This is an audio transcript of the Money Clinic podcast episode: ‘How not to lose a million dollars’
Claer Barrett
Children will soon be heading back to school after the summer holidays. But will their new timetables contain any lessons about money? In our increasingly cashless society, teaching kids the basics is becoming harder to do. And where do we start with learning about investing? Well, my guest today has some great ideas to share.
Sheila Bair
The marketing is relentless for these kids and they see on social media all the success stories. They don’t read about all the young people who lose money, and they’re too embarrassed to tell about it anyway. And all that money that you lose is money you can’t save and invest to get some compound returns for yourself. So there are safe places to put your money. It’s so much better. That’s how you build wealth.
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Claer Barrett
Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor. My guest today is the author of a bestselling series of picture books teaching children about money. Sweet. But her financial wisdom was hard-won. As one of the highest-profile financial regulators in the US, Sheila Bair was instrumental in protecting consumer bank deposits during the global financial crisis in her role as the chair of the US Federal Deposit Insurance Corporation, or FDIC for short. Her work standing up for the interests of consumers earned her the moniker, the little guy’s protector in chief, from The New York Times. And she’s even been portrayed on TV in an adaptation of Too Big to Fail. Sheila has worked as a lawyer, a financial regulator, and over the past two decades has turned her attention to writing books about money for children of all ages. And she’s here joining us on the line from Maryland in the US to give us all the scoop on her next project. Sheila Bair, welcome to Money Clinic.
Sheila Bair
Thanks for having me.
Claer Barrett
I want to start by asking you a question we often ask our guests on Money Clinic. What’s your earliest money memory?
Sheila Bair
I remember my dad had a big jar of spare change and I would count the coins and starting with pennies, that was actually the way I started learning basic math. You know that 10 pennies made a dime. Two dimes and a nickel made a quarter. Five pennies made a nickel. And then as I got a little older, playing store, of course, with play money, you know, setting up a little store in the playroom and buying things and starting to learn, you know, the exchange of value for a good. And I think going shopping is a great way to start helping kids understand the process of money, spending the money, finding value when using your money.
Claer Barrett
And of course one that’s made harder nowadays now that so much money is invisible and digital.
Sheila Bair
Yes, yes it is. You’ve got to keep reminding young people that there’s a lot of labour behind every dollar. I encourage young people when they’re trying to think about whether they want to buy something to think about it in terms of how much they had to work. If you’re being paid $20 an hour and it costs $80, is it four hours of your life? It can slow them down a bit.
Claer Barrett
Yeah, no it certainly can. I mean, there are still some children’s games, of course, which do involve paper money like Monopoly, even if we might not see it as much in real life.
Sheila Bair
Yeah, no, I think Monopoly is good. Buying things, being able to . . . once you establish significant ownership, being able to charge rent is obviously it has things in it that are not realistic in the real world. But I think for young children, everybody likes Monopoly. And it is a good way to start learning about money and how to handle it.
Claer Barrett
Now you’ve written eight Money Tales books now in total. Tell us a little bit about them. And also what inspired you to write them?
Sheila Bair
My exposure to the lack of good financial education literature for younger children, as well as my own experience with my children, were the two things that inspired me. And I was inspired when I was the assistant secretary for financial institutions at the US Treasury Department, and I actually started an office of financial education back then. And we really reached out to the school community to see if we could get more financial education into classrooms because it just seemed to me at an early age, you need to start incorporating financial concepts into the basic curriculum, math being, you know, kind of an obvious place to do that.
And, that raised my awareness of the lack of good quality children’s books that just talk about money and that are not didactic or lecturing, but, you know, are fun stories but still illustrate important financial concepts. And at the same time, I had young children at home. My husband and I loved reading picture books to our kids, and I thought, picture books are great because kids read them over and over and over again. I mean, you know the messages, if they like the book, they’ll read it over and over and the messages really sink in. And then parents learn something, too, when they’re reading these books with their children.
And, they’re written for children ages six to 10. They really deal with just basic concepts like debt, risk, compounding. That’s a key theme in a couple of books. My very first book, Rock, Brock and the Savings Shock, was about the power of compounding when you save. And then later a book, Billy the Borrowing Blue-Footed Booby, is about the power of compounding when you borrow, and it’s important to remember compounding helps you and you save energy when you borrow. That’s just kind of basic stuff. There’s one that deals with, entrepreneurship. It’s about a little girl princess who really wants to buy a spaceship to go to Earth against her father’s advice. So she sets up her dragon ride stand, selling rides on her dragon and actually works very, very hard.
Claer Barrett
Oh, great.
Sheila Bair
Yeah, she’s a very good entrepreneur. And then, you know, a bit squanders it on the spaceship to go to a trip to Earth where she kind of decided, on an impulse, she wanted to go without properly researching it. So it’s again, it’s about how hard it is to earn money, how easy it is to spend it.
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Claer Barrett
Now, one of your most well-known professional successes was protecting bank deposits in the financial crisis. Now, when you were in your role as chair of the FDIC, your instinct was to go public about what you were seeing and write about it in The New York Times. Can you tell listeners the story behind that?
Sheila Bair
Well, actually, I didn’t want to go public first. I got to the FDIC, our staff, our chief economist, a guy named Rich Brown, is already all over this and I’ve done some pretty scary analysis of what kind of mortgages were being originated, these toxic, huge payment shock loans. They were designed to force the borrowers to keep refinancing. So we looked at this and the Fed was raising rates and housing values were starting to decline. And we realised that a lot of these folks with these toxic mortgages were not going to be able to refinance because they were underwater. Their mortgages, they had borrowed more than their homes were worth.
So we pushed and pushed and pushed internally with other regulators to stiffen up mortgage lending standards, at least for the banks. And then when we realised it was still too late for tens of millions of homeowners who had these toxic mortgages, we really pushed to try to get the people who service these loans to restructure them. So they had the legal authority to give people, reduce mortgage payments and give them fixed-rate mortgages if they were in trouble. And so we thought it was going to happen and we waited. That was in the spring 2007.
And then in the fall, you know, we started getting data and virtually none of the mortgages were being restructured. They were going straight into foreclosure. So at that, it was at that point that I went public to decide, OK, we’re going to name and shame, because clearly private conversations aren’t going to sway these guys. They’ll just give us a happy talk and not just do what they want.
Claer Barrett
Now that article really catapulted you into the public eye as somebody who stands up for the consumer, which is maybe not what people are used to regulators doing, but I mean, tell us about the response to it, the effect.
Sheila Bair
Well, the consumer community really liked it. I got tremendous pushback, I think, and to this day, I think the bond investors were a big problem. They were getting these nice, huge, juicy interest rates and they didn’t want to lower those rates. The system had been working fine for them, and a lot of them felt that they had plenty of collateral protection underneath them, so they weren’t going to have to take any losses, even if a good number of mortgages went into foreclosure. So the mortgage securitisation industry and including the investor community, I think, helped stir up or at least did not discourage this kind of a populist revolt against, oh, don’t give these deadbeats breaks on their mortgages. These are all home flippers and speculators, and, you know, you want to bail them out. I got a lot of that. It was pretty hateful. And it did not deter me because it, you know, it just made me mad because I knew where it was coming from.
And it is true that a good percentage, I would say a third of these subprime mortgages probably were taken out by speculators and loan flippers, but the majority of them were people who lived in their home, who wanted to hold on to their home, who already had safe FHA-guaranteed, 30-year fixed-rate mortgages, who had been push marketed out of those safe mortgages into these serial refi products with the enticement of getting cash out. I think that was sad that this kind of Wall Street narrative pervaded even people like Michael Lewis, who should have been looking at this more objectively.
But make no mistake, millions of people were hurt by this, either directly through lost homes or indirectly when, you know, the whole mess brought the whole economy down and job losses. So this was definitely an issue to protect innocent homeowners and innocent bystanders who were being impacted.
Claer Barrett
I mean, this was at the height of the financial crisis, 2007. We fast forward to today, 2024. Do you think that the financial markets are a better place for consumers? Have we progressed? Were there still areas of the market that worry you?
Sheila Bair
Yeah. Well, certainly mortgage lending standards are a lot better. And I worry because there’s always constant pressure to erode those. But we have a Consumer Financial Protection Bureau, which has done a wonderful job, especially with mortgage standards and in other areas protecting people in credit cards. Buy now, pay later, which really is, kind of, is a form of debt they want to call something else. But it is. So yes, with the CFPB we do have much better consumer protections. Is it as good as it should be? No. Is there a relentless pushback? You know, every time the CFPB tries to do something, they get sued. So that is frustrating. But I do think the protections are better.
Claer Barrett
And are there any areas that you feel are going to be problematic in the future? I mean, you mentioned buy now, pay later. That’s a big concern for British regulators at the moment. It’s still an unregulated financial product. And the other one that comes up time and time again of course is crypto and digital assets. And again, they’re exciting areas of the market. Lots of our younger listeners to the podcast especially are drawn to the excitement of investing in those kinds of areas or indeed trading in general, using contracts for different ways of building up leverage. But these things are very, very risky.
Sheila Bair
They are. They’re really not suitable for investments. They’re highly risky. They’re pure speculation. That makes me sad to say that, because I think there are some real promising use cases of stablecoins to lower the cost of payments, especially, you know, for international remittances. So I’m hoping the industry will evolve in a way that we start seeing more socially beneficial uses of this technology. But the assets right now that trade on that technology, it’s sheer speculation.
And I know kids, you know, you see how bitcoin has gone up and they get stars in their eyes. And they read about all these stories about how much money people have made. But it’s really a small minority. Most get in and get out at exactly the wrong time, which is true of any speculative asset. And there are always going to be people that’s going to be smart money on the other side of you with more experience, more information, potentially in the era of crypto, even manipulating the market and the money they make is going to be out of your pocket. So I really wish young people would stay away from it. You know, there are some regulated ETFs where you can take an exposure in crypto, but of course that’s not what they want to do. They want to trade it.
But the marketing is relentless for these kids. And they see on social media all the success stories. They don’t read about all the young people who lose money and they’re too embarrassed to tell about it anyway. And all that money that you lose is money you can’t save and invest to get some compound returns for yourself. For your long-term savings, just put it in S&P 500 index fund. There’s nothing wrong with that. Over the last 50 years, it’s delivered 11.5 per cent in annual compound returns. That’s pretty darn good. And you just don’t have to do anything but let it sit there in your index fund accounts. So there are safe places to put your money. It’s so much better. That’s how you build wealth, really.
Claer Barrett
I mean, that’s such a crucial point, Sheila. I feel that there could be a few more Money Tales books in the making with the conversation we’ve just had. You’ve just finished writing a new book, which is going to come out next year called How Not to Lose a Million Dollars. What’s the significance of $1mn? Could one person really lose that much?
Sheila Bair
Well, easily if you measure in the opportunity cost. I mean, the average American probably pays a couple thousand a year in credit card interest because they don’t pay their balances off. And if instead, you were investing that 2,000 a year in the S&P 500, doing that over 40 years during the, you know, the span of your retirement or even 30 years, yeah, you’ve made $1mn. But you’ve lost it by paying the interest to the credit card companies as opposed to putting it in your long-term retirement accounts. And that’s just one of the examples.
I think in one of the bigger ones, I do think borrowing to pay for college and then not completing the degree, so you don’t get the boosted income from having a college degree, but you get the debt. You’re out of work for a year or two. The opportunity cost on that will exceed $1mn. So that’s the point I want to make. And it was kind of a riff, too.
I really don’t like these books for kids. Oh, here’s how to get rich. I don’t want kids to think that way because I think that’s when they get into trouble. That’s when they start buying crypto. Think about not losing your money. Think about how hard you work to earn that money. Darn it, it’s your money. Take good care of it. Don’t give it to these other people who are very happy to get their hand in your pocket. And that’s just not the money you lose in the moment but it’s the compound returns for a young person over decades when you do squander the money instead of saving and investing it.
Claer Barrett
What simple advice would you give to listeners who are eager to stay on top of their finances?
Sheila Bair
Keep it simple. Just keep it simple. One credit card, one bank account. Try not to borrow. If you do borrow, get a simple like a 30-year mortgage or 15- year. Get a fixed rate. Don’t get an adjustable rate. Don’t borrow to buy a car. You know, just buy a good used car. Don’t lease a new car. Only borrow when you know it will make you financially better off and then only borrow with a contract with a loan you understand. One that you’re used to financial products you really need. And I think that’s really the overarching lesson. Understand there are tricks and traps out there. There are hidden perils. There are people who don’t want you to do this. They will feed on complexity. They will profit by confusing you, by your not understanding the kind of financial commitment you’re making. That’s reality. You just need to be wary and ask a lot of questions.
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Claer Barrett
Now at the Financial Times, we don’t think that there’s anywhere near enough being done in terms of financial education. You’ve probably heard of FLIC, the Financial Literacy and Inclusion campaign, which is the charity that the FT has set up. I happen to be a trustee. Sheila, what economic benefits do you think investing in financial education could bring?
Sheila Bair
Well, I think there are clearly social benefits in helping young people as they embark on financial independence to be good and prudent stewards of their own money, helping them build financial security. I mean, there’s less stress on the public safety nets. There are all sorts of societal costs to financial distress caused by people who just don’t have the basic skills to manage money. It disrupts families. It’s a leading cause of divorce, of mental stress, and I hate that.
So yes, people should invest, but there needs to be a lot of thought in the kinds of curricula and the kind of materials that we’re giving kids. We don’t want product promotion, you know, we don’t want stock market games where you’re rewarded by actively trading with margin. You know, we don’t need that in schools. So even the crypto industry is trying to finance all these crypto so-called financial education books. I think they’re just trying to indoctrinate kids at an early age. So we need to be careful about what kind of financial education is being given them. The good precautionary advice, conservative advice, I think that we should invest heavily in that and help these young people be good savers and spenders at a very early age.
Claer Barrett
Now, Sheila, I want to pick your brains now about some practical ways that we can start teaching our own children and young people in our lives about money. And a question I get asked a lot is when should we start, from how young?
Sheila Bair
Well, I would start with toddlers. Again, I think counting pennies is a great way to introduce them to money, their relative values.
Claer Barrett
If they’re old enough not to eat them.
Sheila Bair
Well, that’s true as long as we still have coin. But hopefully you still do. I guess you could use play money if you need to. I think, hopefully, we’re a bit far away from that yet. And then, as we talked about earlier, helping your child set up a store wherever they play, putting prices on things, encouraging them to price something and how much it should cost and having their friends come over and buy things. I think that’s good. Yard sales too. We did yard sales with our kids. They loved it, you know, trying to figure out the right price.
Claer Barrett
And nowadays it might be more on Vintage or eBay or websites like that.
Sheila Bair
Yeah. Well, that’s true. That’s true. And then having their own business as they get older. Lemonade stands, car washes, mowing the lawn, whatever. I think encouraging kids to start their own business and earn their own money is really important to understand the value of money. And again, of course, buy my books. There are also some other great books out there. But I think reading at home, talking, you know, that Money Tales is designed to be read at home with parents. So the stories obviously are fictional, but there’s material on the back of the book for parents to read and discuss with their children.
I’m a big fan of paying allowances too, but I think there should be chores attached to that allowance. You know, just taking out the trash or whatever. Again, connecting labour, the you know, where money comes from. You have to work to earn money. It’s not just stuff that you get out of a tree. Also, make sure that they automatically save some of their allowance. We had to take action policy in our household, so every dollar they got, they actually got an extra $0.10 that automatically went into their piggy banks. And then as the piggy bank filled up, we take it to the bank and put it in an interest-bearing savings account for them.
Claer Barrett
OK. So incentivise them to save.
Sheila Bair
Yeah, exactly. And make it automatic, you know, pay yourself first. That’s important to learn early too.
Claer Barrett
Now, conversations about money within households may be considered taboo in many cases, but they’re happening more often in the cost of living crisis. How important is it, do you think, for parents to try and involve children in more adult conversations about money and the financial challenges that they’re navigating in their own lives, whether that’s trying to find a better mortgage deal, trying to save money on groceries or bills or just trying to budget and make sure that they don’t get into debt?
Sheila Bair
Yeah, don’t create unnecessary anxiety for your children but I think the best thing to do is set a good example and certainly having a household budget sticking to it. So I think those kinds of discussions are very healthy when they themselves are asking you to spend money, you say, no, you need to wait, you know, for a special occasion or all right, maybe, but this is what’s going to cost me. And what are we going to give up to do that? I don’t know to what extent you need to talk with them about your larger household budget.
I think kids just absorb good money practices. If they see you talking with your spouse about, you know, where are we going to go to vacation this year? What’s it going to cost? Let’s start saving for it now. Buying a house. What can we afford? Involving them a little bit in that conversation is certainly in terms of looking for the house, which they’re going to live in too. But also understanding the cost, the considerable cost of buying a house, the financial commitment, I think in a general way, those are good things to expose them to.
Kids are anxious about so many things right now. I hope you don’t have financial problems. If you do, I wouldn’t involve them too much. But on the positive side involve them on those kinds of really constructive, financially responsible decisions that they should be learning to make at a very early age.
Claer Barrett
Well, you’ve got so much experience to share with the world. So it’s fantastic that this book is coming. But a little bird told me that you celebrated your 70th birthday quite recently.
Sheila Bair
I did, yes.
Claer Barrett
What a milestone. But I mean, looking back on your amazing career, your life, all of the books that you’ve authored, all of the things that you’ve done, what’s the most important to you now?
Sheila Bair
Well, you know, you do it when you get older. You start thinking about your legacy. And I’m proud of my public service. I’m proud of the homeowners we protected and saved during the great financial crisis. I’m proud of the work I’ve done to promote financial stability through stronger bank capital requirements that, you know, that’s important to mainstream.
Government positions change, regulations change. You know, political leadership changes. So having a lasting impact with the minute you did in Washington can be challenging. But, you know, writing books are forever. And, you know, Rock and Brock came out in 2006. It still sells very well every year. And there are a new generation of children to read those books. So they are evergreens and I like that is my legacy. That book will be around for a long time. And the lessons that young people learn from that book will be around for a long time.
Claer Barrett
Well, Sheila, thank you very much for joining us on Money Clinic today. It’s been an absolute pleasure to speak to you.
Sheila Bair
I’ve enjoyed our conversation. Thanks.
Claer Barrett
Thank you.
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That’s it for Money Clinic with me, Claer Barrett, this week, and we hope you liked what you heard. If you did, spread the word and leave us a review, I’d love to hear a bit more about you and what you like about Money Clinic. We’re running a short survey, and anyone who takes part before the 29th of August will be entered into a prize draw for a pair of Bose QuietComfort 35 wireless headphones. Spiffing. You can find a link to the survey and the terms and conditions for the prize draw in today’s show notes. We’re always looking to chat with people about their money issues for the show, so if you’re interested in being part of a future episode, then email us money@ft.com. You could also take a peek at our website ft.com/money, grab a copy of the FT weekend newspaper, or follow me on Instagram and TikTok. I’m @ClaerB. Click the link in the show notes today to complete a short survey, and let us know what you think of the show.
Money Clinic was produced in London by Tamara Kormornick. The sound design is by Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music and Cheryl Brumley is the FT’s global head of audio.
And finally, our usual disclaimer, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here soon. Goodbye.
