A few weeks ago, one of my friends IMd me to ask what she should do with her money. She typed like 15 lines of detailed financial questions, background information, and intricate questions, and then waited for my answer. I thought it would be fun to mess around with her so I waited a few seconds and then asked her this:
“Do you think my hair is pretty?”
Man, nothing makes me happier than aggravating the people around me. In all seriousness, though, when I read what she wrote, I told her I thought her plan was exactly the wrong thing to do. Since then, I’ve had 4 more people propose the same thing. They were wrong, too.
All 5 of these people had parents whose bright idea was for the kids to send their money to their parents, who could bundle it with their investment and start earning some returns.
This is BAD!!!!
Let me explain. Yes, it’s better to invest money that’s just sitting there, earning hardly anything in a bank account. But even though the parents have good intentions, this is one of the worst things they could suggest for their kids.
Why? Because at our age, we should be learning how to manage our money ourselves. No financial advisors, no paid newsletters, no BS. And if we make mistakes, that’s ok–maybe we lose $100 here or there, but we learn from those mistakes. And we get confident enough to be increasingly aggressive with our investments, which is exactly the right strategy for people our age who are even moderately knowledgeable.
Sidenote: I’m very sensitive to the cultural implications of my suggestion, which is a pretty Western-individualist idea. For example, in many households in India where parents and grown children live together, all the money is pooled together and anyone can use it. There are some clear advantages to that model (e.g., responsible spending, etc), but I want to help people learn to manage their own personal finances here.
If we send our money to our parents, what happens? First, we develop a hands-off mentality: “Well, I don’t have to worry about it.” GOD IF I HEAR THIS ONE MORE TIME I AM GOING TO JUMP UP AND BEAT SOMEONE WITH AN ONION (that way it’s unclear why they’re crying). But as I’ve said over and over, investing is largely hands-off once you do the initial research. Buy and hold means buy something and…hold it! Not too hard once you do the initial research. Plus, if it’s your own money and you made the investment yourself, you’ll actually want to track its progress and research it. Trust me, it’s kind of fun.
Second, we don’t have as transparent information as we’d have if it were our own investment. Sure, if you invested with your parents, you could probably get their password and log in every once in a while and check…but would you? Also, if their entire portfolio went up 30%, what does that mean for your money (which was invested at a different time than their money)? How much did you actually make? I hate math so I would avoid having to calculate this at all costs. Anyway, it’s pretty cool to see how much your own money has earned.
Third, you want to give yourself bottom-line accountability for any gains or losses. No blaming the financial advisor, your parents’ fancy account for its fees, or them for choosing to move their money somewhere else. Your investments should be yours, and so should the wins or losses. Use them for advice! Use your friends and the Internet to help with evaluating invesments! But in the end, the investment decision is yours.
Finally, you can probably beat your parents’ return anyway. Read about how to pick a stock, mutual funds and index funds, and asset allocation. Hell, just read all of the
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