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Home > Math Is Money

Math Is Money

So, I’m sitting in the living room one evening, and I can hear my wife, Kim, and my daughter, Carrie, who was five years old at the time, discussing kindergarten math.

 I know what you are thinking. Math in kindergarten? Yes, but all they want the kids to learn is how to count to 20, and recognize numbers. If the little kids can grasp the concept that numbers help us count money, tell time and measure things, then it is mission accomplished.

But I could tell that my little daughter was having trouble with the concept of money. She knew what money looked like. She knew that a paper dollar was worth more than a quarter, for instance. But past that, it just wasn’t getting through to her. Daddy to the rescue.

 I knew Carrie had a passion for American Girl dolls. Whoever invented these dolls was an absolute marketing genius. Little girls love them. As dolls go, they are big – around 18 inches tall. They aren’t babies, either; they portray girls that appear to be around 8-10 years of age. If you are doting dad like I am, you should be warned that you can’t just buy the doll (retail cost $124). You must also buy the book with stories about the doll, various outfits for the doll and other accessories to complete your child’s American Girl doll experience. Not only that, but one doll probably won’t do! Once the kid is hooked, you can count on having at least three or four of these expensive plastic people occupy space in your little girl’s bedroom and a place in her heart. Each year, the makers of American Girl dolls release a new girl who has a special talent. The “Doll of the Year” for 2016, for example, was Lea Clark, who is an adventurer. The 2015 “Doll of the Year” was nine-year-old (yes, they have specific ages) Grace Thomas. Her book proclaimed her a baking business entrepreneur. Her predecessor was Isabel, a dancer.

 Maybe you see where I’m going here. I held up a dollar. “What is this, Carrie?”

 “A Dollar.” She replied.

 “Do you know what you can buy with a dollar?”

 “No,” she said with a giggle.

 “This.” I held up a small packet of M&Ms I had plucked from a candy jar on the counter.

 “Do you know how much Grace cost?”

 She didn’t know. “One hundred and twenty-four dollars!” I said, widening my eyes wide and opening my mouth to make the point that was a lot of money. She made the same face back at me. “That’s a whole lot of M&M’s daddy!” She exclaimed.

 “Yup”, I said “Never forget, math is money!”

 I don’t know if I got through to her how much $124 was. Maybe so, maybe not. But the M&M thing registered with her. Her dolls were worth a lot of M&Ms, and therefore had significant value.

Start Early
When did I begin to understand the value of money? I’m not sure. But I know it was early. I had the advantage of growing up poor. We lived in the small backwater town of Laurinburg, North Carolina. My parents were educators, mom a seventh-grade teacher and dad a college professor. In those days, the pay for school teachers in North Carolina was near poverty level. We never went hungry. We always had a roof over our heads and a warm, dry place to sleep. But there were few extras. We ate lots of government-issued surplus peanut butter and cheese (this was way before food stamps). Things got better as time went by, but my parents never wasted money, and they took advantage of every opportunity to teach me of its value. I can still remember the hot summer days when my brothers Bob and Jeff and I would scour the construction sites for returnable bottles, haul them into the local convenience store and redeem them for a nickel apiece. Hey, that was good money back in the 1970s.

Once, when I asked my father for a quarter, he took one out and held it up with the edges of the coin between his thumb and forefinger. 

“You can have this quarter,” he said, “or you can have what this quarter will buy. But you can’t have both.” I put the coin in my pocket and thought about what he had said for a long time. I was just a second grader, but I understood what he meant. He was trying to teach me the value of money and that I should be careful how I spent it. Once it was gone, and I had consumed whatever it bought, I had used up its value and could never get it again. But by keeping it and saving it, I could keep its value. I never forgot that simple wisdom and would come to appreciate it even more when I became an adult. 

I believe we should start teaching our kids the value of money early. Teach them the difference between needs and wants, and how to save. You can introduce them to U.S. Savings Bonds by taking them to the bank and buying one for them. Open a savings account in their name and teach them to keep a record of the interest. Or consider paying them interest on what they save at home. Even start them in a Dividend Reinvestment Program (DRIP) in a dividend-paying stock of a company – something they may be familiar with, like a breakfast cereal or cookie company.

One couple I know paid for half of their children’s toys growing up. The kids paid for the other half. Years later, when they handed that money back to them with interest upon their graduation from college, it amounted to thousands of dollars.

If you give your children an allowance, pay it in small denominations. If their allowance is $6 per week, pay them in one dollar bills, and have them save one of them each week. Pay them 6 percent interest on the money they save. Give them an envelope for each month of the year, and have them calculate how much they are earning by saving.

At some point, take them to the bank and help them open a checking/savings account in their own name.

Every Penny Counts
I have a habit of counting my change after a purchase, no matter how small. It’s something that was deeply ingrained in me growing up. Most of the time, the change handed to me by the clerk is spot on. When a mistake has been made, the mistake is usually in my favor, and the cashier is usually grateful when I point it out. Math is certainly money in that instance.

Our math teacher in high school loved to give us interesting brain-teasers to make us think. One of them had to do with three men, a hotel room and a bellboy. The riddle goes this way: Three traveling salesmen walk into a hotel lobby to get rooms for the night. They are tired, and it has been a long day. The hotel clerk tells them that there is only one room left, and they can have it for $30 if one of them doesn’t mind sleeping on a roll-a-way. Each man pays $10 and goes to the room. A short time later, it dawns on the sales clerk that he didn’t give them the traveling salesman’s discount, and the room was only $25 (this is obviously an old riddle). He gives the bellboy $5 to return to the three men. On the way to the room, the bellboy starts thinking. It will be difficult to split the $5 evenly between three men. Then he has a bright idea. He will give each man a dollar and keep the other two dollars for himself. 

That means that each of the three men paid $9 for the room, which makes a total of $27. The two dollars the bellboy kept makes $29. Where is the other dollar?

It’s a great little story for dinner parties, but there is no missing dollar. It’s mathematical sleight-of-hand. The men spent $27, of which $25 went to the room. Add back in the $3 refund and the $2 “tip” the bellboy kept, and the dollar reappears. 

What trips people up is the deceptive wording. Where the dollar goes “missing” is with the words, “each man paid $9 for the room.” That’s incorrect. Each man paid $9 for the room, true, but that $9 included both the room charge and the bellboy’s “tip.” If the room cost $25, each man paid one third of that cost, or $8.33. Each man also paid one-third of the bellboy’s purloined two bucks, or 67 cents. So, each man paid $9 ($8.33 + $0.67) for the room and bellboy tip, and had a dollar left over: (3 x $9) + (3 x $1) = $27 + $3 = $30. No missing dollar, but the explanation takes all the fun out of the riddle.

Telling it Like It Is
One of the best compliments I have ever received came from a Financial Safari listener. I had just finished hosting my weekly radio show. I had run out of time and had asked a caller to stay on the line for a more detailed answer to his question.

“Coach Pete, I love your show because you tell it like it is.”

I hope I can continue to live up to that compliment. Telling it like it is. Is there any other way to tell it?

One of my favorite quotes is by Abraham Lincoln. He was faced with some difficult issues that, by twisting a word here or there, he could satisfy his critics and dodge the truth. He asked one of his advisors, “How many legs does a dog have?”

“Four,” said the advisor.

 “But if we call the dog’s tail a leg, could we say the dog has five legs?” Lincoln asked.

Then he answered his own question. “But calling a dog’s tail a leg doesn’t make it a leg, does it? Truth is, a dog has four legs.”

When it comes to answering financial questions, I never forget that I am likely giving answers that impact people’s life’s savings. I have an imposing responsibility to “tell it like it is.”

The Flaw of Averages
Telling it like it is when it comes to money is a sacred trust with me. Sometimes I hear about average rates of return of 10 percent. That number sounds great, but it’s not real life – at least not in the last few decades. And yet you will sometimes see such claims featured on brochures. I get a little uncomfortable when I hear someone talking about average returns. Why? Because it can be misleading.

If a stockbroker tells you, “Hey, your average return on this investment is 10 percent, he or she is inferring that you will experience that return over time. But there is a big difference between average and actual returns. To illustrate, imagine an account into which you invest $100,000. Imagine a spreadsheet with rows indicating the years you keep this investment on the left. On the top are two columns, one says GAINS, and the other says LOSSES. You expect gains and losses to have equal weight, right? Think again.

In year one, you experience a 50 percent gain. Sweet! You now have $150,000. Year two you have a 50 percent loss. How much do you have now? What’s half of $150,000? That’s right, $75,000. But you had a 50 percent gain one year and a 50 percent loss the next. So, yes, your average return was zero. But your actual return was a 25 percent loss. The loss impacted your account more.

When it comes to investing, averaging can be a tricky business. Remember, math is money! Count your change (in other words, think it through before you sign up).

I have heard some stockbrokers say, “Sure, your money is at risk, but you are safe with the averages. The market goes up and down, but over the last 100 years, the average return is (fill in the blank).”  Okay, let’s think about that one.

Suppose you own $1,000 worth of XYZ stock, and the market rose 100 percent in year one, and lost 50 percent in year two. One thousand minus 50 percent divided by two would give you an annual average return of 25 percent. Who wouldn’t jump on a 25 percent return, right? But what really happened was your $1,000 went to $2,000, and then sank back to $1,000. Remember, in year two, you lost 50 percent of your $2,000? Sure, you averaged a 25 percent return on your investment, but in terms of real money, you are right back where you started. The more volatile the returns, the more this disparity between average and actual returns becomes.

You’ve heard the old joke about statistical averages, haven’t you? Put your head in an oven and your feet in a freezer, and on average you should be very comfortable. 

Before you invest, ask yourself where you are in life. How much of your money can you afford to lose at this phase of your life cycle?

People who have had money invested in the stock market for the past 30 years have had phenomenal success. The 1990s saw the longest, strongest bull run in history. But that party ended, and 2000-2010 is referred to as the “lost financial decade.” At some point, as their clients approach retirement, competent financial consultants will help them transition away from an accumulation mindset to a distribution mindset. After all, math is money. 

Reprint with permission IARFC Register, Vol. 18 Issue 2, author Peter J. "Coach Pete" D'Arruda


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