dsmWealth: April 20, 2023

BY STEVE DINNEN

We recently wrote about talking to your parents about money. Today, we reverse course, with instructions about how to talk to your offspring about how they can manage their money and handle their finances. The opportunities and responsibilities here are broader, since they probably live under your roof for their early years and it’s your parental duty, after all, to impart at least a bit of wisdom.

So first, the basics: When, what and how?

“It’s never too early to start” with financial education, said Susan Rathjen, senior vice president of private banking at Bankers Trust. “Playing grocery store was always a big thing at my house,” she added, noting how it shows young ones the value of something while learning how to count pennies, nickels, dimes and dollars. Allowances also help.

Some kids work after school, some don’t. Either way, their financial needs grow with their responsibilities. You’ll want to find time to explain the difference between needs and wants. It can be hard for a teenager to accept that a 6-year-old Ford sedan will get her back and forth to school just as efficiently as a brand-new BMW.

“Money is emotional,” Rathjen said. “It doesn’t matter if it’s one dollar or one million.”

Family wealth and intergenerational wealth can complicate matters, but it also opens an opportunity for a deeper discussion about money, not avoidance. Rathjen works with one wealthy family that has a practice of meeting with each child when they turn 16, to explain where things stand. Periodic updates are warranted, but their frequency can vary depending on the child. Nothing is set in stone.

“Sometimes a 25-year-old is ready to hear about wealth, but sometimes not,” said Lorilee Mills, senior vice president and senior family dynamics specialist with Wells Fargo Private Bank.

Even so, silence can have a major impact on the way families handle intergenerational wealth and pass it along, so at some point, the younger generation needs some coaching. This is especially true when a business is involved. An oft-cited Northwestern University study of Illinois manufacturers found that only 13% of the businesses lasted through the third generation. So it’s key to a company’s survival to properly educate heirs about money and its management.

Parental duties are lifelong. If you see your kid going down the wrong financial direction, it’s your job to step in with some corrective guidance. The conversation never really ends.

They can't even: A generation avoids facing its finance
(Or: Why our top story is so important)
BY OYIN ADEDOYIN FOR THE WALL STREET JOURNAL
Many young adults overwhelmed by financial stress cope by ignoring the problem.

Some tune out bank and credit-card balances, lose track of their spending and rack up debt. Average credit-card debt rose 29% to $5,800 in March from a year earlier for millennials and increased 40% to $2,800 for Gen Z, Credit Karma said. Younger people were also more likely to have paid late fees or taken advances from their credit cards, a survey from NerdWallet found.

Psychologists call these behaviors financial avoidance and say it is a typical habit among younger people in any era.

But the pandemic’s economic whiplash followed by high inflation is making such avoidance more common, say economists and financial advisers. The consequences of ignoring bank and credit-card accounts include overspending, damaged credit and deep debt. Millennials in their 30s had the steepest increase in debt of any age group since the pandemic. Avoidance can complicate later milestones, such as buying a home or retiring.

Spending tends to be more satisfying than budgeting or tracking your expenses, “even if cognitively you know it’s not really the healthiest coping choice to engage in,” said Dr. Vaile Wright, a senior director at the American Psychological Association, who studies stress and anxiety.

Avoidance is a common coping mechanism for all forms of anxiety. Someone with social anxiety avoids parties. Someone with a fear of heights may avoid getting on a plane. The APA’s Stress in America 2022 survey found that 83% of adults reported inflation as a source of stress.

Read the full article to learn how two people in their 20s lost — and regained — control of their spending.

Our globe-trotting greenbacks
BY STEVE DINNEN
I like greenbacks. So does Zimbabwe, which demanded $30 worth of them for the visa they issued to me when I landed at the Harare airport. The cabbie liked the 25 dollar bills I paid him to take me to my hotel.

There is a national currency, the inflation-charged Zimbabwe dollar. But U.S. dollars are officially recognized — and obviously preferred.

At least 11 countries officially use U.S. dollars. El Salvador, Panama and Ecuador are a little closer to our shores, as are the British Virgin Islands. (Huh, no British pounds?)

The best regional currency is the Euro, which is used in 20 member states of the European Union. Long gone are the days of lining up at a bank in Italy to swap French francs you didn’t get rid of yesterday. Another regional currency is the Central African franc, which is used by six countries, and its cousin, the West African franc, which is used by eight.

If you’re traveling to countries that use U.S. dollars, it doesn’t hurt to take an assortment of small and large bills. And make sure they’re clean, with no markings or tears.

By the way, the Federal Reserve of Chicago estimates that 80% of U.S. $100 bills and 60% percent of all U.S. currency circulates outside the United States. It seems our greenbacks have global cachet.

Rising prices: Which goods and services are driving inflation?
BY DAN BURROWS FOR KIPLINGER
The rate of annual inflation slowed to its lowest level in almost two years in March, according to the federal government, and yet rising prices continue to take a hefty toll on consumers' budgets.

The good-ish news on inflation is that the Consumer Price Index (CPI) for March increased "only" 5% year-over-year, according to the Bureau of Labor Statistics' latest report. That represented a steep slowdown from the 6% increase recorded in February and marked the slowest pace of annual inflation since May 2021.

The less-good news about inflation is that prices are still rising at rates not seen in generations. Between 2000 and 2020, annual inflation in the United States averaged just 2.1%. (Recall that the Federal Reserve's inflation target is 2%.) Perhaps we didn't appreciate it enough at the time, but the first two decades of the 21st century were a sort of goldilocks era for inflation: not too fast and not too slow.

Just have a look at some of the subcategories in the latest CPI report to see how much things have changed. Here are the goods and services that are weighing most heavily on folks' finances:

Housing was the largest contributor to inflation in March. No surprise there. The shelter component, which counts sundry costs for keeping a roof over one's head, rose 0.6% last month and 8.2% year-over-year. True, home prices and rents have been in a national downtrend since June 2022, but higher owners' equivalent rent and the fact that the data are backward looking are just a couple of reasons for this CPI component remaining elevated.

Food inflation also continued to moderate with a flat reading in March versus the prior month, but prices rose "a still burdensome" 8.5% year-over-year, noted Sarah House, senior economist at Wells Fargo Economics. Prices for food away from home, which includes eating at restaurants and hotels, increased 8.8% over the past 12 months.

Energy prices fell 6.4% on an annual basis (after Russia's invasion of Ukraine caused them to spike last year). Gas prices, which fell 17.4%, led the category's decline, but not all energy sources are cheaper than they were a year ago. Most notably, electricity prices rose 10.2% over the past 12 months.

Vehicles are getting more expensive, too. "New vehicle prices continued to increase, this time by 0.4% after increasing 0.2% in February," noted Raymond James Chief Economist Eugenio Alemán. Even worse, prices for new vehicles jumped 6.1% over the past year.

The bottom line is that on an annual basis, inflation was primarily driven by sharply higher costs for food, shelter, electricity and transportation services. While inflation may be moderating, it will clearly be quite some time before we get back to the good old days of 2% increases.

Listen: After the recent banking crisis, some lenders have bumped up interest rates on savings accounts to lure new depositors. But if switching banks sounds like a hassle, blame it on what economists call “deposit stickiness.” What would it take to get you unstuck? (NPR)

Read: More Americans are vacationing in Europe — and searching for places with fewer Americans. (Wall Street Journal)

Read: Despite inflation, demand for luxury goods is still riding high. (Wall Street Journal)

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What else would you like to learn? Please contact us at editors@bpcdm.com.