Myth #10: I Can’t Say No To My Kids

One of the most common myths about money crops up in relationship to our children. It goes something like this: If I deprive my children, I’m a bad parent. The vogue these days is to lavish on our children everything they desire and then more. We don’t want to deprive them of anything.

We have forgotten how to say no.

Perhaps we fear losing their love and devotion. Today’s families have less time to spend with their children. In more families both parents work, often spending extended hours on the job, and more families are headed by single parents. So to compensate for not having as much time to spend with our children, we give them things, believing it will make them happy or will demonstrate how much we love them.

Whatever the reason, the situation has grown to absurd proportions. Our kids tell us that they just have to have 7 For All Mankind jeans, which cost $165! All their friends are getting them! If we say no, how are they going to look to their friends? We don’t want them to feel embarrassed or deprived. We get them the designer jeans because everyone else is doing it for their kids.

We talk about it with the other parents. We comment on how silly it is and how expensive the jeans are. But we still buy them. We have forgotten how to say no.

If we don’t say no sometimes—in fact, if we don’t say it fairly often, our kids are not going to understand that they can’t have everything they want in life. What message do we want our children to learn? That everything they want will be given to them? Or do we want them to realize that there are some limits to what is available—and they can help to earn it, if it’s really important to them?

What about a joint effort? “I’ll buy you the $60 jeans, but if you want the ‘7’ jeans for $165, you have to work to make up the difference.” By using this approach, you would be teaching them that it’s okay to have lofty goals, but you have to work to achieve them.

Walt is forty-four. His parents provided for him abundantly his whole life, including paying for his room, board, and tuition for four years of college. But the thing he remembers most occurred when he was nine years old. More than anything else, he wanted a red ten-speed Schwinn bicycle. No other kid on the block had a ten-speed yet. His dad, instead of just buying it for him or giving it to him for Christmas said, “I’ll tell you what. I’ll pay for half of it, but you have to earn the other half on your own.”

Walt took a newspaper route and he sold cookies door-to-door. In four months, he was delivering papers on his new red ten-speed Schwinn bicycle.

“It really made an impression on me,” he said. “I liked it, having to earn the money. It bothered me at first. I thought it was unfair. It seemed impossible that I could earn $60 on my own. But I did it. And I have never been prouder. I took care of that bike, too. Something in me really wanted more of that—having to earn my way, at least part of the way.”

Walt, like a lot of kids, wanted to be responsible. He enjoyed the powerful feeling of “I did it. I earned that!” He did what it took to get there. It wasn’t just given to him. He felt the enormous satisfaction that comes from achieving a goal.

Kids need and love boundaries. When kids are given everything they ask for during their developmental years, it makes a strong imprint. They grow up believing they should have everything. It creates and reinforces a mindset that says the way to get something is to demand it—or always expect that it will be given to you. It eliminates the cause-and-effect relationship between productive effort and reward. It sets in motion a materialistic pattern that will cost both you and your children tens of thousands of dollars over the years.

Myth #9: Only The Best Will Do for My Kids (part 2)

The “only the best will do for my kids” attitude is especially prevalent among first-time parents, whose buying habits for the new family member can be overwhelming. They buy as if the baby will wear things out the way they do. And they consider used cribs, strollers, toys, and clothes unacceptable. They feel compelled to head down to the Baby Designer Store with their charge card flashing, to buy a fancy changing table, the hand-painted $925 sleigh/crib, a state-of-the-art stroller, and colorful designer baby clothes!

They forget that in the case of a crib, the baby just lies around in it—for about two years. She’s not going to wear it out, and she doesn’t care if it’s made of tight-grain antique mahogany. It’s just a crib. The clothes she wears will be outgrown in four months. Are they soft? Comfortable? That’s all she cares about—not that her new sleeper suit has a designer label and cost $35.

The fact is babies don’t need all the stuff we feel obligated to get them. And they certainly don’t need it all to be new. I know a family who has bestowed hundreds of toys on their young, firstborn child. The only one he cares about is a little red plastic guitar with three strings. He carries it around constantly and has composed his own “songs” that he loves to sing for visitors. He couldn’t care less about all the other stuff.

Practically speaking, the things we buy for our kids are used for a short period of time and sometimes not at all. Go look at all the toys your kids have, including the ones that have been around for years. I bet you will find that they look almost new. And even if they don’t, they still work fine. And where do these things end up? First you store them in the closet because you can’t bear the thought of throwing them away. And later, when the closet overflows, you throw them away or give them to charity.

Think back on your first four or five years of life. How many of your toys do you remember? How about the clothes you wore? Your crib? Was it these things that made you feel happy and loved? Would you have considered it emotionally devastating if your first rocking chair hadn’t been brand new? Is your well-being today based on the fact that you always had new clothes?

A newly-pregnant wife and her husband came to see me for financial planning. They were assessing their financial situation and formulating their goals. They listened to my recommendations about not having to buy everything new for their baby, and they took it to heart. They went to all their friends who had young children and collected all of their hand-me-downs—very nice ones, in fact! They saved hundreds of dollars by not buying new. And if they keep this up over the next five to seven years they will save many, many thousands of dollars.

Some people tell me they just couldn’t do that. They couldn’t call up a friend or co-worker to ask them about used stuff for their kids. They fear they will be looked upon as unsuitable parents who aren’t willing to buy the best and the newest for their kid. And they fear that it will tip the cards that they aren’t wealthy enough to buy these things new.

If you have something in your attic or basement that you don’t need or use, and a friend expresses an interest in it, are you going to look down on them because of it? Of course not! Nor will other people look down on you when you ask them. Most people are quite happy to part with these things—you are actually doing them a favor by taking it off their hands.

Now, there are certain times when buying new is the way to go. When my neighbor had her kids’ pictures taken recently, she wanted the job done by a professional. She wanted them to have new clothes, so she bought them. The decision was a conscious one, based on a specific situation. It was not the automatic response that since it was for her children, it had to be the best, and it had to be new.

The cost of automatic behavior can really add up. A middle- class family spends almost $275,000 on a child up to age eighteen. A more affluent family spends more than $358,000. The difference, $83,000 is largely attributable to the number of things bought for the child and a zeal to buy everything brand new every time. Just think what a difference $83,000 can make towards your retirement.

Remember that for children the bottom line is the love, acceptance, and attention you give them, not whether you buy them the best.

Myth #9: Only The Best Will Do for My Kids

Do you have any idea what it costs to raise a child? Are you sitting down? It’s a shocker.

According to the U.S. Department of Agriculture, a middle-class couple will spend almost $275,000 on a child born today and raised to age eighteen. Add in four years of college expenses and the total is more than $415,000 (assuming you will send your child to an instate public university). More affluent parents, whose combined income is over $72,480 a year, will spend more than $358,000 to raise a child to age eighteen. If they send the child to a state university, the total reaches nearly $500,000.

For a middle-class family, this averages $1,289 a month per child over those eighteen years, excluding the cost of college. For a more affluent family, the cost is $1,658 a month per child.

These costs include prenatal care, delivery, childcare and education, housing, food, transportation, health care, clothing, and other miscellaneous expenses. They do not include the cost of lost wages or income as a result of having a child and I’m not sure the amount assumed for childcare and education is realistic.

Having or not having children is a personal choice that defies a purely economic analysis. However, having embarked on the path of having a child, you would do well to understand the economic implications of the decision.

My clients have a pervasive attitude that their children deserve the very best. They rarely look at the day-to-day cost associated with this attitude—which can be staggering.

Underneath the belief system of having to give their children the very best is a theme mentioned earlier in this blog about parents automatically paying for college: I cannot deny my kids anything—otherwise I’m a bad parent.

Baby boomers believe they need to give their kids everything, and everything needs to be brand spanking new.

When my younger daughter Annie turned two, her best friend owned one of those little plastic cars that the kids can get in and propel around. Whenever Annie went to visit this friend she climbed in the car and wouldn’t get out. She just loved it. So for her birthday, the obvious choice was her own little car. I was about to head out the door to buy a new one, when some friends told us that they had a toy car their child had outgrown and that Annie could have.

But they didn’t drop it off at the house when they said they would and Annie’s birthday was approaching fast. Finally, I said, “Tomorrow, I’m going to buy a new one.” I didn’t really want her to have a crummy used car anyway. A new one would be better. After all, Annie is my daughter—she should have the best.

On the front porch the next morning was the used toy car. We gave it to Annie on her birthday and she loved it. It was perfect. And guess what? It rained every day for two weeks after Annie’s birthday. As I saw the car sitting outside in the rain, I realized that it wouldn’t have taken long for a new one to look just as used as the car we got from our friends.

Because we love our children, we think we have to spend whatever it takes to get them the best. And we don’t question this attitude. We also make the association that “best” means the same as “new.” It’s ridiculous!

Myth #8: Pay Off Your Mortgage Early

Oftentimes people say, “I really want to pay off my house.” I ask them what their mortgage interest rate is. These days, the answer is usually in the 6% to 7% range.

I then show them an investment return analysis covering ninety years. From 1900 to 1990 a nicely diversified portfolio of 60% stocks and 40% bonds would have earned a 7.75% rate of return. And a portfolio allocated 60/40 stocks to bonds is rather conservative. A higher allocation of stocks would have earned a higher rate of return. And as everybody knows, over the last sixteen years, we have earned returns from stocks and bonds greater than 7.75%.

To pay off a mortgage requires coming up with a healthy chunk of money all at once, or making larger mortgage payments than required each month. Instead of using that money to pay off their mortgage, I suggest to my clients that they invest it. If past history holds true, they will probably earn a return at least equal to their mortgage rate. Even if they earn the same percentage as they are paying in interest, they will come out ahead by keeping their mortgage because they receive a tax deduction for the interest paid on the mortgage.

If instead of applying $100 a month toward early payoff of your mortgage, you took that same $100 and invested it for thirty years at 8%, it would grow to $140,855. If you made your regular house payments during that same thirty years, you would then own your house free and clear, and have a pretty good investment account to use for other purposes.

Yet some people will read the simple analysis above and start to sweat. All their life they have had this goal of paying off their mortgage early. Even though, from a rational economic standpoint, they might earn more in the long run by investing the money in stocks and bonds, they feel better paying off their mortgage instead.

And to them I say: Pay off your mortgage.

Every financial decision involves a blend of analytical and emotional factors. We are told that emotion doesn’t belong in business or in financial decisions. But, in fact our decisions are often primarily based in them. To deny our emotional needs in financial decisions is to deny ourselves—the part of us that needs to feel good about what we are doing and to feel safe.

Remember that financial planning is usually based 80% on fact and 20% on emotion—except when the decision is based 100% on emotion.

I often work with couples where one spouse is very analytical. Stereotypically, the husband arrives with all the mortgage amortization schedules and has all the proof to show his wife why they shouldn’t pay off their mortgage. He listens to me reinforce his position and smiles.

Then I tell them that emotional factors should sometimes take precedence over analytical results and the wife lights up. If one spouse has strong emotional reasons to pay off the home, I may support doing that over what the strict financial analysis might show. The emotional drain of not having the mortgage paid off may actually be more costly than the amount of money they are bypassing by not investing in the market. Some people find that the peace of mind that comes from living in a house that is paid for is priceless.

One client worked for a company that was bought by another company. As a result of the buy-out, his stock options increased in value by 35% percent. His net worth increased to over five million dollars. Do he and his wife have enough money? Shouldn’t that amount of money give them peace of mind? Not in this case. His wife will not be comfortable until their mortgage is paid off.

But he didn’t want to pay off the entire mortgage immediately. In the end, they compromised. They made an agreement that 25% of everything from the old company stock that is sold would be diverted and will go toward paying off the house. The other 75% can be invested in the market. This accomplishes what the wife needs and, at the same time, takes advantage of the higher potential returns they can make in the market.

Paying off a mortgage early may give you peace of mind. Who cares about a few percentage points one way or another if you sleep better at night? Go ahead and pay off your mortgage. Just be clear why you are doing so.

But if optimizing your long-term financial return is important to you, then begin to see your mortgage interest in a different light. You could take the money you would otherwise be using to pay off your mortgage early and invest it in a diversified portfolio. Over a time period of ten years or longer, your portfolio could potentially earn you a higher return than your mortgage interest rate. In the long run, you would probably come out ahead.

Myth #7: Owning a House Means I’ve “Made It” (part 3)

To rent or to buy comes down to a lifestyle choice. First look at the facts: What are the true costs of buying versus the cost of renting? Once you can clearly see the facts, does it make financial sense to buy or rent? If rent comes out on top, then stand back and ask yourself, “But, do I want to rent?” The answer may very well be “no.” If so, the emotional issues may outweigh the financial ones.

I tell my clients that most financial planning decisions are based 80% on facts and 20% on emotions—except when the decision is based 100% on emotions. The decision to rent or buy a home is a perfect example of this principle. No matter what the facts are, sometimes our emotions are the real reason we decide to do things. If you run the numbers, they may show that it is more cost effective to rent: the fact. But you may just feel better knowing that the roof over your head is one that you are going to own one day: the emotion. If you decide to buy when the facts suggest differently, that is a decision 100% based on emotion. That’s fine, as long as you decide it consciously.

The important thing is to make the decision based on the lifestyle elements that are really important to you. Avoid making an automatic decision to buy because you have been told it’s a great investment or because you feel it’s necessary in order to be considered a grown-up.

If your reason for buying a home is based on financial issues alone and the analysis shows rent is better, then rent. If you need the emotional security of owning, then buy.

Financially, you’ll make few purchases in your lifetime that rival the cost of a home. Study your alternatives closely. Understand your options, and then weigh the facts against your underlying values and emotional needs.

You do not have to buy a home to “have it made.” It is equally okay to rent. The choice is up to you.

Karen Ramsey Introduces new Educational Video Library

Certified Financial Planner professional and three-time book author, Karen Ramsey, now has her very own Educational Video Library on Vimeo.

Karen Ramsey has been teaching her clients and members of the general public about personal finance basics and smart savings strategies for over 20 years. On her new Educational Video Library, you will find some “best of” videos produced by PBS and other television stations, private educational companies, and Ramsey herself. Check back often for new educational videos featuring personal finance tips and investing advice.

Visit the Educational Video Library and learn more now!

Myth #7: Owning a House Means I’ve “Made It” (part 2)

If you decide to buy a home, make sure that your decision is not based on peer pressure like “You are not a respected member of society until you own a home.”

I know a young professional couple who recently moved to Seattle and are renting a home. They have plenty of disposable income and would have no problem qualifying to buy a home. Yet they could not tell me with any conviction that they planned to stay in this area for more than three years. They have parents back east and they wanted to be able to respond quickly if their parents’ health failed. They didn’t want to be stuck with a house.

They are prime candidates to continue as renters. They should make mobility a priority, and not buy.

Now, let me turn the tables on you. Based on an analysis of your situation, even if renting does make more sense financially, it still might be best for you to buy a home, once you factor in the emotional issues.

There are risks involved in renting. You are subject to the whim of the landlord. You may have to move with only a few months’ notice. The rent may go up. (However, home ownership does not make you immune to rising costs. Real estate taxes, insurance, and maintenance costs all are liable to rise beyond your control.)

However, you may need the peace of mind brought by the long-term security and stability of owning a house. You may want to have a home you can upgrade or remodel. You might want to develop an extensive garden or make improvements to the landscape. You might want to paint it pink.

Kym is a client who is an account executive at a media firm. She is also an artist, and she wants to develop a business painting portraits. Her husband is a freelance writer who survives economically by writing copy for commercial clients. He, in turn, would rather work on his own short stories and leave the commercial work behind. They currently rent a home.

They are thinking of buying a house. I worked with them to determine the amount they could spend on a home based on their current income level. They can afford one that costs about $295,000.

I said to them, “Are you sure you want to do this? You’ll most likely have to keep working full time at the media company and your husband is going to have to continue doing corporate work for some time to afford it.”

Kym said, “We just don’t like being at the mercy of the landlord. We never know when rent is going to go up and we might have to move before we are ready. A house that is our own will give us a base camp that we can rely on. We can then make some long-term planning decisions in our life. And fixing it up will be a form of self-expression for us.”

Because their rent is low, if they kept renting it would allow them the chance to make some career changes they both want. But the need for a long-term base, for the security of knowing that they will not have to move at the whim of a landlord, wins out. It wins out even if it means they will have to continue doing work they do not entirely enjoy. That is okay because it is a lifestyle choice they are making consciously. Another couple in the same situation might prefer to do their hearts’ work, even if it meant they’d earn less and have to rent.