#33 | What Did You Learn About Money Growing Up?

Jon “Jag” Gay: Welcome to the Protecting and Preserving Wealth Podcast. I’m Jon Jag Gay, here as always with our host, Bruce Hosler of Hosler Wealth Management. Bruce, quite an interesting topic today. You want to tell our listeners about it?

Bruce Hosler: Jon, this is a very interesting topic. The question that we use in our discovery questionnaire when we meet with new clients and start getting to know them, we ask them, what did you learn about money growing up? The answer to this question holds great insight for us as individuals based on our experience with money growing up.

Jon: Wow, that question has a lot of implications for every one of us, thinking about myself as well as friends and family that I’m close to. Much of our relationship with money, I’m guessing you’re going to tell me, Bruce, is likely formed when we’re children, right?

Bruce: This week, I had the opportunity to meet with one of our clients and one of their young adult daughters. She was very impressive, recently graduated from college, and had secured her first job. This last year, she has saved tens of thousands of dollars and wants to find a way to put her money into accounts that would be earning more than what she’s earning at the bank.

Jon: That young lady sounds like she has her act together financially a lot more so than a lot of other people her age.

Bruce: I would say that she’s off to a very good start. She’s enrolled and is saving in her 401k at work. If we’re able to help her create a lifelong financial plan, her chances of enjoying financial success increase dramatically. My question for our listeners today is, what did you learn about money as a kid when you were growing up? When we ask this question to new clients, we have received a wide variety of answers. Some families never talk about their money. Other families are very open and spoken about money on a regular basis. I know of a very successful gentleman who was the son of a very successful banker. Dinner conversation for them around the family dinner table was talking about financial deals and decisions about business opportunities, how business was done, and the context, financial concepts had helped him to understand at a very young age how business was done.

Jon: Bruce, this is really interesting and I’m thinking about two opposite ends of the spectrum here. On one hand, my wife learned a lot about money as a kid. Her folks taught her really, really well and she’s excellent at budgeting. On the other hand, a dear friend of mine had parents that struggled at the time. Financially, they weren’t always responsible with their money. They never really talked or taught about money and that friend is really struggling as an adult, both in his own life and then also thinking about maybe having to take care of his parents as they get older.

Bruce: That is a prime example of why we all learn many of our early perspectives about money from our parents. I think back to my upbringing, the training that my father provided to us about working and earning money and it positioned me to want to make sure that I learned about business and it created in me a desire to try and be successful financially in my life.

Jon, as a small businessman yourself, how did your experience as a child relating to money have an impact on you and on your current work and financial situation?

Jon: Honestly, Bruce, I grew up middle class. We weren’t starving and we had dinner on the table every night, but we also weren’t taking large family trips or anything like that. I think back to my childhood and when it comes to revenue I make for my business, I’ve got spreadsheets on spreadsheets. This goes away for taxes, this goes to these business expenses, this goes to investing in more production equipment for my podcast business, this goes away for vacations, this goes to my wife to manage the house finance for the month.

She’s very good at it. She’s the CFO of my company and of our marriage. There’s a lot that I learned as a kid that really comes into play now that I’m constantly thinking about as I run my business. I never thought I would own a business, but it’s in large part thanks to my wife and her financial acumen that I’m able to do it.

Bruce: That’s a great example. Thank you for sharing it with us, Jon. My experience in life, even with my own children, lets me know that all of us come into this world with our own natural propensities. Let me give you an example. One of my sons has always been, since he was a little boy, without the need to spend money. If he came into some money, months later, he would still have that money. He just didn’t have a need to spend money. He just didn’t have wants that caused him to want to spend money.

On the other hand, one of my daughters was always inclined to spend money. If she had any money, it would burn a hole in her pocket until she spent it. I don’t believe that we taught these concepts differently to our children. I think their natural propensities came to them when they came into this world all on their own. Have you known anybody like that?

Jon: Yes, me! I am always the one that’s had money burn a hole in my pocket. I joke that I eat geographically. If I’m running an errand and I’m on the side of a town where there’s a coffee shop or a lunch place that I’m not over by very often, I almost have this FOMO, this fear of missing out of, oh, geez, I’m not on this side of town very often and man, they have a great burger over here.

I should just go get this burger or this sandwich while I’m over here because I’m here and I’m not over here every day or every week. I should just do it. You know what? I made a couple extra bucks this week. I can totally splurge on lunch for myself. I am as guilty as anybody on that.

Bruce: All right. Well, that’s a great example of how we have natural propensities. As we meet with clients and find out about what they have learned about money growing up and their relationship to money, it is very interesting to see different things that people learned. For example, in some families, they didn’t have any money so there wasn’t very much opportunity for the children to have experiences making decisions about how to spend money because there wasn’t very much of it.

Other people grew up and had the opportunity either to earn a little bit of money or were provided with an allowance and they in turn had an opportunity to decide how they would spend their money. What’s interesting to me is how people may feel differently about money that they receive from working and the money they received as a gift or an allowance. If someone has had to work for their money, it seems like that money is much dearer to them than money that was received as an allowance.

Jon: I’m thinking again about myself here, Bruce. I’ve had clients that have sent me an Amazon gift card if I did a little something extra for them and that money gets blown right away, but the money that I worked for, maybe not so much. That’s really interesting. Any other insight that might be interesting to our listeners?

Bruce: For many years, I have served as a Boy Scout leader, and specifically, I was a merit badge counselor for the personal finance merit badge. In that merit badge, Boy Scouts learned the difference between saving and investing. I have found that many adults don’t really know the difference between saving and investing. Saving is the act of living on less than what you earn and the portion of money that you did not spend is saved and set aside in some way. That is saving.

Investing is the decision of where to put the money that you saved, whether it be under the mattress, in a bank account, or invested in some type of investment. The type of account that you save it in, whether it’s a Roth IRA or taxable brokerage account or simple bank account, is also a part of investing.

Jon: Well, if one side of that equation is saving and the other side is investing, what do you call somebody who spends more money than they have coming in and lives beyond their means?

Bruce: In debt. That’s what I call that.

Jon: [laughs] Fair enough. I never really thought of that differentiation you mentioned, Bruce between saving and investing. What concepts about saving and investing do people bring with them from their childhood?

Bruce: I’ve seen some families that report to me that their mother or father was a saver and many times if they spoke to their children about saving money and taught them the same concepts, these people grew up and were savers. The opposite of savers are spenders. Spenders can hardly bring themselves to consider saving, if at all, because somehow they receive enjoyment or fulfillment in spending their money.

Additionally, in today’s world, there are many financial demands on families. Especially with the inflation that we’re seeing going on right now, it is making it very hard for people to save.

Jon: Boy, these concepts you’re talking about around saving and investing, they’re so important. Where should our listeners fundamentally start saving first, and then second, if they have the ability to do that?

Bruce: For many people that have the opportunity to participate in a 401k plan at work, that has a matching benefit from the employer. That probably should be the first place that they make sure they’re saving because that money from their employer is essentially free money. Additionally, with the recent comments by Ed Slott advising people that they should stop saving in traditional 401k and IRAs, but rather save in the Roth 401k and the Roth IRA, I agree with Mr. Slott.

Even though they’re not receiving a current tax benefit of pre-tax savings from the traditional 401k, with the expectation that future tax rates are likely going to be much higher than they are today, our listeners would likely benefit the most from saving in the Roth 401k or the Roth IRA first.

Jon: If our listeners should save in the Roth first up to the employer match, what other type of savings might they consider making?

Bruce: When you start saving, you should also have a clear objective or purpose for what you’re saving for. You should divide up your savings by your purpose. Let me give you an example. If you’re saving for the down payment on your first house, that money should not be saved in a retirement plan. The funds that you’re saving for retirement should be in a retirement plan.

Thefunds that you’re saving for a house, or a vacation, or a car, or something that you will need much sooner should be saved in an account that is not penalized for early withdrawal.

Jon: It sounds to me from what you’re saying, Bruce, that people have all kinds of different accounts and they use them to save for different purposes. Do I have that right?

Bruce: That’s exactly right, Jon. The purpose and objective of your savings will determine the type of account you should be saving in and the type of investments you should be using. For example, if you’re saving for an emergency fund, that probably should not be invested in the stock market, folks, which can lose up to 14.3% on average every year. Your emergency funds should be saved in a safe, liquid account, likely like some sort of a bank account that would provide the access you need in the moment of an emergency. On the other hand, if you’re saving for a down payment on a home that you don’t anticipate purchasing until 10 years from now, then those funds could be invested in the stock market early on and participate in that potential growth.

Jon: Do you have any suggestions for our listeners on what they can do to help teach their children, and even their grandchildren, important concepts about money?

Bruce: Yes. First of all, parents and grandparents should take the initiative to talk to their children and grandchildren about money. One of the first mistakes that I see many young adults make is regarding credit and credit cards. When kids move away from home for the first time and go to college, all of the credit card companies are anxious to provide these young college students with a credit card. I’ve seen it time and time again.

Jon: I was one of those college students myself once, Bruce.

Bruce: Okay, so then you know what I’m talking about. Those young adults get that credit card and they run up the balance not fully understanding that it will take them years to be able to pay that credit card back down. They do not read or understand how the high interest rates that credit card company charges them on that outstanding balance will affect them. Right from the beginning, many of these students become prisoners of credit card debt, and they don’t even realize it. Debt is a terrible taskmaster, and it enslaves many young people before they even realize that they’re captors.

Jon: As the kids say, Bruce, I feel seen, because I was one of those college students, as I mentioned. I graduated college in 2002, so when I was in school, it was, hey, get a free t-shirt if you sign up for this credit card. I don’t know if they’re still offering free t-shirts or what the offer is, 25 years later. And then when I ran out of money my last semester in college, again, that FOMO, that fear of missing out, I didn’t want to miss out on those last precious nights at the bar with my friends in college.

I was swiping the credit card three nights a week at the bar my last semester of my senior year and throughout my 20s and 30s. I was still paying that off well in my 30s.

Bruce: Whoa.

Jon: Yes, that’s a cautionary tale but let’s move on to the other side of it, Bruce. What else can people talk to their children, their grandchildren about on the plus side?

Bruce: They can teach their children the concept of saving, learning the important lesson of actually living on less than what your income is the very seed of financial success in this life. Children growing up, learning the ability to save, and learning about compound interest and how to make that work for them instead of against them are very important financial principles for children to learn about.

Jon: Bruce, I know you’re really a big fan of helping people learn from their mistakes. My mistakes that I’ve already mentioned aside, how can our listeners help their families learn from mistakes as well?

Bruce: I believe that we learn much more from our mistakes than from the occasions that we guess correctly the first time. If you’ll consider that to be a principle, then it makes sense to allow our children to practice making decisions and experiencing the consequences of making a mistake or choosing wisely. When children, teenagers, or young adults are allowed to make small but regular financial decisions, that exercise of choosing helps them to become proficient at making wise financial decisions.

These experiences of making decisions on their own and suffering the consequences or experiencing the success of a good decision can help prepare young people to become wise financial decision-makers in adulthood.

Jon: I think back to when I did have an allowance in high school and I think I probably blew a month’s worth in a week on a video game and then I had no money to walk around with the rest of the week. Heck, riding my bike to the candy store and buying way too much sugar as a 15 year old. I’ve made all the mistakes.

Bruce: All kids do, Jon. Don’t beat yourself up. That’s okay.

Jon: I appreciate the forgiveness there. What about adult children, Bruce? How can parents and grandparents help their adult children?

Bruce: Most of our listeners know that from my research, I believe that tax rates in the United States are going to increase dramatically with the likelihood of doubling for many American taxpayers in the next 10 years. This means that for our children and grandchildren, they may be suffering from tax rates likely in the 40%, 50%, or maybe even 60% or higher in the future.

Now, I know that sounds like a shock value, but given the choice, we as parents and grandparents can choose to move our investments from tax-deferred accounts to tax-free accounts so that we can potentially leave a tax-free legacy of inheritance toward children and grandchildren. Now, that may involve paying some taxes right now because that means we have to pay the taxes today when the tax rates are in the 22% to 24% tax brackets.

Additionally, if we plan properly, we can arrange our affairs in such a way that we can take advantage of the step up in basis tax laws when we die. This can potentially leave the remainder of our estate income tax-free to our heirs if we do it right.

Jon: You’re suggesting that clients pay the tax now to convert their IRAs and 401ks to Roth IRAs and Roth 401ks, do I have that right?

Bruce: That is correct. I’m not suggesting that they do it all in one lump sum, but rather use the tax bracket strategy and begin converting those funds in a strategic method over the next 10 years. You don’t convert too much in any one year, but you spread it out and convert them over 10 years equally. I believe that the tax rates may go up and go up significantly before the 10 years is up in 2033 when the Social Security Trust Fund runs out of money and the choice between raising taxes and cutting Social Security benefits to recipients is the decision that the politicians will have to make.

I believe that they will choose to raise taxes at that point and the amount of tax that they will have to raise to cover Social Security will be an obligation that appears to be very dramatic.

Jon: Yes, I can’t imagine that with the level that older Americans vote in, that politicians are going to want to cut Social Security. I agree with you on that one, Bruce. What about helping out young adults right now? How can parents and grandparents do that without doing more harm than good? Like helping that chick break out of an egg. The struggle that chick must make to break out of the egg makes him stronger and more likely to survive from that effort.

Bruce: I had to work my way through college, and I believe that there are great benefits for college students holding a part-time job in addition to their schooling. I’ve had siblings and other clients that believe that when their child is in school, that school should be their full-time job and that’s what they should focus on, making sure that they get good grades so basically, doing school full-time and not working.

I don’t want to argue with anyone over the benefits of one belief or another, but today, with the cost of education being so outrageous, parents and grandparents can help fund a college savings account. These are called 529 accounts, and that can help ease the burden on young adults trying to attend a college, University, or a trade school to get the education they need to secure a good job.

The benefits of education and financial success are clearly correlated together. Helping your children get the education they need in order to secure a good career is fundamental in helping them achieve financial success in their life. Another opportunity, though, that parents and grandparents can use to help young adults, assuming that the parents and grandparents have the financial wherewithal to cover their own retirement first, they can make annual gifts of up to $17,000 per person annually, without any gift tax consequences to either themselves or the recipients of their gifts.

This can be a great way for grandparents and parents to help out young adults to secure enough money for a down payment on a first house or perhaps help buy a needed car or help with some other emergency need that is beyond the financial resources of that young adult.

Jon: Bruce, as always, this really has been great information. Is there any other financial knowledge you want to share with our listeners about helping young people learn about money before we wrap this up?

Bruce: I want to remind our clients that may be listening to this podcast. Now, this is our clients, not you listeners regular, but our clients can send their children and grandchildren to reach out to our firm and request assistance and advice with any financial decisions that they may need to make, whether it be on taxes, investments, financial planning, estate planning, insurance, or anything to do with money. They can reach out without any charge and talk to members of our team.

Jon: Bruce, with the lack of financial literacy among young people these days, that really does sound like a great benefit to offer to your clients and their families.

Bruce: As a team at Hosler Wealth Management, we find it very fulfilling to help these young people get started on the right foot, making wise financial decisions.

Jon: Okay, so those are for your clients and their families. If any of our listeners want to get in touch with you and your team, find out more information about these concepts, and maybe become a client, what are the best ways for them to reach youat Hosler Wealth Management?

Bruce: Jon, they can reach us at www.hoslerwm.com or call our offices in Scottsdale at 480-994-7342 or up in Prescott 928-778-7666. Thank you, folks, for listening today and I hope you’ll reach out and give us a chance to help you and your families.