While “researching” this piece I asked my kids what financial lessons I imparted which immediately made me want to cut them out of their inheritance.  Things like—”Seven  kids fit fine in one hotel room,” you can only have water as a drink in a restaurant and by the way Dad is not allowed to order enough food to quite fill everyone.” They also reminded me of my favorite quotes—“I am raising you without expectations so you will never be disappointed” while I played the family theme song—“you can’t always get what you want” by the Rolling Stones.   

I mean, not bad lessons, in my opinion, if you have seven kids, but hopefully I did better than that.   

I do think it is important to instruct our kids (my kids call it “lecture”) to raise them so they don’t need us. This includes financial lessons. It is human nature to want our kids and grandkids to do better in life than their parents, which I think can lead to simply handing them things. I believe one of the keys to happiness is earning your own way and that is what I try to instill in my kids. No forced expectations on how my kids will earn a living, just that they must and they have to learn to save and invest their own money. I have found these lessons are easier when the parental means are less, but they can be tougher to remember to teach as the parental means grow.  Our 15-year-old is growing up with an old and tired Dad, and my inclination is to say yes a lot more than I did with my older kids, which the older kids remind me of all the time.  But I think it is worth fighting that temptation and work just as hard with him to instill the same life lessons. 

When our kids were younger, we tried a little bit of everything. We paid allowance.  We tied allowance to behavior.  We tied allowance to chores. If one has the means, I think paying allowance is a good lesson rather than simply handing over money on request.  Probably our best effort was paying allowance and having the kids divide it three ways—a portion to spend now, a portion to save, and a portion to give charitably.  If a kid is responsible for paying for part of the fun it gives them a sense of the tradeoffs—if they spend all their money in the here and now, they will not be able to save up for something larger later.  All good lessons, and the discipline of saving is a critical one.   

When my kids were teenagers, there was no better way to learn about investing, I don’t think, than investing with real money.  I believed that funding a small investment account with some of their savings is healthy.  Not all the kids were interested but the lessons learned are good ones.  My kids learned about risk, diversification, and timing. And what it is like to lose and make real money.  When interns join our firm for the summer, we have them pick stocks, and I buy a small amount of each one so they can experience the pressures and the seriousness of potentially losing other people’s money. 

So now when the kids get older and get their first jobs, we have hopefully started to instill in them the discipline of saving and the basics of investing.  I supplement these lessons with the importance of starting early with their retirement plan and the power of compounding and tax-free growth. When they ask me how much they should put aside in their company 401(k) plan, I tell them they should absolutely defer at least the amount up to the company match.  For example, if the company matches up to 3% of the amount they put into the 401(k), they should defer at least 3% because they are instantly doubling the amount of retirement savings and would otherwise be leaving free money on the table.  After that, it is a tradeoff between enjoying their current lives, saving inside the 401(k) plan for retirement and saving outside of the 401(k) plan for retirement or sooner. And which they value more—saving for retirement or saving for something sooner than retirement.   

To hammer home the importance of starting early, I love the popular example from JP Morgan Asset Management A Guide to Retirement.  

In this example, there are two investors, I will call them Sally and John, who are the same age: 

–The early investor, Sally, starts at age 25.  Sally invests $200 monthly for 10 years (until age 35), for a total contribution of $24,000. She stops contributing but lets the money compound for 30 more years until age 65. 

–The late investor, John, starts at age 35. He invests $200 monthly for 30 years until age 65.  He contributes a total of $72,000. 

–If both of their investments compound at 7.25% per year, at age 65 Early Investor Sally ends up with more money ($293,800) than Late Investor John ($254,400) despite John investing three times as much money in total over 30 years.  

I also give each of my kids a copy of Morgan Housel’s great book “The Psychology of Money” when they head off into the workforce. 

There are lots of lessons in the book and it is a great book for young investors.  There are two that stand out to me that I try to pass on to my kids: 

The first is to develop a plan and stick to it and to not be caught up by what is happening in the market day to day. Younger investors have long horizons and picking a plan that follows the rules of diversification whether with ETFs or individual stocks is important.   

The second lesson from Housel is that risk tolerance is most often shaped by first or early experiences.  If you lose money on your first investment experience it might make you less tolerant of risk. And vice versa, if your first experience is successful it might make you willing to take more risk, even inappropriate risk.  I remember when I was newly in the Army and found myself with $1000 of savings for some reason.  I invested a lot of it in a diversified mutual fund, which I had been told was prudent…in September 1987. Two months later, it was $700.  I fought the urge for years to be too conservative or to overreact to current events by doing the wrong thing at the wrong time–rather than sticking to my long-term objective.   

Of all of these lessons, probably the most important lesson I tried to teach my kids is the discipline of saving and developing that discipline early.  The investing lessons of what to do with those savings and the power of compounding are important supplements to those lessons.  If you forget all of these, you can always fall back on—”only order water when you are out to eat at a restaurant because that $4 savings adds up.”    

Disclosures: Howe & Rusling is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill or training. This material is provided for informational and educational purposes only and should not be construed as investment, tax, or legal advice, or as a recommendation or solicitation to buy or sell any security. Any opinions expressed are as of the date presented and are subject to change without notice. Investing involves risk, including the possible loss of principal. Diversification and asset allocation do not assure a profit or protect against loss in declining markets. There can be no assurance that any investment strategy will be successful. Any examples, including compounding illustrations and assumed rates of return, are for illustrative purposes only and do not represent actual client results. Hypothetical results have inherent limitations and may not reflect the impact of material economic and market factors, fees, expenses, and taxes. Actual results will vary and may be higher or lower than those shown. References to employer retirement plans (including 401(k) plans) are general in nature. Plan features, investment options, and employer matching contributions vary by employer and are subject to change. Consider reviewing your plan documents and consulting a qualified professional regarding your specific situation. References to third-party publications or resources (including JP Morgan Asset Management and Morgan Housel’s book) are provided for informational purposes only. Howe & Rusling does not endorse, and is not responsible for, the content, accuracy, or completeness of third-party information. Howe & Rusling will provide investment advice only within the context of an advisory agreement and after gathering information about an investor’s financial situation, objectives, and risk tolerance. For additional information about Howe & Rusling’s services, fees, and disclosures, please review our Form ADV (Parts 2A and 2B), available upon request or at the SEC’s Investment Adviser Public Disclosure website.