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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.

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Does your kid know what a bank is?

The earlier a child learns about money, the less likely they are to make mistakes when they have to manage their own

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Oh, who are the people in your neighbourhood?

According to the classic Sesame Street song, the people that you meet when you’re walking down the street include bakers, teachers, barbers, and trash collectors — but no bankers. And while it’s understandable that an abstract money job might be as interesting to a child as the guy who makes cupcakes, that omission hurts a child’s developing financial literacy, according to new research.

Financial literacy should include knowing what a bank is.

Economists examined how children who were familiar with their local bank fared financially later in life as compared to those who lived in areas without a neighbourhood financial institution. They used Native American reservations in the U.S. for their research, as some have banks while otherwise identical reservations lack them. The results were significant: “Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have ten point lower credit scores and four percentage point more delinquent accounts.” That’s just the credit side, but you can assume the chances these individuals have made smart early investments are vanishingly small.

The conclusion: The earlier a child learns about money, the less likely they are to make mistakes when they have to manage their own. So take them to the bank, explain who does what, and answer as many questions as you can. And if the conversation goes well, why not segue into the only three things every adult needs to know about money?

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You already understand Kakeibo, the Japanese art of saving money

Hint: It’s a budget

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Nothing sparks joy quite like a paid-off credit card.

That’s the theory behind Kakeibo, the Japanese art of saving money that’s being marketed alongside Marie Kondo’s life-changing magic of tidying up and Ikigai, the Japanese secret to a long and happy life. And it’s not just a clever way to cash in on a trend: Kakeibo means “household financial ledger” and it dates back to 1904, when Hani Mokoto developed the system.

Kakeibo is basically just budgeting.

In a nutshell, it comes down to keeping a pen-on-paper list of everything you spend. In other words: keep a budget. The four spending categories — survival, culture, optional, and extra — are unique, but it’s still a budget.

Like most budgets, it breaks down in monthly increments, meaning that every four weeks, you ask yourself these four questions:

1️⃣ How much money will I make this month?

2️⃣ How much money will I save?

3️⃣ How much will I spend? (divided into the aforementioned categories)

4️⃣ How can I improve next month? Where can I adjust my spending?

Yes, they’ve tacked on a Kondoesque bunch of extra questions you’re meant to ask of every non-essential thing you buy. Can you live without it? Can you afford it? Will you use it? Do you have room for it? Where’d you find it? How do you feel in general, and about this purchase in particular? All of which are good questions, and all of which boil down to not buying unnecessary things. 

The art of saving money comes down to budgeting, and that translates into pretty much every language.

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A simple cure for latte guilt

An easy way to blend spending and saving like espresso and steamed milk

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Enough with the coffee talk.

A huge percentage of personal finance advice revolves around espresso-based shame, or trying to convince people their small daily indulgences are paving the road to ruin. And a huge percentage of people ignore personal finance advice. Coincidence?

That’s Nick Maguilli’s view on his blog, Of Dollars and Data, and we concur. In place of guilt, he offers this advice: “Anytime I want to splurge on something, I have to take the same amount of money and invest it as well.” Go ahead, buy yourself those AirPods Pro — but be sure to drop $350 in equities. And if the combined cost of $700 is more than you’d like to spend, then … don’t. It’s effectively a 100% tax on unnecessary spending levied by your future self. 

Latte guilt makes no sense if lattes are fulfilling and affordable.

Maguilli also recommends weighing each purchase by how much long-term fulfillment it offers, an immensely worthy exercise that leads back to some serious reflection about who you are and what you truly value (lattes). Which you should do! But in the meantime, double each splurge and invest the rest.

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Fold a piece of paper 8 times to understand investing

Hint: It’s all about exponential doubling

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As Mythbusters once demonstrated, exponential doubling makes it impossible to fold an 8½ by 11-inch sheet of looseleaf in half more than 8 times. Using a steamroller, a forklift, and a sheet of paper the size of a football field, you can just barely get to 11 folds. 

All of this is a demonstration of the power of exponential doubling. The first time you fold the paper, it becomes twice as thick as a single sheet. The second time, it becomes four times as thick, then 8x, then 16x, and so on. By ten folds, the wad of paper is more than 1000 sheets thick; at 20 folds, you’re at a million layers. 

What does this have to do with investing? When you invest, the interest on your money earns interest. With the right interest rates and timespans, that leads to exponential growth. If you get 5% interest on $100, you’ll have $200 in 14 years. And in another 14 years, you’ll have $400. 

Exponential doubling is how investing gets astonishing.

As with the folding paper, it’s when you double the third, fourth, and fifth times that things get really interesting. Not many investors get the rates or the time to make that happen, but knowing that it’s possible — and that you don’t even need a forklift to do it — should make everyone an investor.

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The three things to know about money

And what Rihanna learned the hard way.

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If you took all the personal finance advice out there and distilled it down to three things to remember, you’d likely end up with what Barry Ritholtz recently laid out in a (paywalled, ugh) Bloomberg column:

1️⃣ Spend less than you earn;

2️⃣ Prioritize investing for your future;

3️⃣ Figure out what matters to you, and spend accordingly.

Number 1 has proven especially hard for a whole lot of people. Even the people with a whole lot of money. We live in a culture of more, we’re surrounded by #humblebrags, and chasing more leaves people with less.

Case in point, Rihanna.

RiRi sued her financial advisor in the 2010s after coming close to bankruptcy because she’d overspent. Her advisor clapped back with, let’s face it, some obvious advice worth reading everyday:

“Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

Start celebrating the things you’re not buying. Use this “time on the inside” to reset and boost your savings where you can. Remember that you don’t need riches to start investing, you just need time. And when in doubt, take a moment, and revisit Rule Number 3.

1, 2, 3.