Should you be paying your kids an allowance

Kid picking flowers
Kid picking flowers

I never received an allowance and neither should my kids. My logic sounds silly right?

But have you considered how an unconditional allowance is causing damage to your children’s ability to handle money?

Unconditional Allowance

Let’s define unconditional allowance. This is defined as an allowance given to the child without them having done any task or chore to receive it.

I didn’t received an allowance for the chores I should be able to to. This was my contribution to my parent’s house. My spending money came during the summers when I would hoe cotton fields in West Texas. Character-building they called it.

When my kids were younger I struggled on whether they should receive an allowance. Our goal as parents should be to have our children be financially savvy and come to appreciate the work that needs to happen to earn a dollar.

Allowances and Entitlement Attitude

I believe that kids that receive an allowance without having “earned” it have an entitlement attitude. I recall some of my childhood friends who received an allowance and as young adults they struggled mightily in developing a health work ethic and meeting their obligations.

Curious if your poor performers where recipients of an unconditional allowance? They believe just showing up is enough to receive their paycheck. Unfortunately I don’t have the research to draw that comparison but it would make sense.

I still don’t provide a my kids an allowance for doing chores. They both know they can come to me and ask for spending money. I won’t always say yes but will encourage them to find ways to generate that money.

Either the yard needs to be mowed or my blog needs proofreading. The 11 year does a good job of that. The younger one will realize she needs to go above and beyond her chores to earn that money. To my surprise she’ll do just that by doing that extra, like vacuuming, without us having told her.

Why so strict?

Kids are resilient. They will find a means to generate spending money. I am teaching my children to find an opportunity/ need and meet that need. Recently, my 11 year old was making wooden signs and successfully sold all of them!

This proved to be a wonderful learning experience for her. She learned break-even point, revenues, margins, and tools that will benefit her throughout her life.

My learnings

I grew in a household where money was scarse. This limited my world-view and believed many of the myths associated with wealth people. I have taken the initiative to teach my girls an abundance mindset.

An abundance mindset that says that what flows out their hands will come back. A mindset that teaches them to see every transaction as a learning opportunity.

Loss aversion explained and tips to overcome it

How this psychological behavior is causing you to lose lots of dollars

Loss Aversion
Loss Aversion

Loss aversion: the pain of losing is twice as strong as the gain

Hey, did you notice an increase in your paystub?  You may want to check it out.   If you did, you are part of the 90 percent of Americans who will have experienced a positive net gain in their take home money.

But have you given much thought to what you will do with that extra money?

Chances are you haven’t given it much thought.  Honestly, I have not done much with mine yet.

Unfortunately, you and I will struggle to save that extra income because it is so much fun to spend rather than save.  Who can relate?

Wait, I have a mental condition?

Yes, we all do!  There is  a psychological behavior that will keep you from saving.  This behavior is known as loss aversion, or the hate of losing.  Loss aversion is a psychological state of mind where the “pain of losing is twice as powerful as the pleasure of gaining”.

We know we need to do something smart with that little extra money and yet we choose to do nothing.   This same behavior is seen  in different areas of one’s life:  health, spiritual well-being, education, and list continues. We know the benefits gained from each of these actions are great, but the pain of losing time, money, relationships, or other resources will keep you from taking action.

Look around your influential circle of friends and you may see the benefits experienced by overcoming loss aversion.   These benefits did not happen overnite.  They probably battled loss aversion at some time yet they did something about it and they took action.

Inaction breeds company and it will have an impact in many areas of your life.

Now that we know that loss aversion keeps us from investing let’s explore the two solutions

The more steps or actions an activity requires the less likely we are to take a step forward to bettering ourselves.   For example, we need to get in shape and for some reason we believe we need a new workout wardrobe, hire a trainer, and post your accomplishments.  These are but a few things that keep you from taking action.  So many unwritten rules to follow it seems.  But disregard those and get going.

 Let’s look at savings and retirement

The lingo alone will drive one insane!  Annual percentage rate, annual percentage yield, certificates of deposit or CD, bonds, IRA, 401K, etc etc!  That is why your accounts have not grown or you have not started.

According to a report, 50 percent of Americans don’t participate in their 401Ks and reasons stated include: feeling overwhelmed with the many choices, laziness, and struggle with deposits.

I remember feeling all the mentioned emotions as I enrolled in my company 401K.  Trying to be in compliance with company policies, understand vacation policy and now 401K!

The struggle was real and I’m glad I took that plunge. I was afraid to ask questions. Here’s an MBA student who has no idea how to invest, I thought they would say.  I had no idea or direction and no one to turn to.

Don’t let that hold you back! Take action.

My experiences have shown that the first step you take, is the most important one.  Over time you will become more educated and can make wiser choices in your finances.

Turn the challenges into solutions

You might have heard the acronym KISS- Keep It Simple Silly.  Try taking advantage of automatic contributions.   Let the accounts withdraw from your check before you have time to spend it.   If you don’t see it you will not miss it.

Understand as you save more it does not necessarily mean you will spend less.  If you have a budget in place this will keep you focused on your goals.  I’m old school and prefer to look at spreadsheets when using my budget.  There are apps that keep this process simple.  Don’t see saving or investing as a present loss but a future gain or victory.  Keep focused on your goals.

Helpful bits

We are visual creatures.  We like wooing and awwing over beautifully created pictures.  I can spend hours on hours looking through Pinterest and Instagram.  Do the same for  your finances.  Use visuals rather than figures to help you achieve goals.

For example, instead on fixating on a $500,000 retirement, use visuals that that money will help you reach.  Visuals such as vacations, nicer home, or activities you enjoy doing with your family and friends.

Don’t allow loss aversion keep you from achieving your goals.  Learn to focus on the gains and not what you will be losing.  Remember the pain of losing needs to be dealt with.  Keep reminding yourself of the benefits or gains you will be able to enjoy.

How have you been able to overcome loss aversion?  Care to share?

https://www.linkedin.com/pulse/loss-aversion-explained-tips-overcome-joel-gallegos

Kaizen Tools For Personal Finances

Kaizen Tools Discussed

Kaizen is a well accepted business principal that seeks to improve inefficient practices in industries like manufacturing, logistics, and sales.   Toyota manufacturing is credited for developing the principal. Soon Kaizen would gain popular acceptance in self improvement fields.

The self improvement fields include:

  • Health and Fitness
  • Personal Finances
  • Personal Relationships
  • Kaizen for Productivity and Business

The Kaizen principal is about focusing on the minutiae.  The idea is that one small change makes a huge difference.  It breaks down the job or task into multiple process and then evaluates each process for waste or inefficiencies. 

The eliminating of waste speeds up your process. The change is then made and will be monitored before proceeding to the next process.

2 Powerful Kaizen Tools 

Consider these two powerful tools to improve your personal finances:  force multiplier and automation.  Both achieve similar results and your risk-tolerance will depend on the tool you choose.

Don’t leave before downloading the FREE Kaizen ebook.

Kaizen Tools in Your Personal Finances

Automation

Automation is using software to automate and will include automatic transfers. Set up automatic investment for your retirement accounts.  Enroll in your company sponsored accounts and opt-in for the yearly 1% contribution increases.  Take advantage of your health savings accounts (HSA).  These HSA offers tax advantages throughout your life.

Another example of automation is to create an effective spending plan.  Capture all your expenses at the beginning of your pay period and monitor it as you go.  Plan to tweak your spending plan a few times before you can set it on auto pilot. 

I will not be one to tell you can’t have the latte or avocado toast. I don’t believe these goodies will keep your from being wealthy.

Force Multipliers

Force multipliers can be describe as tools that help accomplish your desired goals.  If you prefer to handle cash you can use envelope system to handle your plan.  You can plan to keep cash for gasoline, groceries, fun activities, etc.

We started out with an envelope system and would later go to an automated one.  The idea was to get comfortable handling cash and understanding how our expenses would fluctuate.

Another example of a force multiplier can be a certified financial planner.  The CFP depicts a tool that will amplify your production output, i.e. gains and dividends.  Most CFP will not charge an upfront fee but rather they are paid by commission by the investment firm.

Kaizen Tools in Your Retirement Accounts

Automaton can also provide net worth building gains.  Here you think of diversification through mutual funds, company sponsored accounts, and individual retirement accounts.  Diversification will allow you to weather the ups and downs of the markets.

The method can be considered passive income as you don’t have to talk with your broker or review anything.  I don’t recommend you completely ignore your retirement accounts though.

Force multiplier is a tool that can help you achieve great wealth but comes with greater risk.  Think individual stocks here.  If you put all your earnings in a one individual stock the capital gains are impressive in a bull market.

Now when a bear market roars around the risk is great. Stocks in major oil companies, airlines, and restaurant chains have taken a huge loss and have offset previous gains.

The popularity of commission-free trading has open the door for many novice traders.  I consider myself a novice and invest an amount that will not hurt too much if my portfolio has great losses.

Wrapping it up

Kaizen tools are effective in managing your personal finances and creating wealth.  The tools discussed include automation and force multiplier and are but a couple of tools that Kaizen offers. 

However, regardless of the tools used they will require you your buy-in.   You must dedicate time to achieve your desired results.

Loss Aversion Explained and Tips to Overcome It

How this psychological behavior is causing you to lose lots of dollars

Loss Aversion
Loss Aversion

Loss aversion: the pain of losing is twice as strong as the gain

Hey, did you notice an increase in your paystub?  You may want to check it out.   If you did, you are part of the 90 percent of Americans who will have experienced a positive net gain in their take home money.

But have you given much thought to what you will do with that extra money?

Chances are you haven’t given it much thought.  Honestly, I have not done much with mine yet.

Unfortunately, you and I will struggle to save that extra income because it is so much fun to spend rather than save.  Who can relate?

Wait, I have a mental condition?

Yes, we all do!  There is  a psychological behavior that will keep you from saving.  This behavior is known as loss aversion, or the hate of losing.  Loss aversion is a psychological state of mind where the “pain of losing is twice as powerful as the pleasure of gaining”.

We know we need to do something smart with that little extra money and yet we choose to do nothing.   This same behavior is seen  in different areas of one’s life:  health, spiritual well-being, education, and list continues. We know the benefits gained from each of these actions are great, but the pain of losing time, money, relationships, or other resources will keep you from taking action.

Look around your influential circle of friends and you may see the benefits experienced by overcoming loss aversion.   These benefits did not happen overnite.  They probably battled loss aversion at some time yet they did something about it and they took action.

Inaction breeds company and it will have an impact in many areas of your life.

Now that we know that loss aversion keeps us from investing let’s explore the solution

The more steps or actions an activity requires the less likely we are to take a step forward to bettering ourselves.   For example, we need to get in shape and for some reason we believe we need a new workout wardrobe, hire a trainer, and post your accomplishments.  These are but a few things that keep you from taking action.  So many unwritten rules to follow it seems.  But disregard those and get going.

 Let’s look at savings and retirement

The lingo alone will drive one insane!  Annual percentage rate, annual percentage yield, certificates of deposit or CD, bonds, IRA, 401K, etc etc!  That is why your accounts have not grown or you have not started.  According to a report, 50 percent of Americans don’t participate in their 401Ks and reasons stated include: feeling overwhelmed with the many choices, laziness, and struggle with deposits.  I remember feeling all the mentioned emotions as I enrolled in my company 401K.  Trying to be in compliance with company policies, understand vacation policy and now 401K!

The struggle was real and I’m glad I took that plunge. I was afraid to ask questions. Here’s an MBA student who has no idea how to invest, I thought they would say.  I had no idea or direction and no one to turn to.

Don’t let that hold you back! Take action.  My experiences have shown that the first step you take, is the most important one.  Over time you will become more educated and can make wiser choices in your finances.

Turn the challenges into solutions

You might have heard the acronym KISS- Keep It Simple Silly.  Try taking advantage of automatic contributions.   Let the accounts withdraw from your check before you have time to spend it.   If you don’t see it you will not miss it.

Understand as you save more it does not necessarily mean you will spend less.  If you have a budget in place this will keep you focused on your goals.  I’m old school and prefer to look at spreadsheets when using my budget.  There are apps that keep this process simple.  Don’t see saving or investing as a present loss but a future gain or victory.  Keep focused on your goals.

Helpful bits

We are visual creatures.  We like wooing and awwing over beautifully created pictures.  I can spend hours on hours looking through Pinterest and Instargram.  Do the same for  your finances.  Use visuals rather than figures to help you achieve goals.

For example, instead on fixating on a $500,000 retirement, use visuals that that money will help you reach.  Visuals such as vacations, nicer home, or activities you enjoy doing with your family and friends.

Don’t allow loss aversion keep you from achieving your goals.  Learn to focus on the gains and not what you will be losing.  Remember the pain of losing needs to be dealt with.  Keep reminding yourself of the benefits or gains you will be able to enjoy.

How have you been able to overcome loss aversion?  Care to share?

3 Part Communication Style to Help with Money Talks

This simple 3 Step Communication Method will help you have those tough financial discussions. Try this too on tough topics.

I Message - 3 Part Communication Method
Simple Communication Method

This 3 Part Communication Style will make money talks easy

The “I” method is an easy and effective communication style to help with money talks.

It has 3 parts.

Marriage and Money

Marriage and money are hard.  Even more-so when spouses are not able or willing to communicate about them.  As with any relationship,  effective communication is the key for it to work!  It takes practice and application.

Solution

Check out this video where I explain an easy and effective 3 part communication method that will help you handle the most stressful conversations.

The 3 parts are: behavior, event, and emotion.  This method is better known as the “I” Message.

Behavior

This is the behavior that needs to be addressed.  For example, one spouse overspending every month or not paying the bills on time.

Avoid words phrases like “you never” or “you always”.  These phrases will make the situation worse.

Event

The event is an action or consequence caused by the behavior.

Using the example from above, not paying bills on time, an event triggered can be:

  1. credit scored is negatively impacted
  2. will be late charges
  3. foreclosure or repo
  4. deadlines missed

Emotion

The last component of the message is the emotion.  Emotion is used to describe the feelings caused from the event.   Here one can focus one the emotion the event caused.

How did the event make you feel?  Perhaps you were embarrassed, afraid, concerned, uneasy and so on.  These emotions will tend to be negative.

Putting it all together

Now let’s combine the 3 parts.

  1. bills are not paid on time (behavior)
  2. the late payments are causing unnecessary charges and this will affect my credit score (event)
  3. I’m afraid this will cause a bigger balance (emotion).

Consider these notes

  1. Make sure the behavior is tangible (can not be disputed) and you have observed it first hand
  2. Do not use the conversation to address more than one behavior
    1. Don’t piggyback multiple behaviors
  3. Do not address in front of others
  4. Make sure there are no other topics discussed
  5. Make this a one on one discussion
  6. Avoid all distractions
  7. Avoid causing blame or guilt
  8. Avoid using words like “you”
  9. Do not use to manipulate
  10. Do practice or rehearse