life skills

Raising entrepreneurs: Risk tolerance

Published by Lori Pickert on December 4, 2011 at 02:41 AM

When I was in the early years of running my first business, I hung a bulletin board right beside me at my desk. On it I had three things: a graph showing compound interest on savings, a page torn from the Whole Earth Review with a quote by Helen Keller, and a tiny quiz “Could You Be an Entrepreneur?” torn from a business magazine.

I had failed the quiz.

I remember specifically that the accompanying article said I should be very organized and I absolutely was not. Yesterday I took a quiz on forbes.com that would gauge whether or not I should be an entrepreneur. It’s too late for me to heed anyone else’s advice — but I was heartened to get a decent score this time. Apparently, I’m only held back by my disorganization and the fact that I would jump the gun and start working on a project without a signed contract.

Could you be an entrepreneur? Could your child be an entrepreneur? A business owner? A freelancer? There may be natural traits that would lead one in that direction, but there are also skills you can develop by having the right sorts of learning experiences.

Risk tolerance is an oft-discussed entrepreneurial trait, but it’s frequently misunderstood. Risk tolerance doesn’t mean craving risk. It doesn’t mean entrepreneurs are danger junkies, like extreme sports fanatics who snowboard avalanches. Far from it — entrepreneurs want to make good decisions. They’re just willing to take calculated risks when they’re confident those risks have a good chance of paying off.

That willingness to take a risk is key.

Successful entrepreneurs are masters of taking good risks. They’re willing to bet on themselves.

If we accept that our children will be entrepreneurs in the future — CEOs of their work lives, if nothing else — how do we help them develop the confidence to believe in their ideas?

Is your child comfortable marching to the beat of a different drummer? Is he able to break free from the crowd to go his own way?

Investors need to be able to tolerate risk in order to reap rewards. Those who can’t tolerate risk will stick to the safest investments and therefore earn the least amount of return; over time, their nervousness will have a cumulative effect on what they’re able to accomplish. Successful investors — and entrepreneurs — can weigh options and take appropriate risks. They can get in the game — and you can’t win if you don’t play.

Investors must have the mental fortitude to ride out the ups and downs of the market. Likewise, entrepreneurs must have the fortitude to ride out the ups and downs of running a business. The reason that corporations take more of the profit share than employees is because they shoulder most of the risk. When times are hard, the employee who might find himself out of a job — the corporation keeps going. Shouldering the risk and taking on the responsibility gives you the decision power and the control. (Whether corporations wield their power responsibly is a whole other topic.)

Warren Buffett famously advised that an investor should “be fearful when others are greedy and greedy when others are fearful.” The entrepreneur is someone who essentially invests in himself. He has to be willing to take a right when everyone else is going left. When the economy is down and people are most fearful, an entrepreneur will start a new business. He sees opportunity where others only see risk. When the economy swings up again, the entrepreneur is poised to make the most of it. 

How do we help our children develop a tolerance for taking risks?

  1. We let them make mistakes, and we let them know mistakes are unavoidable when you’re doing any kind of significant work. We encourage resilience and confident problem-solving.
  2. We give them time to explore and experiment. We invest in their interests and passions.
  3. We don’t get in the way. We let them own their own work, their ideas, and their successes.
  4. We praise them for being strivers and problem-solvers rather than geniuses.
  5. We help them reflect on their choices and the outcomes. We help them connect the dots: effort, mistakes, persistence, resilience. We develop a family culture that celebrates doing, making, learning, and growing.

The most important thing about risk tolerance is that your child doesn’t let a fear of failure hold him back from working to make his ideas happen. He’s willing to invest in his own ideas. He’s willing to invest in himself.

The quote:

Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing. — Helen Keller

Financial literacy: Allowances

Published by Lori Pickert on December 1, 2011 at 04:44 PM

At the end of yesterday’s post I asked about allowances — check the comments to see how different readers handle allowances, chores, and the spend/save/donate option.

We handle our boys’ allowances a bit differently. I noticed a few people said that they forget about giving the allowance or the kids forget; one parent gives the kids till Sunday to ask for their money or it’s too late! We don’t even hand out actual money; the boys get $5 a week and we keep an account on the computer. Every so often they check to see much money they’ve accrued. When they receive money as a gift, they usually hand it to me and ask me to put it in their account.

We don’t require them to save or donate any of their pocket money; that’s entirely up to them. Both boys have elected to donate not just money but time and physical effort to causes they care about, so I think we did well there. Letting them have complete control over their money hasn’t made them into greedy monsters. (On the contrary — they’re both very generous!)

Children can learn real lessons from managing their pocket money — the regret when they blow their money on something cheap and flimsy, the thrill when they save for something they really wanted, the pride when they buy a gift for a loved one. You can lecture your kids (imagine Mrs. Othmar in the Charlie Brown cartoons: wah wah wah), but their own experiences will really resonate and stick with them.

We do not tie allowance to household responsibilities. They receive pocket money as a family perk, and they have responsibilities to fulfill because they are a member of the family.

Other than giving them the chance to manage their allowance as they see fit, I told them one story and enforced one rule.

The story:

Two twin brothers inherited $15,000 each from a relative when they were 18. The first brother used his money to buy a car. He was the envy of all his friends. The second brother used $5,000 to buy a used car and invested the other $10,000 (for a modest 5% annual return). After 10 years, the first brother's car wasn't running any longer and he needed a new one. The second brother also needed a new car, but now he had over $16,000 in his bank account. How much would the second brother have if he didn't touch that money again and left it until he retired? Almost $115,000.

This story had a big impact on my older son especially. He immediately announced that he wanted to save his money and he wanted to learn to invest. All kids should be encouraged to play with a compound-interest calculator online — it might convert them all to being great savers!

The rule: You have to declare you want to buy something and then wait one week to buy it. That's it. We call it the one-week rule. There were times when they absolutely hated this rule, because of course it completely eliminates impulse spending. If they had something in their hot little hands at the store, they could only announce they wanted to buy it the following week.

So what happens? You can guess. A week later and most of the time, they have completely lost interest in buying whatever it was. The lesson is imparted by their experience with the rule, not by a lecture from me: If you wait a week, you’ll avoid buying a lot of things that you don’t really need or want! When they complained, we simply said it was a family rule — and it is. We wait on our own purchases as well!

They have both turned out to be big savers; last year my younger son spent two years’ worth of allowance on a single purchase. This, too, is a great life lesson: saving means you can eventually get something really awesome!

Our family culture plays a big part in how we educate our kids about money. We identify ourselves as frugal, as savers, as investors. We say, “In our family…” We share our long-term goals and we talk about our financial decisions.

Just as with learning, we build a strong family identity around our shared values.

How does your family handle allowances, chores, saving/donating?

Financial literacy: Books

Published by Lori Pickert on December 1, 2011 at 02:37 PM

There are three main areas of money management: making it, saving it, and investing it. Frugality is an important branching topic — it can help you save more of what you earn.

J.D. did a great round-up of books about money recently. My favorites that he mentioned are Ramit Seth’s I Will Teach You to Be Rich (a great introduction to finance), Andrew Tobias’s The Only Investment Guide You’ll Ever Need, and Debt Is SlaveryYour Money or Your Life could also be inspirational for some teens. All of these would be great gifts for teens or a great basis for a personal finance curriculum. You can find all of them at your local library, as well as a dozen different financial magazines.

I agree with what J.D. says in his post — your taste may vary, so just check a lot of books out of the library and find what works for you.

And — I think J.D. would add another important area of money management to those I mentioned: getting out of debt. The best part about having your child study the subject of debt is that it may help him or her avoid accruing it in the first place!

J.D.’s blog is the personal finance blog I most often recommend, but there are many. Many, many, many. Finance blogs, books, and magazines are similar to diet blogs, books, and magazines — there are infinite variations on what boils down to the same basic advice. So, find the delivery that you like the most and just get started. Don’t worry about finding the perfect program — it’s more important to just pick something and start.

When it comes to starting a business, I like Jason Fried’s advice about bootstrapping.

If you have financial literacy resources to share, please do so in the comments!

For tomorrow’s post, I’m interested to know — do you pay your child an allowance? Do you have rules about your child spends his or her money?