It Pays to Talk: How to Have the Essential Conversations with Your Family About Money and Investing - Softcover

Schwab-Pomerantz, Carrie; Schwab, Charles

Softcover

ISBN 10: 1400049601 ISBN 13: 9781400049608

Publisher: Crown, 2003

Synopsis

Financial security begins with a conversation . . .

And that’s why Carrie Schwab-Pomerantz has teamed up with her father, internationally respected investing pioneer and bestselling author Charles R. Schwab, to produce this excellent family financial primer. This book will help investors succeed whether the stock market is going up or down, both in the present and in the long term. Throughout the book, the authors stress the importance of having regular and effective conversations about money—with a spouse or partner, young children and teenagers, and aging parents—and offer the perfect roadmap for starting and continuing those conversations, including:

· understanding the basics: stocks, bonds, and mutual funds
· building wealth over time, understanding your tolerance for risk, and developing and maintaining the right investment portfolio
· investing for your children’s future and for your secure retirement
· estate planning for you and your older parents
· preparing for life’s unexpected events

“A practical book for men and women, young and old ...It’s smartly written, earnest without being preachy, and offers down-to-earth advice on how to forge productive conversations about money between spouses and partners, parents and children, and adult children and aging parents.”—Chicago Tribune

“Most families don’t talk about money. Personal finance ranks with sex and drugs as one of the least-discussed topics and one fraught with emotional baggage....Bottom line: You have to fend for yourself when it comes to money, and the way to do that is to talk about it with parents, spouses, and children....We all have to take care of ourselves financially. This book is a good place to start.”—USA Today

About this title

About the Author:

Carrie Schwab-Pomerantz is president of the Charles Schwab Corporation Foundation. She established and now spearheads Schwab’s highly respected Women’s Investing Network, an initiative designed to educate and inspire women investors across America. She lives with her husband, journalist Gary Pomerantz, and their three children in the San Francisco Bay area.

Charles R. Schwab is the founder, chairman, and co-CEO of the Charles Schwab Corporation, one of the nation’s largest financial services firms. He is the author of the bestselling You’re Fifty—Now What? and Charles Schwab’s Guide to Financial Independence. He lives in the San Francisco Bay area with his wife, Helen.

Excerpt. © Reprinted by permission. All rights reserved.:

Starting the Conversation

When Pete, a longtime colleague of ours, married his wife, Eleanor, in 1973, it would have been safe to assume that she, being a banker, would handle the finances while he, then a schoolteacher, would take a backseat. Then their son was born with a disability, and the couple decided that Eleanor should quit her job and stay home with him. Once Pete, who had returned to graduate school and obtained his MBA, became the only breadwinner, he also inherited the financial-decision-maker role.

At the same time Pete—a generous, jovial, and articulate man—turned into quite the spender, thinking nothing of buying an expensive suit that he’d wear only two or three times. To compensate for his champagne taste in clothes, Eleanor, when she shopped at all, would do so at discount stores (a detail she kept from Pete, who would have been horrified). Sure, her husband’s income had shot up, but so had his appetite for luxuries, including high-priced cars.

“We moved to California from New York, and I saw everyone driving around in BMWs,” explains Pete with a self-deprecating laugh and the kind of regret that only hindsight can bring. “I thought that must be the state car, so I went out and bought one.” Over the next fifteen years he bought another and another and another, just as soon as the mileage on the “old” car passed twenty thousand—or a newer model captured his fancy. Despite hefty sports-car price tags, he never thought to consult his wife about those—or any other—purchases.

That attitude, combined with an overall lack of communication, almost cost Pete his marriage. Since the couple never discussed money, let alone a savings or an investment strategy, Pete never knew how increasingly resentful his highly educated wife, who had spent ten years in the banking industry, was becoming about her lack of participation in the family finances or Pete’s spending decisions.

Pete and Eleanor may have avoided facing their issues, but they couldn’t escape the downfall of their marriage. After a separation of several months, the couple decided that divorce was inevitable, and together they headed to a financial planner to figure out how to split their assets.

But unlike so many similar stories, this one has a happy ending. “You guys obviously care about and love each other,” the financial planner observed one afternoon after numerous joint meetings. “What are you doing getting a divorce?” Thus prompted, Pete and Eleanor asked themselves the same question and subsequently decided to try to work out their differences. After months of marriage counseling and a lot of hard work, Pete and Eleanor learned how to communicate with each other about money and everything else. They identified what was important to them as individuals and as a couple.

The upshot? At forty-seven, Pete quit his job to devote himself full time to the nonprofit international health-related causes about which he’s passionate. Investments they’ve made together now finance their lifestyle, one in which they agree on each and every sizable purchase as a team. “Though I’m ashamed of my past behavior, I’m also proud of our courage to stick it out,” says Pete. “It’s so much easier to walk away from very difficult issues than to confront them head-on. I am the better—and we are the stronger—for it.”

Pete and Eleanor’s new financial policies and procedures, along with their ongoing discussions about values and priorities, led to their recently building a dream house in Sun Valley, Idaho. “In almost thirty years of marriage, this is the first major purchasing decision we ever made together,” admits Pete.

In short, Pete and Eleanor now make a point of dealing with their life together—and their money—as equal partners. Once every three months they meet with their financial advisor to review their finances and make (or revise) their money decisions for the next six months. Then they go out to a nice restaurant and discuss their decisions and plans.

What better way to reaffirm your love for each other than to talk about the life you’re living now and your dreams for the future?

The Emotional Side of Money

As Pete and Eleanor’s story so vividly shows, talking about money can allow you to build the life you want. In fact, we believe that financial security begins with a conversation—whether between spouses, between a parent and a child, or between an adult and an aging parent.

But these conversations aren’t easy, especially in the beginning. Most of us are used to chatting casually about the stock market or mortgage rates, but when it comes to candid, personal conversations about how much money we’ll need for retirement or how we’ll possibly be able to pay for our children’s college educations, the talk is much tougher. In a wealthy country where millions of investors have money in the stock market, there is still a desperate shortage of honest, candid talk about how we should be planning for the future.

And unfortunately, as Pete and Eleanor’s story also points out, not communicating about financial matters, from spending to investing to planning for the future, is an almost surefire way to undermine a relationship. So why, despite the obvious payoff and the equally obvious price of avoidance, do most people neither initiate nor participate in these essential family conversations about money? Because money is never just money, especially in the context of a family.

For starters, money is tied up with our deepest emotional needs (such as security, comfort, success, and confidence) and fears (such as failure, inadequacy, and poverty) as well as with our sense of self-worth and identity. And ultimately, it becomes a reflection of our relationships. “In the first part of our marriage, there were all these inequalities, and money was a huge unspoken one,” says Pete. “Now it’s more of an equal playing field.”

Like it or not, even your parents’ attitudes about money have likely influenced yours. If your father or mother always tried to save that little bit, you may have adopted the same fiscally restrained habits. Or like a pendulum, you may do the opposite now that you’re an adult, refusing to let those money-saving tactics run your life. Either way, you’re reacting to lessons learned at your parents’ knees.

For example, I have a friend whose father used to drive her crazy with his penny-pinching habits: He phoned her only after five p.m. (he had one of those old-fashioned phone plans where the rates dropped at night), and he parked his car in a lot a mile away from where he was going if he could save a dollar. In response, as a young girl, my friend would call her dad whenever the urge struck, even if it was a mere ten minutes before the rates changed, partially to prove that her actions weren’t being dictated by the chance to save a buck. Valuing time and convenience more than economy, she often took cabs instead of buses and paid a housekeeper for cleaning she could easily have done herself. Figuring that you only go around once, she routinely indulged in expensive wine and top-notch restaurants. Only lately, many years later, has she come to recognize how much all those indulgences compromised her ability to save for her future and the things that mattered more.

My colleague Tom’s financial baggage also stems from his upbringing. Despite a steady income, his parents sometimes ran short of cash. Since Tom consistently held jobs as a kid—doing a paper route or umpiring Little League games—he usually had some cash on hand. “As a twelve- or thirteen-year-old, I was proud to always have a few hundred bucks,” he recalls. “I remember my dad and mom borrowing from me a few times to buy groceries or go out to a movie. In those pre-ATM days, I was like their bank for short-term credit.”

Not surprisingly, this situation made Tom quite resentful in the long run. Thirty years later those emotions continue to affect how he deals with finances and money-related communication, but not in a positive way. Even today Tom never talks to his parents about their financial position since it brings back uneasy memories. He and his wife don’t talk very much about their financial decisions or long-term plans either. While Tom attributes a lot of this silence to juggling two careers and raising two children, he also admits that his early negative money associations may play a part in his current attitude.

Sidestepping Common Behavioral Traps

Another downside of our silence about money is that we become even more likely to make financial decisions based on emotion rather than on logic or research. In Why Smart People Make Big Money Mistakes (Simon & Schuster, 1999), a terrific book that I recommend to all my friends and clients, journalist Gary Belsky and psychologist Thomas Gilovich summarize a new branch of economic research, called behavioral economics, that examines many of the most common traps that lead us to make poor money decisions.

Let me give you just a few examples. If you tend to treat your hard-earned income differently from the way you treat other money—say a tax refund or a lottery winning—you’re guilty of what behavioral economists call mental accounting. This concept, developed by Richard Thaler of the University of Chicago, describes our tendency to categorize and value our money according to its source or how we spend it. Mental accounting can be dangerous, because in reality one dollar is worth just as much as the next. One hundred dollars that you get from a windfall will buy you just as much as one hundred dollars you’ve saved. Likewise, if you feel much freer spending money when you use a credit card than when you pay in hard cash, you are likely practicing a form of mental accounting.

There’s also what the behaviorists call the “sunk-cost fallacy.” If you’re the type who continues to pour money into an old rattletrap, you should train and discipline yourself to think hard before you throw any more good money after bad. If you wouldn’t want to buy the car today, knowing that it needs repairs, why would you want to waste money fixing it up just because you already own it?

As an investor, there are two other tendencies you should be aware of, neither of which will help your stock portfolio. If you let your emotions get the best of you, you may be prone to panic selling—or selling when an investment hits a low. As you’ll see in Chapters 2 and 3, you are especially vulnerable to this panic if you take on more risk than is appropriate for your investment time frame or personality. At the other extreme, many investors fall victim to what the behaviorists call “loss aversion.” This can manifest itself in many ways, including not selling a poor performer to avoid finalizing the loss. Not only can loss aversion cause you to lose even more money, it especially doesn’t make sense in light of the fact that you can use your losses to offset your gains, thereby potentially reducing your tax bill.

And finally, you should be aware of what Belsky and Gilovich refer to as “number numbness,” or the tendency to tune out when we are faced with numbers and math. Clearly this won’t work to your advantage as an investor. Ironically, most of the math you deal with as an investor is simple and straightforward. But if you fail to appreciate the power of compound growth, or avoid evaluating a mutual fund on the basis of its expense ratio, just because numbers are involved, your overall portfolio return could suffer. It’s as simple as that.

Once you understand these tendencies, it can be fascinating and instructive to sort through them. A word of caution, however. It can be a lot easier to identify these lapses in someone else than in yourself, so try not to get too critical too fast. We all have our own less-than-desirable financial proclivities. You’ll need to be as willing to hear what your family and friends have to say about your habits as you’ll want them to be once it’s your turn. Though their comments may sound and feel critical, treat this conversation as a growing opportunity and avoid becoming defensive. Remember: Your goal is to open the lines of communication and strengthen your family and friendship ties—not to jeopardize them.

The First Step: What’s Important to You?

You work hard for your money. It may seem obvious, but if your money is going to work hard for you and your family, you first have to come to terms with your priorities, then discuss those priorities with the people closest to you.

What we’re talking about here are your most cherished values—things like family, love, security, independence, and philanthropy. Although your values may evolve as you age, they define who you are. Think of values as the prism or filter through which you’ll view all your life and money decisions.

Put another way, your values are what make you tick. They’re not a reflection of how good or moral you are. They’re not a reflection of your personal worth. If you’re a homebody or you want to travel the world, that is your decision alone. No one can dictate your values; they’re like your emotional DNA.

Can you list your values off the top of your head? Do you know what matters most to your mate, or to your children? In my experience, most people just haven’t taken the time to discuss them—at least not on a regular basis.

When I was pregnant with my oldest child, my husband Gary and I would walk through Olmsted Park by our home in Atlanta every Sunday morning, throw the ball for our dog, and discuss our hopes for the future. What kind of life did we want? Where did we want to make that life? What did we aspire to career-wise, and how did those aspirations dovetail? What did we want for our son, and how would we raise him?

Although I tend to be more of a risk-taker than Gary, we’ve always agreed on our overriding values: that family comes first and that dollars and cents are just a means to an end. As a result, our conversations focused primarily on our long-term goals and the best ways to achieve them. In a way we were drawing our road map, complete with a rough timetable.

With the passage of time and increased demands of both career and family, those walks—and talks—have become less frequent. That’s too bad, although probably not uncommon. Like us, I think most families feel they’re giving their all just to keep up with everyday demands.

Unfortunately, though, the price we pay for not having those talks is a loss of the perspective that is so essential to our long-term happiness. If you value adventure and the most exciting place you’ve traveled in the last two years is the supermarket, then you may need to reevaluate how you’re spending your money (to say nothing of your time). If you value being secure and debt-free yet every month you rack up another $2,500 on your credit cards, that’s also a disconnect worth examining.

Without the perspective that your priorities provide, money is likely to slip through your fingers like water through a sieve, getting you no closer to your ultimate goals. That’s why talking about money is so crucial: It allows you to restate and reconnect with your values. Any big life event such as marriage, a new child, starting or losing a job, divorce, or death of a spouse presents a natural oppor...

About this edition

• Publisher: Crown
• Publication date: 2003
• ISBN 10: 1400049601
• ISBN 13: 9781400049608
• Binding: Paperback
• Number of pages: 400