About a month ago I penned a post that put forth the proposition that the government can’t save you from compound stupidity. In other words, if you consistently make bad financial decisions throughout your life, there’s no government program on earth that can save you from a difficult, if not miserable, life. Habits are destiny.
In response to this post, Penny over at She Picks Up Pennies commented that the government provides more welfare/subsidies for the middle and upper classes than the poor, the implication being that the government may not be doing enough to help the poor.
In my response to Penny, I pointed out that I was philosophically opposed to subsidies, especially those which targeted the upper and middle classes. I then went on to say the following:
If I were the Grand Poobah of the United States, then, I would begin by phasing out the subsidies for the upper class. Then I would gradually phase out the subsidies to the middle class. For instance, I would cap the mortgage interest deduction at $10K. Then I would reduce that cap $1,000 a year until it was done. I wouldn’t think of tackling subsidies for the poor until middle-class and upper-class subsidies were eliminated or under control. I know this may seem heartless, but what’s going on right now in Greece and Puerto Rico is pretty sobering. We can’t [live] beyond our means forever. To do so, would be even more heartless.
Penny then came back with this:
I think subsidies are cyclical, but I’m not sure they’re the problem. They’re a band-aid slapped on a problem that probably exacerbate it long term. If you’re born into that cycle, what incentive do you have to step outside of it? How are you supposed to know to step outside of it if it’s all you’ve ever known?
I had no immediate response to Penny’s excellent point. She very nicely summed up our problem. How do you get people to drop bad habits if that’s all they know? How do you break the cycle of dependency?
Since I had no immediate response, I wussed out and asked Penny for some time to ruminate on the matter. Well, I’ve ruminated on it. Here is my response.
Piaget: Another Underappreciated Personal Finance Guru
Jean Piaget was a famous psychologist who studied cognitive development in children. He came up with four stages of development, and the key one for our purposes is the fourth one: formal operations.
Formal operations is the stage where children begin to think abstractly and anticipate the consequences of their actions. It normally kicks in during the teen years. But here’s the rub. Half the adult population never reaches this level of cognitive development. And of those who do, very few put it to use.
Human beings are just not good at connecting the dots—that is, human beings, whether children or adults, are just not good at recognizing the long term consequences of their current behaviors. Meh!
This is why I put Piaget along with Hannibal Lecter as the two most underappreciated personal finance gurus of our time. Hannibal taught us that we covet what we see every day. Piaget taught us that short-sightedness is in our DNA.
Make Wealth-Sabotaging Habits Socially Unacceptable
Counteracting the “Hannibal Effect” from a personal finance perspective is relatively easy. You can’t covet fabulous stuff if you don’t see it. So you mitigate your exposure to those things which throw an endless supply of fabulous stuff in your face. Get rid of cable, cancel your Facebook account, and don’t hang with people who are all about image and consumerism. Do these three simple things, and your odds of developing a spending problem will be greatly reduced.
But how do you counteract the “Piaget Effect”? How do you get people who are short-sighted by nature to give up habits that feel good but are not conducive to building wealth?
Reasoning will work for some. Show one hundred 18-year-olds that they can become millionaires by age 60 if they start saving $100 a month now and a bunch of them will immediately open a Roth IRA. But most won’t.
To overcome the Piaget Effect, you need to do two things. You need to make simple rules, and you need to enforce them socially with a fair degree of high-handedness. In other words, make the distinction between right and wrong crystal clear, stigmatize those who choose badly, and people will make fewer bad decisions.
To show what I mean by this, consider the Confederate flag. There’s no nuance when it comes to the Confederate flag. If you hoist the Confederate flag on your front lawn, you’re not cool. Plain and simple. The distinction between right and wrong couldn’t be more clear. There’s no Harvard professor telling the masses that the Confederate flag is actually a legitimate form of protest against federal overreach. There are no hip actors on television or the movie screen wearing Confederate flag t-shirts. It’s all very binary. Confederate flag = bad. And because the arbiters of good taste have deemed the Confederate flag socially unacceptable, fewer and fewer Americans are waving it.
So what wealth-sabotaging habits would I make socially unacceptable? Here are three. Any young person who avoids them like the plague will greatly increase his or her odds of securing a middle-class life.
Procreating irresponsibly. Children are expensive and time-consuming. If you have them before you’ve built a solid financial foundation (i.e., savings, job skills, and a committed partner), you will have a very tough time escaping poverty. After all, it’s kind of difficult to earn a college degree when you’re on your own and have to work full-time and care for a child. True, many people rise to this challenge. But a lot don’t. And that’s why 46 percent of children in single-parent households live in poverty versus 10 percent in married-couple households. Wouldn’t it make more sense then to get a worthwhile job skill and establish a career before you started having kids? Wouldn’t it make sense to have an awesome partner at your side to help you raise your kids?
Having kids under the following circumstances should be as uncool as slapping a Confederate flag bumper-sticker on your car.
- You’re still in high school.
- You’re household income is less than twice the annual salary of someone working full-time at federal minimum wage ($15,080 x 2 = $30,160).
- You’re not married (raising children is the ultimate team sport).
Not learning new skills. Jim Rohn said it best: “If you want to have more, you have to become more.” This advice works in any era, but it’s especially relevant now. Because of globalization and automation, no one knows what jobs skills you’ll need 10 to 15 years from now. So you can’t remain stagnant. You got to be constantly upping your game. This means you got to set aside a little time every day to improve your skill set.
Up until this past year, I used to work on my database skills every day. I would either solve an hour’s worth of SQL problems from one of my SQL Server books or I would study the features of a NoSQL database called Mongo for an hour. But since Mrs. Groovy and I are calling it quits this October, I’ve lost interest in honing my database skills. Does this then mean that my learning days are over. Hell no. I’ve just changed my focus. Rather than up my game in databases, I’m upping my game in Spanish. Every day I spend at least an hour fiddling around with Duolingo and Anki. Do I need to know Spanish? Not now. But you never know. If Mrs. Groovy and I fail at this retirement thingy and I have to go back to work, knowing Spanish might come in very handy.
So every day, spend at least a half hour (preferably before work or school) improving an existing skill or learning a new one.
Not investing. The best tried and true way of building wealth for the average person is to spend less than one earns and invest the difference. Begin following this strategy soon enough and you’ll be able to take full advantage of the glories of compound interest. Your money will be fornicating like rabbits. Without lifting a finger, you’ll have more and more of it.
Not doing the following should be even more socially unacceptable than slapping a Confederate flag bumper-sticker on your car. It should be as uncouth and distasteful as wearing a Confederate flag t-shirt to a Black Lives Matter rally.
- Every parent should open a Roth IRA for his or her child as soon as possible, preferably at birth.
- If your parents never opened a Roth IRA for you, open one yourself as soon as you’re legally able to do so (18-years-old in most states).
- Put at least 10 percent of whatever you earn after taxes into your Roth IRA.
- The default Roth IRA investment should be a low-cost target-date fund based on your projected year of retirement.
Our Elites Won’t Stigmatize Wealth-Sabotaging Habits
So there’s my answer, Penny. I would break the cycle of dependency by stigmatizing those who procreate irresponsibly, refuse to enhance their skills, and fail to invest at least 10 percent of their take-home pay.
Would it work? Yes. Stigma is a powerful tool. Most people are good and want to meet society’s expectations. So whatever we stigmatize (e.g., the Confederate flag), we get less of.
The problem is that our elites have no interest in stigmatizing these wealth-sabotaging habits. Wealth 101 will never become an integral part of K-12 education. Big journalism will never blame anyone but one-percenters and Wall Street for poverty. Big entertainment will never portray unwed teenage mothers as anything but heroic. Big advertising will never suggest that happiness isn’t derived by acquiring more and more stuff. And big government will never make it easy for children to start their investing careers (e.g., creating the Junior IRA).
Just why our elites won’t stigmatize wealth-sabotaging habits is hard to say. On the one hand, people who engage in wealth-sabotaging habits aren’t doing so because they’re wicked. They’re doing so because they’re ignorant. So it is somewhat cruel to shame people who are basically good. And maybe that’s our answer. Our elites can’t stomach the thought of dumping on already troubled souls.
But on the other hand, which is more cruel? Shaming good people and reducing poverty? Or not shaming good people and allowing poverty to fester?
Our elites surely know that the latter is more cruel. Could it be, then, that our elites refuse to stigmatize wealth-sabotaging habits, not because they have delicate sensibilities, but because they prefer a large dependency class? Could it be that they want an ever-growing number of Americans who are bad at making money and managing their finances? After all, if the vast majority of Americans were excellent wealth-builders, our elite wouldn’t be nearly as powerful as they are today. The plot thickens.
Okay, groovy freedomists, that’s all I got. Let me know what you think when you get a chance.