Bonus Q&A: Teaching Kids about Money, Investing and Financial Responsibility with Tad Fallows
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Hello and welcome to another episode of All The Hacks, a show about upgrading your life, money, and travel. I'm your host, Chris Hutchins, and each week I sit down with the world's best experts to learn the strategies, tactics, and frameworks that shape their success. A couple days ago, I had a fascinating conversation with Tad Fallows, and we talked about how high net worth investors manage and invest their money, including their asset allocation percentages and a deep dive on alternative assets.

So if you want to check that out or get more context on Tad and the community of high net worth investors he runs, definitely listen to that episode. But today I wanted to release a little bonus episode with the rest of that conversation, which is all about how he thinks about money and kids, things like allowance, college savings, sharing family finances, as well as a real estate tax hack and his recommendations if you're ever in his hometown, Dallas. So let's get started right after this.

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I am curious about another type of financial education, which is how you're thinking about

sharing all of this knowledge with your kids? Because mine right now at two and five months, we're not really talking about it a lot. A guy I know, Rob Phelan, has this awesome book called Emma's for Money that we bought for my daughter. So it's like an alphabet book, except each page is talking about an aspect of money. And my daughter knows that the piggy bank has money and the money buys things. And that's about as far as we've gotten. You're further on the journey. How have you thought about trying to make sure your kids both

understand all of this and are equipped with the knowledge. But also, I went to a conference recently and there was a group of people that said, how do we raise kids that aren't entitled? Have you thought about that? And what are you doing? Yeah, I love this question. And of course, I'll start with the comment that I don't have all the answers here. But if I look at myself and actually all the members of our community, I'd say, what is the number one problem that most of them are struggling with? It's this question of, as you're saying, what's the right way to raise kids in regard to money? And I might put that into two groups. One, you talked about

how to make sure you're instilling them with the right values and not to take things for granted, not to be entitled. And then the other one is just practically how you get them sort of the information and knowledge about it. You know, in the world of not being entitled, don't have a full answer there, but a few things in general, I would say that communication and honesty and transparency, I think is the best way to go. So my kids are a little bit older, they're seven and 11, and we've been trying to do this throughout.

So in terms of making sure they value money, of course, they can see that we have a nice house. If we want to go on vacation, we go on vacation.

But my wife and I are transparent when we talk about decisions we're making. Like we bought a new car recently and my son was asking, well, why didn't we get a luxury car? Why did we get Hyundai? And he knows that we didn't have the money for it. I said, we could if we wanted to buy a fancier car, but that's just not important to us. And other things that we spend our money on are more valuable to us. I used actual numbers with him of, okay, here's how much a Mercedes would cost. Here's how much the Hyundai costs. This one seems nice to me. They both get from A to B.

So just this idea of communicating, no matter how much or little money you have, there are trade-offs, whether it's whether to buy the coffee at Starbucks versus making it at home versus do you want to fly private versus do you want to fly commercial? I personally have not moved beyond the idea of flying economy. I can't get my head around flying first class. So the kids actually, it demysticizes it. They see this as something that mommy and daddy talk about and they think about these trade-offs. And I think that kind of gives them exposure to it. In terms of

how to sort of educate the kids on money and how it works is something where I wouldn't say that we've done a lot of things right in parenting, but this is one where I feel like we have done a pretty good job of it.

I think the fundamental thing is your kids are interested in everything that you're interested in and everything you do. So again, my wife and I just talk transparently about our jobs. And when I'm looking at an investment here, I will put it in words that will make sense to a seven-year-old or make sense to an 11-year-old. But I'll tell them, hey, we're looking at this whiskey aging fund and here's how it works. You're buying stuff that this factory makes and you're holding onto it and you think you can sell it for more for later. And does this seem like a good deal? And asking them, hey, what would you be worried about on this deal? How do you think it might not work out? Why do you think it does make sense here?

Just that open talking about it of not having money be a taboo. Our son was asking about how we bought a house and how we decide which one to buy. And we didn't make up numbers saying, okay, let's pretend a house costs $100. We talked about the actual prices of that because they are sooner than we want or realize going to get access to the actual numbers. So versing them those real numbers is super helpful.

And then the other thing we've done is actually just tactically in the world of investing. Each kid, as soon as they were born, I opened a brokerage account for them. So this was separate from their 529 college savings, but just a brokerage account to buy individual shares of stock. And then for every birthday and Christmas and Hanukkah, they each get to pick out one stock that they're interested in. It starts when they're little kids, like, okay, how about Mattel or how about Disney or something like that? And I just print out a cute, goofy looking stock certificate. And they think that's semi-cool. But

But then especially my son, now he's 11, has gotten older. He's expressed interest in this. And so we will actually talk about particular companies and say, hey, your birthday is coming up. What do you want to look at? And depends. Sometimes he'll be he wants a share of stock in the company or my wife works or something like that. And sometimes he'll say, well, which one's growing faster and start to do a junior version of analysis on them.

And it's not like this is his passion. He may show no interest in it for two months, but then the brokerage statement will come. He'll look at it. He'll read it. And the cool thing about kids is if he's getting 75 cents in dividends from some companies, wow, I just got 75 cents I didn't work for. For a grownup, you might say, hey, who cares about the 75 cents? But for a kid, actually, those small numbers are an exciting amount of money.

And it's a way to sort of start getting them that exposure there and they can get those little wins. And they actually then see that continuity where a year from now in two years and five years, he's seen those same shares that he got for his third birthday. Now it is eighth birthday or his 13th birthday. He's seen those there. If he puts on dividend reinvestment, he's seen those numbers get bigger. And just sort of, at least for him, I saw this light bulb go out of these dividends. Hey, I didn't

do anything. And now I got this money here. I think he sort of gets the value. We also nudge them in that direction where they get an allowance and we give them the option of, hey, you can spend it on whatever you want to. It's your money. It's your choice. But if you donate to charity, we're going to match that 100%. And if you invest it, we're going to match that 100%. And so the kids, they spend some on trash, but I would say most of it, they choose to donate or invest and they see the value of that 100% investment and it gets it compounding pretty fast.

I've also found, especially as they get older, it's been a nice discipline tool. Every parent discipline is such a challenge. You don't want to yell at your kids. You lecture them, you give them consequences, timeouts, takes things away, et cetera. But for a certain class of misbehavior, this can actually be really effective. So my son and I were at Boy Scouts a couple of weeks ago. He was throwing around his Boy Scout book and he accidentally threw it up in the rafters and it got stuck there.

And so I was being like so frustrated with him. Like, why'd you do that? It's going to cost $25 to buy a new Boy Scout book. And I realized, you know what, Jack, you got to spend the $25 to buy that Boy Scout book. I told you not to throw it around. You knew that was the wrong thing to do.

It factually cost $25. We can look on Amazon here and saying getting a new book is costing $25. That's coming out of your account there. And so that was, I would say, a very fair consequence. It was just a natural consequence of what he did, but it really reinforced it. He has not done that same thing again when he realized, hey, I have to pay out of pocket for this. And of course, he destroys our sofa. We're not going to charge him thousands of dollars for that. But you get these sort of small classes of things where you can actually just make them

more responsible, at least with material things, by making them live with the consequences when they act irresponsibly. I like it. I feel like I got a lot of thinking to do before we get there. I will ask in case you've thought about it, have you thought much about college savings and 529s versus just...

just keeping something in a little bit more liquid, less restrictive place? Yeah, I looked at this a lot when they were born and I've just started put on autopilot since then. The math I did when they were born was basically if you put $1,000 a month from day one into a 529 plan,

Assuming some reasonable rate of return, that's going to more or less cover the cost of college when they get there. Since that was 7 or 11 years ago, it's probably a higher number today. Maybe it's $1,200 that you need to put a month into that. But I just started that from day one, and those accounts have been building up. The upside to 529 is they're great from a tax perspective. You put the money in untaxed at the beginning, but basically it grows untaxed.

The dividends are on tax, capital gains are on tax. And when you take it out, as long as you're spending it on education, and there's a very broad set of things that counts education, there's no taxes ever when you're taking it out. So it's great there. The only quote risk is that you actually overfund it and maybe your kid doesn't go to college or they get a full scholarship or they go to an inexpensive in-state school and you've got too much money in there. I think it's a really pretty small problem. One reason is that you can take that money out and just pay a penalty. But if it's been compounding for 20 years, you've probably done better than the penalty anyway.

Or if you're fortunate that you've got extra money and there's money left over in there, you can always just repurpose that to a new beneficiary. So in theory, you could make your grandkids the beneficiary of that. And then you've done your kids' college savings on their behalf for them. I have probably overfunded what we need to have in there. But just in the idea of that, the downside is pretty small and the upside of not having to worry about it is pretty significant.

There's other things you can do in terms of also putting money in trust for your kids and UTMA accounts, et cetera. I wouldn't say I have the exact answer there, but for the 529s, I think just picking a number and consistently putting in every month is kind of a no-brainer if you can afford to do it. Someone sent me, I can't even remember the name of the website or I'd share it, but this guy who basically teaches a course or does consulting. I can't figure out how legitimate it is, but it's a bunch of hacks and a series of tactics to basically...

Yeah.

Yeah. And I will say, if you send your kids to private elementary school, you will question why you're saving for college. It costs just as much to send them to a private elementary. Fortunately, our kids are going to a public school now, but when they were previously going to a private school, I really questioned why there was all this hoopla around it when it costs just as much before that. That was kids. Are there any other areas of life, things you've picked up, tactics you want to share, tips, hacks before we take off?

Sure. I think one that does not work for everybody, and I don't personally do this, but if you can make it work, there's a huge upside to is having you or your spouse become a real estate professional. And what that means is whoever is the real estate professional needs to spend 750 hours or more and at least half or more of their business hours doing real estate. It's pretty broad variety. It can be a contractor, a real estate agent, managing your properties, et cetera. But if you do that, then...

Then all of your paper losses on real estate are actually deductible against your ordinary income. So if you have one spouse, say your wife is a lawyer earning a lot of money or a doctor earning a lot of money, and you can qualify as a real estate professional, you can actually cancel out her income with your spouse.

paper losses on real estate. I don't know that I think this is good public policy, but if it's something you can do, it's a real savings for your portfolio. Awesome. Unfortunately, no real estate profession here, although maybe that definition gets wide enough one day it'll qualify. I know you love all this stuff. This conversation has been great. We've had other ones before.

Are there other places online that you consume content? You've got Long Angle. You've got this podcast, of course. But other resources, sites, blogs, people you follow to stay on top of all this? Yeah, for sure. There's a couple websites I like. Mr. Money Mustache, I'm sure you're familiar with. A lot of your listeners probably are.

He was one of the ones that initially got me into this idea of a lot of the investing and I guess financial hacks. It's fairly different from some of the stuff I do, but I find him a very entertaining writer and a lot of interesting content there. There's also the Fat Fire Forum on which Mr. Money Mustache is all about extreme frugality. Fat Fire is more around financial independence, but spending a lot of money. So between those two, you kind of get a yin and yang of it.

In terms of podcasts, there's probably three that I really like. One is the Odd Lots podcast by a couple of the Wall Street Journal reporters. It covers different economic topics in a really good degree of detail, sort of like yourself. There's one called Money for the Rest of Us that, again, he'll pick sort of one generally investing concept or asset class and really go deep on it for half an hour or so. And I've learned quite a bit from that one. And then there's one that won't appeal to all listeners, but it's called The Business of Family.

And especially people who are in a demographic of having a family office or a family company and having quite a bit of assets in some company like that. Every episode, he interviews the sort of person leading one often multi-generational family company and talks about what they do to...

past values and wealth and practices and other things across generations and how to run these family companies. I'm not personally in that situation, but I just find it fascinating to hear what some of these very successful families have done there. So those were three that I would point you to. Great. We always end up asking you to pick a place that you're pretty familiar with and share a few recommendations, something to do, eat, drink,

What's your spot? So I live here in Dallas. I've lived here about seven years. Anybody who talks to me knows I'm basically the Dallas Chamber of Commerce. I love it here. So I'll talk about a couple of things with Dallas. You know, if I were looking at a really nice day in Dallas, I'd probably go for a walk down the Katy Trail, which is our rail trail here. There's a nice place called the Katy Trail Ice House. There's not great food there, but the atmosphere is awesome. And one of those places where you can get a margarita the size of your head. So that's a fun kind of people watching on the trail.

And then where I'd probably go, what might surprise people about Dallas is the symphony here is actually phenomenal. I'm not a very cultured person and not historically into the arts, but we went one time to the symphony and I absolutely love it. We became season ticket subscribers after the concert hall was designed by I.M. Pei. And apparently it has top 10 acoustics in the world among symphony halls, given the way they designed it. We definitely recommend anybody who has a free Thursday, Friday, Saturday night here in Dallas checks out the symphony. This is awesome. I really appreciate you being here.

All right. Thank you for joining for this short bonus episode. If you have any thoughts, feedback or questions for me about anything, especially because I'm prepping another listener question episode soon, shoot me a DM or email me chris at all the hacks dot com. OK, that's all for this week. See you next week.