skill that can mean the difference between providing for one’s family’s financial security and just scraping by.
Aside from having a keen eye for antiques, my parents were no different from most other Americans with respect to their limited investment acumen. As a teenager in the 1980s, I remember hearing bank and brokerage advertisements on the radio talking about “money market accounts”, “Keoghs”, “IRAs”, and “mutual funds”, and having no idea what those terms meant. When I graduated from high school in 1984, I knew absolutely nothing about finance. I did not know common stock from livestock. The jargon was completely foreign.
A degree in economics and a series of serendipitous events (i.e., dumb luck) led me to stumble into the investment industry at age 22. In looking back a quarter century later, I feel immensely fortunate to have obtained the knowledge to make sound financial decisions at an early age and appreciate the importance of imparting arguably the only valuable skill I possess on to my own children. So, now that our oldest son, Noah, is a teenager, I decided to get serious about talking to him about money. Our first conversation began as follows:
JR:“Noah it’s time you started to learn about investing. Whether or not you or your brothers decide you would like to take over the reins at Financial Planning Hawaii one day, managing your own finances is a skill you are going to need for the rest of your life.”
Noah (without looking up from the Xbox): “Sure, dad. Whatever.”
JR: “Okay. Tell me what you know about how the stock market works?”
Noah (eyes now in full roll): “You buy these things called stocks and they make you money.”
Valiantly, I pressed on in my attempt to engage him in a two-way dialogue about balance sheets, revenues, P.E. ratios and the like, but, much to my chagrin, in less than two minutes it was painfully clear that Noah’s attention level devolved from mildly disinterested to completely zoned-out. My intent was to slowly introduce Noah to the jargon and to eventually get him to the point where the concepts are as second nature to him as his “Call of Duty – Black Ops” video game. Instead, it was “Game Over” faster than I could say “S&P 500”. This attempt to turn our living room into a classroom was, to use the boys’ vernacular, an “epic fail”.
What I learned from this encounter (and probably should have known from the outset) is that talking about investments with dad is about as much fun as doing chores, yard work, or getting shots at the doctor's office, and that, if I truly want to expose my kids to this stuff, I need to find a better way to engage them. After some deliberation, I came up with the following blueprint for educating my boys:
- Give them money to invest on their own and give them incentive to stay engaged. Noah is actually interested in doing this. I don’t care what he buys – stocks, bonds, mutual funds, pork bellies, etc. The only caveat is that I am going to make him do at least a little bit of fundamental research to understand what he is buying. I have told Noah that he can take out any profit he makes at the end of one year to spend as he wishes, and that, if he is actively engaged in the endeavor, I will add more to his “hedge fund” over time. This is consistent with today’s progressive teaching philosophies and “hands on” learning.
- The Peter Lynch approach - Look for opportunities in everyday life to make the subject tangible. For instance, we observed that people seem to be increasingly gravitating toward Silk brand soy milk and almond milk and that the price is roughly the same (in Hawaii, at least) as regular dairy milk. This lead us to ponder whether one could take advantage of this trend by investing in Silk. A quick Internet search lead to the discovery that Silk is owned by a publicly traded company called Whitewave (WWAV)*. Similarly, the boys have noticed that a cool new milkshake machine from a company called Freal has been popping up in 7-11s all across Oahu. Research revealed that Freal machines are available for franchising at a cost of around $10,000 each, but that the company is privately held. Yesterday, a jazzy new Coca-Cola soda fountain at the Phoenix Science Museum lead to a discussion of trends in the beverage industry and of a comparison of Coke (KO) (Coke, Diet, Zero, Dr. Pepper, Sprite, Fanta, Minute Made, Dasani, Powerade, etc.) and Pepsi (PEP)(Pepsi/Diet, Lipton, Mtn Dew, Gatorade, Tropicana, Aquafina, Lays, Doritos, Ruffles, etc.) business models and branding strategies. These three discussions have come surprisingly easily and have engaged all three Robinson boys.
- Watch Popular Investment Related Movies. “Wall Street”(1987), “Wall Street: Money Never Sleeps” (2010), “Boiler Room” (2000), “Enron: The Smartest Guys in the Room” (2005), “The Wolf of Wall Street” (2013), “Trading Places” (1983), and “Bonfire of the Vanities” (1990) are all examples of entertaining investment-related films. Obviously, these may not be age appropriate for younger teens, but for older teens and college age children, these types of movies introduce real world jargon and concepts and are useful in presenting an unvarnished view of the dangers of investing as well.
- Read [interesting] books. As one would expect, this suggestion was not met with great enthusiasm from Noah. His knee-jerk revulsion is attributable to both teenager apathy and a preconceived notion that I am talking about educational, textbook style books. While there is no easy cure for the former, the latter aversion was partially ameliorated when I told him that my reading list is comprised of only interesting books that he may actually enjoy reading. Books by authors such as Michael Lewis (author of “The Blindside” and “Moneyball”) and Tom Wolfe (“The Right Stuff”) are NY Times Best Sellers and are so engaging that many readers have a hard time putting them down. The following is a partial list of some of my favorite books in the investment-related genre:
Bonfire of the Vanities -Tom Wolfe
Historical Non-Fiction (These books are as engaging as any novel)
Liar’s Poker – Michael Lewis
The New New Thing: A Silicon Valley Story – Michael Lewis
The Big Short: Inside the Doomsday Machine - Michael Lewis
Boomerang: Travels in the New Third World – Michael Lewis
Den of Thieves – James Stewart
Barbarians at the Gate: The Fall of RJR Nabisco - Bryan Burroughs and John Helyar
Educational (but interesting, engaging, easy reading)
Freakonomics: A rogue economist explores the hidden side of everything - Steven Dubner and Stephen Levitt
For teens and young adults who do not plan to pursue finance or economics academically or as a career (or even for those who do), it is important to gain the basic practical knowledge to be able to make sound decisions about their own financial plans. This blueprint was developed with that in mind. Realistically, I don’t expect that Noah will make it through everything referenced above (particularly the reading list), but, so far, at least, I am having greater success with this methodology than with my initial approach. Feel free to pass along this article to your children or grandchildren if you think it may have practical applications in your family too. Additional ideas and suggestions from readers are welcome as well.