Do you spend money easily? Do you always want new clothes, music or gadgets? Or are you more frugal and careful with your cash?
Ron Lieber writes in “Why You Should Tell Your Children How Much You Make” that parents should be upfront with their children about family finances. Talking about the household budget can help prepare young people to be more responsible savers and spenders.
Mr. Lieber writes:
When Scott Parker wanted his six offspring to know more about the value of money, he decided to do something that many parents would consider radical: show them exactly what he earned.
One day, he stopped by his local Wells Fargo branch in Encinitas, Calif., and asked to withdraw his entire monthly salary in cash. In singles. It took 24 hours for the tellers to round up that many bills, so he returned the next day and took away the $100 stacks in a canvas bag.
His oldest son, Daniel, who was 15 at the time, remembers the moment his father walked into the house and dumped the $10,000 or so on a table. “It looked like he had robbed a bank,” he said.
After a pause to let it all sink in, Mr. Parker began peeling off bills. He told them about taxes, set aside money for a tithe to their church and made a big pile for the house payment. The singles piled up for soccer and scouting and hamburger night. By the end, there wasn’t much left over. “I was trying to make as big of an impact as I could, and I definitely had their attention,” he said recently.
Your children deserve to know what you make, too. It may sound improbable, but you can begin to initiate them when they’re as young as 5 or 6, building their knowledge slowly and giving them the real answer while they’re still teenagers. Handle it right, and it will be one of the most valuable lessons of their childhood.
Here’s the bigger problem this helps to solve: Money is a source of mystery to children. They sense its power, so they ask questions, lots of them, over many years. Why isn’t our house as big as my cousin’s? Why can’t I have a carnivorous plant terrarium? Why should I respect my teachers if they earn only $60,000 per year? (Real question!) Are we poor? Why didn’t you give money to the man who asked you for some? If my sister can have Hello-Kitty-themed Beats by Dre headphones, why won’t you get me the Bluetooth-enabled Lego Mindstorms set? (It’s only $349, and it’s educational, Mom!)
We adults, however, tend to do a miserable job of answering. We push our children’s money questions aside, sometimes telling them that their queries are impolite, or perhaps worrying that they will call out our own financial hypocrisy and errors. Sometimes we respond defensively and viscerally, barking back, “None of your business,” unintentionally teaching our children that the topic is off limits despite its obvious importance. Others want to protect their children from a topic many of us find stressful or baffling: Can’t we keep them innocent of all of this money stuff for just a little bit longer?
— Are you a saver or a spender? Do you always like to buy new things? Or would you rather put aside your money for the future?
— What have your parents taught you about the value of money? What lessons and attitudes do you think you have learned about money from your family, either directly or indirectly?
— How much does your family talk about money, about saving and spending? Do you ever discuss your household budget, such as how much money you make and spend each month? Do you agree with Mr. Lieber’s position, that parents should be transparent about the family finances with their children to build financial awareness? Why?
What makes one person focus on saving for his or her future, while another is totally oblivious and winds up hopelessly in debt? It turns out that our relationship with money is much more complex than we think.
Debunking conventional wisdom
In the 1996 best-selling book, The Millionaire Next Door, authors Thomas Stanley and William Danko revealed some little-known behaviors of the majority of millionaires. While millionaires, of course, were often high income earners, they were also hoarders who rejected the big-spending lifestyle. They tended to drive older cars, shop for bargains and not flout their wealth.
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Conventional wisdom presumes that we learn our saving and spending habits from our parents and pass them down to our children. While this may sound intuitive, research suggests that presumption is not true. Thomas Stanley’s later research demonstrated that rather than emulating their parents’ financial restraint, children of millionaires are often spenders who can blow through a large inheritance.
What causes us to be savers or spenders?
The subject of why some run as fast as they can to keep up with the neighbors, and why others don’t, hasn’t been well explored in academia. Some research indicates that the cause comes down to the way our brains are wired. Here are two theories that explain some of these differences:
Theory 1: The pain of paying
A paper entitled “Tightwads and Spendthrifts” addressed the issue of what makes some consumers more likely to buy things than others. Published in 2008 in the Journal of Consumer Research, the article theorized that the pain of paying drives tightwads to spend less than they would ideally like to spend. In contrast, spendthrifts don’t experience the same amount of pain and spend far more than they would like to spend.
The paper referred to some research in which participants were given a series of purchase decisions while having their brains scanned. It found that the purchase motivation was inversely related to activation in an area of the brain called the insula, a region that is commonly active when experiencing painful stimuli such as disgusting odors. The more the activity in the insula, the less likely the consumer was to make the purchase.
Theory 2: The joy of saving
The opposite of the pain one feels upon spending is the joy received from saving. The study found that the highly frugal tend to get joy from saving. This pleasure comes not only from not spending, but also from getting a good deal. Surprisingly, those who got the most pleasure from saving were not always those who experienced the most pain from spending. This suggests that some people spend conservatively for very different reasons.
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I spoke to behavioral economist Meir Statman, of Santa Clara University, on the joy of getting a good deal. Statman stated that a $70 steak will taste much better if the saver managed to get that steak for $7. But this is true only if the saver knows it’s a $70 steak. If we think it’s really a $7 steak, then it will not be perceived as tasting as good as a steak with a $70 price tag. Thus, savers will achieve the additional pleasure only if they believe they scored a better deal than the rate everyone else was paying.
Can adult behavior be changed?
While it’s not easy to change someone’s behavior in adulthood, reframing the way we think about money can help. Here are a few suggestions.
Our relationships with money can be either healthy and constructive, or unhealthy and destructive. Neither excessive spending nor excessive saving is desired. What causes us to be spenders or savers is still not very well understood. Is it nature, nurture or, to some degree, just a random trait like other personality traits? There are many examples of families where one child is very outgoing and the other child is shy. The same may be true when it comes to building our nest egg.
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Much more research is needed in this area. For now, there are practical lessons we can take from the data that exists. One is in the merits of teaching children delayed gratification at as early an age as possible, and another in the marginal behavior change that can be achieved with adults by reframing buying decisions.
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