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Inflation’s Hitting the Tooth Fairy

My six-year-old just mentioned that her friend got $20 from the Tooth Fairy. Is that the going rate?

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Twenty bucks is nearly four times the national average, which hit an all-time peak in Canada this year at $5.99. It’s possible the Tooth Fairy was feeling generous, but equally likely she forgot to make change before flying in. 

Given the predictability of this particular payday (20 teeth over about six years), tooth loss is a great opportunity to talk about, you know, fiscal responsibility. Sound about as fun as oral hygiene? Okay, we get you, but the tooth fairy really is a good way to table topics like saving and investing, even inflation (the rate of increase in prices over a given period of time). 

Let’s look at the numbers: 20 teeth x 5.99 = $119.80. Your child’s mouth is building an empire, so it’s as good a time as any to talk about what that money could do over time. 

Delta Dental is an American insurance company that has been tracking the tooth fairy’s financials since 2001. It turns out the amount kids find under their pillow is a good barometer for the overall economy. Your average baby molar fetched more in 2006 than it did in 2008 following the economic downturn. And the fact that rates are higher than ever this year is an encouraging sign of post-pandemic recovery. Another principle at play is what’s known as income elasticity of demand. This is the idea that when people (or fairies) have more money on hand, there are certain things they tend to splurge on disproportionately. Children are one of these items.

So while the TF’s feeling generous, take advantage of a happy time and a teachable moment—while it lasts. One columnist recently argued that given the terrible hours, unsafe working conditions, and non-existent travel budget, the Tooth Fairy may be ready to join The Great Resignation. Who could blame her? She’s an essential worker who doesn’t even get dental insurance.

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The Value of Bingeing Animal Crossing

Tom Nook and Econ 101

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Animal Crossing: New Horizons is one of the most popular video games of 2020/21. The game has already sold over 26 million copies, and has become the best-selling title ever for the Nintendo Switch. The premise of this smash-hit might surprise you, though: players don’t fend off malevolent aliens or tame fantastic beasts. Instead, AC:NH is fundamentally about working hard in order to pay off the mortgage on your house.

For many people, this goal will sound remarkably similar to everyday life, even if Nintendo’s version involves adorable anthropomorphized animals. But the game’s highest concentration of players are between ages 15-30 — older Gen Zs and younger Millennials — for whom the prospect of having their own home may still be more dream than reality.

Young people also love the game. If your kids are playing, here are a few valuable financial lessons you might tease out for them.

1) Don’t fritter away your money — reinvest in yourself

There are lots of ways to earn “Bells,” the game’s fictional currency. Players can fish, gather fruits and vegetables, dig for treasure, or build furniture, to name but a few. This is like adult life, where you have to find the vocations you enjoy and are good at. And once you’ve got some money burning a hole in your pocket, the temptation might be to immediately spend it on swag you don’t necessarily need, like new duds or cool stuff for your home. Resist this urge, and put that money towards getting established. Focus on buying better tools, and rake in even more Bells!

2) Save your cash and make it work for you

It isn’t as immediately gratifying, but savvy Animal Crossers can also keep their hard-earned Bells in the game’s bank, where they’ll generate interest. (In fact, fiscally prudent gamers were doing such a good job saving their money that Nintendo actually had to lower the interest rates offered by the in-game bank in order to “to boost virtual spending.”) The lesson here is that if you want to be able to afford that fabulous mansion with the claw-foot bathtub later, get started on saving early! Compound interest — where you generate interest on your principal investment, and then later, make even more money on that interest —  can really add up over time.

3) Get in the real estate game

Players start off living in a cramped tent. (Think of your first place after leaving home, the one where your bedroom was an actual closet.) Happily for gamers, the banker raccoon, Tom Nook, is happy to offer interest-free mortgages so you can expand your fledgling business enterprises, and he never hassles you about the money you owe. In real life, mortgages aren’t quite such a fabulous deal: you’ll have to make monthly payments to the bank, and you’ll definitely have to pay back more than just the initial loan. But you’ll be building equity by putting money into your own investment, instead of someone else’s. 

Who knew a best-selling game could be so instructive? In both the real world and Animal Crossing, the prudent investor tends to end up comfortable enough to afford the luxuries they skimped on earlier. 

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Always take the doubling pennies

Exponential growth starts small but picks up speed fast!

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When Soren Wheeler was a kid, his father stumped him with this exponential growth model:

“He would say, I want you to mow the lawn every day for the next month, and I’ll either give you a million dollars to do that, or I’ll give you a penny today, and two pennies tomorrow, and four pennies the next day, and so on, for a month.”

Wheeler once told this story on Radiolab, the science podcast he helps produce. His response then was the same any kid — and really anyone — would have: Take the million! 

But if you go with the pennies, you’ll make nearly $20 million dollars for a month of yard work. The lesson Wheeler remembers: “Things can turn out way bigger than you think.”

Exponential growth model in a nutshell: Things can turn out way bigger than you think

His advice became particularly relevant a year ago, as we all become armchair epidemiologists, obsessing over how a virus might spread. It is also why compound interest is famously called the seventh wonder of the world. Exponential growth starts small and picks up more speed than we can literally imagine.

So, the best course of action: Start Early. Take the doubling pennies. Get a bigger piggy bank.

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Stimulus, defined

Why the government is suddenly so eager to give you money

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🌰 In a nutshell: Stimulus is when governments pump money into the economy during a downturn.

📦 Unpack that a bit: When the economy stalls, people stop spending. They may have lost their jobs, or watched their neighbours lose their jobs, and tightened their belts accordingly. (They want to preserve their liquidity, in other words.) By giving people money — either directly or indirectly, through jobs — the impact of an economic slowdown is reduced.

👶 Tell a toddler: “You know how you get a bit cranky between meals? The granola bar I keep in my bag for those moments is like a stimulus.”

🤷🏽‍♂️ Whose idea was this, anyway? John Manyard Keynes, if we’re going to name names. The British economist developed the idea after the Great Depression, as he believed governments made a bad situation worse by not spending. “Let us be up and doing, using our idle resources to increase our wealth,” he wrote in 1928. “With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them.”

👊Why stimulus matters:

We are all Keynesians now“. Milton Friedman said that, suggesting that even those who advocate for “small government” and a hands-off approach to the economy realize that, when times are tough, the government has to jump in and keep money flowing. Those who beg to differ say governments shouldn’t spend money they don’t have.

📰 In the headlines:
• Massive stimulus packages in Canada, U.S. put cash on Main Street in departure from 2008 crisis — Financial Post
• Many Gen Zers might not qualify for the stimulus check — Business Insider
• The $1,200 stimulus checks are arriving. People are mostly spending them on food — Washington Post

🔀 See also: Imagine if the stimulus cheques came every month. That’s a serious proposal, and it’s called the UBI.

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UBI, defined

Why the pandemic has pushed the idea to the top of the policy agenda

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🌰 In a nutshell: UBI stands for Universal Basic Income.

📦 Unpack that a bit: As Annie Lowrey explains in her book Give People Money: “It is universal, in the sense that every resident of a given community or country receives it. It is basic, in that it is just enough to live on and not more. And it is income.” Or as Lowrey titles her book’s introduction: Wages for breathing.

👶 Tell a toddler: “You know how people work to get money to buy food? With a Universal Basic Income, everyone would get some of that money automatically from the government.”

👊Why UBI matters:

Thinkers of all stripes have supported the idea as a way to end poverty, help the middle class, reduce bureaucracy, and help society deal with the rise of automation — and now to soften the economic blow of the coronavirus pandemic. Though of course, there’s a difference between one-time cash infusions and an ongoing UBI.

📰 In the headlines:
• Pandemic Strengthens Case for Universal Basic Income — Washington Post
• Coronavirus Pandemic Proves We Need Universal Basic Income — Vice
• Spanish Government Aims to Roll Out Basic Income ‘Soon’ — Bloomberg News

💬 In a sentence:  Universal basic income is about giving people cash without question, and trusting that they know how to use it in the most effective way they can.” — Luke Martinelli, economist at the University of Bath, UK, quoted in Nature.

🔀 See also: Andrew Yang’s 2020 campaign for the U.S. Democratic presidential nomination, in which he called for a $1000 monthly cheque to all Americans called The Freedom Dividend.

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Liquidity, defined

How quickly can you get your hands on cash? That’s how liquid you are.

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🌰 In a nutshell: Liquidity is how easy it is to get cash. 

📦 Unpack that a bit: How quickly can you buy or sell something at a price that reflects its value. If you buy a teddy bear for a dollar today and you can sell it for a dollar tomorrow, that’s a very liquid asset. If no one wants to buy that bear tomorrow, or if you have to sell it for 50 cents, it has low liquidity. Market liquidity describes this at scale: How easy it is for all of us to trade assets — be they stocks, bonds, or stuffed animals — with one another.

👶 Tell your toddler: “Water, milk and juice are liquids, meaning you can easily pour them into a cup. Liquidity describes things that flow easily. When we talk about money being liquid, we mean it’s easy to move it from one cup to another.”

💬 In a sentence:Cash is universally considered the most liquid asset, while tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid.” — Investopedia

👊Why liquidity matters:

“One person’s spending is another person’s income. That, in a single sentence, is what the $87 trillion global economy is,” explains Neil Irwin in The New York Times. So when money stops flowing — when liquidity dries up — the economy stops. 

🔀 See also: Stock Market, Liquidity Trap

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Circuit Breaker, defined

The stock market version of a chill pill

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🌰 In a nutshell: When the stock market is going crazy, a circuit breaker gives it a timeout.

📦 Unpack that a bit: If the market drops by a substantial amount in a single day — 7% from the prior day’s closing price for the S&P 500 — trading is automatically stopped for 15 minutes. The specifics of how big a drop triggers how long a timeout can be quite detailed.  The idea is to give everyone a chance to take a deep breath, reflect on the situation, and hopefully stop any panicked selling.

👶 Tell a toddler: “When you get upset and I call a timeout, it’s so we can all calm down. Sometimes the stock market needs that, too.” 

💬 In a sentence: “The circuit breakers were adopted in the wake of the Black Monday crash of Oct. 19, 1987, when the Dow plunged 508 points, or 22%.” – NPR

👊 Why circuit breakers matter:

Stock markets are built to be responsive. Sometimes, they appear to be too responsive.

🖐 The other hand: “Some academics say circuit breakers actually exacerbate selloffs because investors may see the market approaching a halt and sell in a panic to exit trades before the level is reached,” according to The Wall Street Journal. You know how telling someone to “just relax!” rarely works? Like that.

🔀 See also: Stock Market, S&P 500

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Words That Sweat

Here are the words to avoid when applying for your next loan.

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As the world continues to deal with the economic consequences of this pandemic, governments are offering zero-interest loans to individuals and small businesses. If you’re in need of a loan in Canada, there are helpful resources here, here, and here. But before you apply, check your words! Because, mentioning family, religion, or your future could cost you.

A recent study called, wait for it, “When Words Sweat”, examined the text of loan applications that ended in default. Turns out, they had a lot in common.

Sifting through 120,000 loan applications from the online crowdfunding platform Prosper, researchers found that  “defaulters used simple but wordier language, wrote about hardship, explained their situation and why they need the loan, and tended to refer to other sources such as their family, God, and chance.”

The safer bets, on the other hand, didn’t sound needy, hopeful, or dependent. 

If you had a loan application rejected, a bot likely did it

Though the researchers built their own machine learning tools to unearth these conclusions, banks, credit unions, and lenders are also using data like this. Credit scores are important, sure, but when it comes to applications, there’s time spent reading between the lines.

Did you mention your divorce? Did you say please? Did you insist that you have a good work ethic? All of these “sweaty words” correlate with a higher default rate.

The bottom line: Money talks. It has its own language, and it pays to get fluent.

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Do you suffer from money illusion?

The greatest trick your money ever played was convincing you that its value would stay constant

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If you think the first dollar the tooth fairy left beneath your pillow is still worth a dollar, we’ve got some bad news. First, the tooth fairy is magical, but she’s not THAT magical. And second, you may suffer from money illusion.

That gift was (probably) a real dollar, so the money itself wasn’t a mirage. The illusion comes in your thinking that a dollar back in the day is worth a dollar today. It’s a natural phenomenon; after all, the actual currency still says “one dollar.”

The thing is, we don’t naturally account for inflation, which these days runs about 2% a year. That means it’ll take $1.02 to buy as many groceries in 2021 as a dollar gets you today. Over time, that really adds up: Consider that a 1986 dollar could buy as much as two 2020 dollars. And that also means that if you didn’t get a 2% raise last year, your salary actually went down. 

Knowing about money illusion means you’re no longer fooled by it.

What’s to be done about this? First, know that it exists and know that unless you’re actively growing your money, it’s shrinking. And second, when it’s time to tell your kid about the magic of the tooth fairy, take the opportunity to tell them about money illusion as well.

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Why “buy the dip” is good advice for nachos

If you’re in line at a taco stand, get the guacamole. Yes, it costs extra, but we firmly believe it’s worth it for the creamy green fruit that manages to be nutritious, delicious, and the perfect compliment to a corn chip.  But what if the dip isn’t the most perfect guac? What if it’s too […]

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If you’re in line at a taco stand, get the guacamole. Yes, it costs extra, but we firmly believe it’s worth it for the creamy green fruit that manages to be nutritious, delicious, and the perfect compliment to a corn chip. 

But what if the dip isn’t the most perfect guac? What if it’s too salty? What if you’ve had better dips? Buy the dip! It’s still likely to be delicious.

Always buy the dip, whether it’s guac or stocks

And here’s the metaphor for investing: When the stock market dips and stocks get cheaper, it’s worth buying them. You may never know if they’re the cheapest they’re gonna get. But history suggests, over time, that the market will get back to where it was and then keep growing. So you’re snapping up a deal. If you’re invested for the long term and you’re dollar-cost averaging, you’re better off always buying. Is it the best deal ever? Are the avocados organic and at the peak of mushability? You don’t know and likely can’t know. You can’t time the market. So buy the peak, the trough, the up, the down, the salsa, and the dip.

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The trouble with investing camps

Short-term thinking is exactly the opposite of financial literacy

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Teaching financial literacy to the next generation is vital, right? Right. So it’s a good idea to send your kid to investing camp or encourage them to play stock market games, right? Maybe.

At least according to Beth Kobliner, personal finance guru and author of Make Your Kid a Money Genius (Even if You’re Not). Her logic is two-fold:

  1. Camps and games often promote the idea that with some research, your kid can pick winners. And no offence, but well-paid and full-grown financial analysts do that for a living, and even they aren’t so great at it.
  2. These time-limited activities are all about quick wins, and “this approach contradicts the diversified, long-term investing strategy that will be more likely to succeed in the real world.” 

Short-term thinking is exactly the opposite of financial literacy.

There’s no real harm in learning financial literacy in this way, of course. Just be sure that’s not your child’s only exposure to the world of investing.

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Extended warranties aren’t worth it

You’ve just plunked down $89.99 for the Veg-O-Magic 5000 because this is the week you finally start on that all cucumber juice diet. So, do you buy that extended warranty for just a few bucks a year? Money that you could otherwise be investing? I mean, you’re gonna be juicing until you’re 125, right? Maybe, […]

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You’ve just plunked down $89.99 for the Veg-O-Magic 5000 because this is the week you finally start on that all cucumber juice diet. So, do you buy that extended warranty for just a few bucks a year? Money that you could otherwise be investing? I mean, you’re gonna be juicing until you’re 125, right? Maybe, but here’s why it’s not worth it:

  1. Most big-ticket products are already covered with a year-long warranty — and your credit card may well extend that term.
  2. Companies make huge profits off extended warranties, as much as 60% according to Bloomberg News. Why? Mainly because …
  3. Things don’t break as often as we think. Consumers estimate a new TV has a 13% chance of failure over three years but the actual rate is more like 5%, according to one study.

The good news: Extended warranties are a bad buy because products are well built.

A well-built Veg-O-Magic ought to last well beyond your taste for cucumber juice. And if it needs a fix, pay out of pocket. Chances are, you’ll end up ahead.