Wealth 101 and the Power of Stigma

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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.

  1. You’re still in high school.
  2. 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).
  3. 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.

  1. Every parent should open a Roth IRA for his or her child as soon as possible, preferably at birth.
  2. 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).
  3. Put at least 10 percent of whatever you earn after taxes into your Roth IRA.
  4. 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.

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17 Comments

  1. Interesting points. The problem is that people struggling financially aren’t going to feel that the elite’s attitudes apply to them — because few of those people have been in poverty and struggling.

    It’s the same problem with your Confederate flag argument: Like so many things in life, it’s location, location, location. Because there are plenty of places where Confederate flats are a source of pride or are at least neutral. Why? Because it’s how the people who grew up. Similarly, people who grow up in poverty or places where the majority of people struggle have different values. It’s about permeating those.

    We’d visit my husband’s old neighborhood from his teen years. I’d leave with a headache. A woman was talking about how she was worried that their water was going to be shut off — they could be late on rent because her boyfriend’s mom owned the property — but when money came in later that day, she wanted to go out to eat. At a $10-15/person place, so not budget-busting but… And this was better than her boyfriend’s desire to go play at the casino. They had 2 kids, and she was telling me this in front of a TV nicer than ours with a bigger cable package than ours.

    The problem is that this was par for the course there. The self-fulfilling prophecy of”You’ll never have enough, so you might as well enjoy it while you have it” is so prevalent that it never occurred to them not to act that way.

    I’m not sure how much the stigma would get in those people’s heads. Again, part of the problem is that they’d judge the people stigmatizing their behavior as “not getting it.” I’m not saying we shouldn’t change our attitudes somewhat, but I’m not sure it’d really do much.

    • Mr. Groovy

      Hey, Abigail. Thank you for your very thoughtful response. I really don’t have a come back. I was just kicking around some thoughts on how we might change a very damaging mindset/culture. We’ve done it before with respect to racial attitudes. But every institution has to be on board–schools, churches, television, music, sports, government, etc. In other words, by stigma, I’m not suggestion an environment where well-off people are encouraged to look down upon struggling people. That certainly wouldn’t be very helpful. I’m suggestion an environment where our most respected people and institutions compassionately make the argument that wealth-sabotaging habits are not cool and should be avoided.

      But, alas, I’m afraid you’re right. Our leaders, institutions, and culture are too feeble to turn things around. How sad. It just kills me that our country is becoming increasingly bifurcated–those who shun wealth-sabotaging habits live well and those who don’t live poorly–and there’s nothing we can do about it.

      I’ll leave you with two things, Abigail. First, you are so right about the Confederate flag. I grew up on Long Island and went to college in Buffalo and the Confederate flag was fairly common. More common than it is right now in North Carolina, believe it or not. But back then we saw it as a symbol of rebellion, not hate. Second, I heard you on Stacking Benjamins today and you were freakin’ AWESOME!

      • Awww thanks! It was fun chatting with him and, yes, pimping my book. Glad it came out well. (I never listen. I don’t like the recorded sound of my voice. It’s weird.)

        I’m shocked that the flag is so common anywhere in the north. And yes, it’s nice to pretend that we could get schools and pop culture to preach how good and careful financial habits could make things a lot easier for a lot of people.

        • Mr. Groovy

          I hear ya about listening to your own voice. I know I sound atrocious. I sound like some Brooklyn goombah from central casting. But you really did sound great. And, yes, the Confederate flag was fairly common up north. This was in the 70s and 80s, mind you. And in the 70s, southern rock was very popular (Marshall Tucker, Lynyrd Skynyrd, Charlie Daniels, etc.). Heck, the Confederate flag was very prominent on a very popular TV show (the General Lee on the Dukes of Hazzard). But again, this was so because hardly anyone considered it a symbol of hate. It was seen as a symbol of rebellion.

  2. Wow, seriously intense brain food here. Excellent article and analysis. If nothing else, you’ve created an idea. Ideas have consequences. Well thought out. My daughter just got her first real job, and I told her we’re opening a Vanguard Roth IRA with her first paycheck!

    • Mr. Groovy

      Hey, Fritz. Thanks for the kind words. Yeah, Penny got me thinking about the cycle of poverty and I was just kicking around some thoughts on how to break it. It’s a tough problem, and I don’t see how it can be turned around without bruising some egos. Imagine what would happen if a politician from any party said the following: “No, it’s not cool having a child you are not financially, emotionally, and culturally strong enough to support and nurture. It’s unfair to yourself and the child.” The howls of vituperation that would crash down upon this politician’s head would be deafening. But on a brighter note, it looks like someone’s daughter just took a giant leap toward financial independence. Congratulations. Love the Roth. Love Vanguard. Is she going with a target-date fund? Or is she going with the S&P 500 index? Let me know when you get a chance, my friend. Cheers.

      • Hey Groovy! I’m thinking of putting her Roth 100% into global equity fund (not sure of fund name, given that I’m sitting in a airport and typing this on my phone). You’re 100% correct on politicians, I’m afraid Political Correctness is killing this country…take care of what you can take care of, and pursue FIRE!

        • Mr. Groovy

          Forgot all about the Global Equity Fund. Excellent choice. And, yes, ready, aim, FIRE! There’s no excuse for not taking care of what you can control. Safe travels, my friend. Talk to you soon.

  3. There’s stigma attached to unwed mothers and teen pregnancy already in a lot of realms. BUT when I taught in a school that was 80% free lunch, my students were SHOCKED that I wasn’t already a mom. In my first month of teaching I actually answered a “Why don’t you have kids yet?” question with a response of not being married. “So?” was the reply. How naive was I?! I’m not sure stigma is enough to combat something that is so deeply rooted in socioeconomics, familial history, and dozens of other things. I’m also not sure that making people feel bad about themselves (or their parents, grandparents, etc.) is the best way to teach them. It might be effective, but it might also be a bit extreme and could have other unintended consequences. I don’t think there is ever going to be a universal set of values or a universal norm as long as we have class systems in the United States. And for better or worse, they seem to be here to stay. I’d like to think that creating a system of mentorship (idol worship like my kids and Air Jordans…ZOMG) would work well, too. Instead of giving kids celebrity mentors, give them mentors who manage money well. And if they happen to be celebrities, focus on how they manage money well rather than how many Kardashians they date. I don’t know. I’m not saying your plan wouldn’t work. Stigma is powerful. It’s why teaching middle school can be so hard. It’s why brand names are so popular. It’s why kids struggle with self esteem. I’m just not sure it’s the way I want kids to be taught. However, I will say it probably would be a whole lot more effective than what we (don’t) do now.

    And a final half-baked thought: And I still think the middle class and upper class has a whole lot of privilege and benefits that go underacknowledged. We have to find a way to ask or influence all people of all classes to change. Otherwise, it seems dangerously close to an -ism.

    Thanks for the food for thought. I will probably be mulling this over long after I should be asleep tonight!

    • Mr. Groovy

      Penny, Penny, Penny!!! It’s not fair. Your brain is too big and it easily slices through my half-baked thoughts. I really don’t have a comeback. I agree with everything you wrote. But I do have some more half-baked thoughts for you. Here they are.

      1) Yes, unwed mothers and teen pregnancy is frowned upon in a lot of realms. But are these realms dominated by cool people or uncool people? It seems to me that a lot of cool people sneer at the Ozzie and Harriet guide to child rearing. So there is a lot of mixed messages out there. And in my mind, mixed messages = nuance = the greater likelihood of people making poor decisions.

      2) I went to school from 1967 to 1979, and I remember equality and the brotherly love being a big part of the curriculum. I distinctly remember my 6th grade teacher saying, “We’re all the same under the skin.” Did our school teachers worry that this message might make some of us feel bad or uncomfortable? After all, I’m sure some of my classmates had less than egalitarian parents and grandparents. The answer, of course, is no. Thankfully, our school teachers weren’t worried about bruising egos when it came to combating racism. So why can’t our schools teach good economic habits like delaying child birth? Sure it would step on toes and rattle the cage. But are we more worried about feelings are combating poverty?

      3) Finally, you mention that middle class and upper class people have a lot of privilege and benefits. Now, I’m not trying to be snarky or confrontational, but can you give me some examples of this? When I think of privilege, for example, I think of state-mandated preferential treatment. You have to treat one group better than other groups. You have to add 200 points to anyone’s SAT score from this group. I don’t like this. I’m all for ending privilege. But I just don’t think we all have the same definition of privilege.

      Let me know what you think when you get a chance, Penny. I love these discussions. Like I said, you have a keen mind, and you definitely have a knack for exposing the weaknesses in my thoughts and ideas. Cheers.

      • I’m with Penny on a lot of her points. And having been raised by fundamentalist religious folks who used shame to control and castigate women in particular, I’m not terribly interested in promoting cultural shaming as a way to change one behavior that some people find objectionable. We could combat the problem (that has been shrinking for something like 20 years – kids these days are having sex later, having protected sex, and engaging in fewer other risky behaviors than kids from earlier generations) in another route. We could handle some of the poverty in parenthood with more access to universal daycare. I know that goes against your belief in smaller government, but I also think that there is no small government way to discourage people from having sex and/or becoming parents.

        I wish the confederate flag was as verboten as you think it is. I’ve lived all over the US and you would be surprised where it flies. This lesbian sticks to places without them as much as she is able.

  4. “Wealth 101 will never become an integral part of K-12 education”

    The thing is a lot of finance bloggers write about being debt free, investing on a low budget, how to get freebies BUT FEW PEOPLE DO IT!

    I don’t mean to scream at you sir, sorry for the all caps, it’s just that many don’t follow free advice in the age of information.

    I doubt that many would even after they’d been schooled. It’s more than just knowledge. There’s a lot of behavioral psychology behind it too.

    That’s why IF I have kids, I’m going to follow the Dave Ramsey plan. He actually does have a plan for kids that both parents and kids can follow.

    Teach them to put away their toys when they are three and I’ll give them a quarter, as they age I want to teach them how to have a lemonade stand or something similar, teach them to save, give to charity, spend wisely and teach them age appropriate money lessons at each age.

    So that when they reach the age of majority they don’t have to start at zero. I don’t work for Dave.

    • Mr. Groovy

      You’re absolutely right, Jamie. I know I’m tilting at windmills. For many of us, financial life will just be “poor, nasty, and brutish.” There’s no escaping that unpleasant truth. Totally agree with your Dave Ramsey plan. Your future children should do very well. They’ll have a great mommy!

  5. You mentioned that people shouldn’t have kids if “You’re not married (raising children is the ultimate team sport).”

    I agree that co-parenting is ideal, but I do have friends and family members who chose to become mothers while unmarried. I’m not talking about accidental pregnancy, but about IVF. These children were WANTED and are well-loved and cared for.

    The mothers have created a wonderful extended friends and family community to help raise these kids, and they’re thriving.

    I truly believe that growing up in a stable single-parent household is much better than growing up with parents who are unhappily and dysfunctionally married.

    I realize this wasn’t your point– just wanted to give a shout out to all the single parents out there rocking it and raising great kids.

  6. You’re absolutely right, Julie. There are plenty of single-parents out there who are rocking it. And it’s better to be a child in a loving single-parent home than a child in a terribly dysfunctional two-parent home. Looking back, “stigma” was a poor word to choose. I don’t want anybody to look down on single moms. I was just pointing out the single-motherhood is often a major impediment to economic advancement and should be approached or contemplated with a great deal of caution. Thanks for putting things in perspective. This post needed some qualifiers.

    • Mr. Groovy

      I remember three things from my psychology class. Piaget’s formal operations, Maslow’s hierarchy of needs, and Milgram’s electric shocking experiment. And it never dawned on me until recently that Piaget might be useful in the field of personal finance. I don’t know if I made my case. But it made for an interesting post. Thanks for stopping by, Francesca. And good luck with your degree.