In her book, The Battle Hymn of the Tiger Mother, author Amy Chua chronicles her struggle to be the ultimate “Tiger Mom”, pushing her daughters for As in school, banning TV and video games, and making sure they grew up practicing the violin for hours every day. Her reasoning: nothing in life is fun until you’re good at it. And getting good at it means hard work and discipline.

Although Chua’s book has generated boatloads of controversy, I think there’s a big lesson parents can take away from it when it comes to teaching our children about money. In a society where kids now want (and expect) to have everything adults have — including laptops, cell phones and cars — it’s up to parents to teach them that nothing in life is free and that, with discipline, they can be capable of making good financial decisions.

Without that discipline — to pick up on Chua’s theme — kids are going to have a really hard time enjoying their money later in life, when they’re shackled by debt or trapped in high-paying jobs they hate. I think it’s time for us all to sing the battle hymn of the financial tiger mom and start teaching our kids some money smarts and discipline.

Here are a few tips to start with (and please feel free to add your own below):

Don’t just give it to them: Your kids are going to bug you relentlessly for expensive stuff like Wiis and iPads. Saying no is tough — but it’s the first step in teaching them they can’t have anything they want.

Set a family budget with them: Teach them that your family has spending limits and show them what they are. So if they want to have that Wii, they’ll have to pick something else to knock out of the budget.

Get them a savings account: Financial products are part of life. Used well, they can be great tools for building wealth. But they can also be a money trap if you don’t understand how they work. A basic bank account teaches kids about interest — and bank fees. It’s a good starting point.

Help them find ways to earn extra money: Your kids should have a chance to earn their own money and save for the things they want to buy. Help them come up with ideas like shoveling neighbours’ snow or doing extra tasks at home. But don’t confuse this with their basic chores — kids also need to understand you don’t get paid for duties that are part of being in a family.

Model good behaviour: If you eat out all the time or spend your weekends at the mall shopping, your kids are going to do the same. The best way to teach your kids discipline around finances is to lead by example. Teach them how to cook and bake, and make meal preparation a family activity. Kids who love cooking are less likely to spend all their money on takeout when they grow up. And avoid using shopping as family entertainment — there are tons of free things you can do instead that will bring you closer together as a family.

Congratulations! You’ve just walked down the aisle and/or moved in with the love of your life. Combining households and making a life together with your partner is about more than just figuring out whose stuff goes where. You’re now financially tied together, for better or for worse – you probably pay the bills jointly and, if you’re in a long-term relationship, your financial futures are also entwined. If you haven’t yet thought about the money part of your relationship, you should start now. Here are a few tips to get you on the same money track:

Track your expenses together
Before now, you’ve never had to answer to anyone about your spending – as part of a team, everything you buy has an impact on your joint finances. Spend time tracking your spending jointly so you and your partner can find out where the money goes every week. Use that to create a joint budget and, if necessary, find ways for the two of you to trim expenses and save more.

Yours, mine, ours
You’ll need to merge your money to cover joint expenses. Set up a joint chequing account to cover all your bills and expenses. Whether you pool your money together in one pot or you just put in enough to cover the bills is up to you.

Decide whether to split or pool
There are two ways to go about combining your finances. You can both pool your earnings in one pot (probably the easiest way). Or you can each maintain separate accounts but put a percentage of your earnings into a joint account to cover all of your household expenses. If you choose this route, make sure you split fairly based on income levels – it’s not fair if your partner earns twice as much as you and you still have to cover half the expenses. Rather, base your contribution on percentage of earnings – so, for example, you each put 50 percent of your paycheque into the pool and save the rest.

Retirement planning
If you and your partner have committed for the long haul, then you need to sit down with a financial planner and determine how to approach your retirement savings. There are lots of great opportunities for maximizing your tax savings through a spousal RRSP, for example. Note, for tax purposes, if you’re not married, the Canada Revenue Agency defines common-law relationships as couples who have been living together for at least 12 months.

Review your insurance coverage
From property insurance to life insurance, being in a relationship can impact your needs. At the very least, you should make sure your coverage is synched up – you don’t need to have two people holding property insurance on the same place, for example. You should also check and see what kind of life insurance coverage makes sense for you – if you’re planning to have kids and you own your house, you want to make sure that if something happens to one of you the other will be taken care of financially.

Make a will
If you are entering into a significant committed relationship, you need a will – without one, you could lose everything you worked hard to build with your partner. A will is especially important if you’re planning to have kids together.

Deal with your debt
If one or both of you is bringing debt into the relationship, you have to own it as a couple – and find ways to deal with it as a team. Take the blame off the table. Think about consolidating your debt into a lower interest payment program so you can work together to clear it faster and cheaper.

Hold on now? Do you need the shoes?

Need, who cares about need… you WANT those shoes.

And so out comes your credit card and $260 later your savings just got tapped by the Impulse Monkey.

You get home, you look at your new red shoes and you want to kick yourself for not having the good sense to walk away. You’re trying to save for a house, and that’s $260 you didn’t have to spend. Where was your self-control?

If you think you might be an impulse shopper, the first step to controlling it is monitoring your urges. It’ll only take a couple of weeks of thoughtful note-taking to give you a good insight on how and why you shop.

Get yourself a small notebook, keep it handy, and every time you get an urge to shop, practical or not, write it down. Note where you were, what you wanted to buy or did buy, and how you felt. Note every time the Impulse Monkey squawks at a prize, whether it grabs you online, at a store, or when you’re flipping through a flyer. No matter how often that Impulse Monkey chatters in your ear, make a note of it.

Whether you buy the item or not, keep track of the Monkey. Many times our urges are subconscious and we can’t control our spending if we aren’t aware of it.

Once you’ve determined that you have a problem, you’ll then be able to take steps to get the Impulse Monkey off your back.

Such systems usually have a few characteristics in common: They promise to make you rich, they involve lots of complicated graphs and scientific-sounding indicators, and they tend to involve frequent trading. They’re also predicated on the belief that by studying where stock prices have been in the past you can—like the proverbial fortune teller with a crystal ball—predict how things will play out in the future.

These strategies belong to an investing field called technical analysis (as opposed to fundamental analysis which involves looking at the financial health and valuation of the companies themselves). And they’re hugely popular. After all, we humans are glorious pattern finders. It’s evolutionarily useful to be able to quickly spot lions hiding in the bush—and when we do, fast action saves lives. But does it make sense to take our stone-age pattern-spotting propensity and apply it to the modern world?

The surprising answer is—in some cases—yes. But you need to identify the cases where it doesn’t make sense, and they are legion. When someone is trying to sell you such a Pavlovian system, you’ll often find yourself dealing with a tarot card reader of the markets. Like a two-bit fortune teller at the county fair, they’ll serve up a darn good yarn, but their stock analysis will usually fall flat.

Why we love technical analysis
At a very deep level, we’re all suckers for patterns. The problem is, it’s easy to stumble on erroneous patterns in large mounds of data. You can see the result on TV almost every night in the form of new medical breakthroughs. You know, titillating things like the discovery that eating yellow foods decreases the risk of having a heart attack. But after loading up on squash and turning a strange shade of pale, another study might come along that refutes the first and instead points to the cancer causing properties of yellow food. It’s a wonder health-conscious people eat anything all. (Rest assured yellow foodies, these examples are fictitious.) The problem being, just because you’ve spotted a pattern doesn’t mean that it’s predictive or, in math speak, correlation does not prove causation. All too often what the researcher actually uncovered occurred simply by chance.

That doesn’t keep our love of predictable patterns from infiltrating the markets in all sorts of unexpected ways. Even the types of prices you see in the stock market are impacted by it, as some numbers tend to show up in share prices more often than others. For instance, in 2001, stocks on the NYSE traded most often at prices ending in 0 and second most frequently at prices ending with a 5. That is, people liked to trade in five-cent increments with $16.10 being more common than $16.05, and both being more prevalent than $16.12.

Interestingly, traders in China have a slight preference for prices ending in 8, a lucky number for the Chinese, and they tend to avoid those ending in 4, which is viewed as less propitious.

Most investors would say that looking for patterns in raw prices is a waste of time. But when it comes to the overall performance of the markets, it’s hard to find an investor who isn’t looking for patterns on some level. The past is almost always viewed as prologue, despite the common refrain that “past performance is not an indicator of future returns.” Even buy-and-hold types often employ a mild form of technical analysis. After all, when they point to the long-term performance of the stock market as proof that it makes sense to invest in stocks, they are using pricing patterns from the past to try to predict the future.

Indeed, in Canada and the U.S., which have been amongst the best places in the world for stock investors over the last century or so, it’s common for regular families to have a great deal of their retirement savings in stocks. However in places like Japan, where the stock market has been mired in a grinding bear market for many decades, families tend to shy away from stocks.

Related Reading:

• This & That: Black Swans, Loonie Prices and more…
• Election 2011: Comparing Party Financial Platforms
• Mortgages in a RRSP
• Tax Cuts are Certain
• This and That: Happy New Year 2011 Edition

This & That: NDP Platform, Flat Taxes and more… is brought to you by Canadian Capitalist — Helping you to invest & prosper.

1. Avoid places where you can spend money.
Whether you’re heading into a shopping mall or a dollar store, if that monkey’s gotcha, you’re going to drop money you’ll wish you hadn’t. If you don’t want to eat the cookies, stay out of the cookie jar. And if you don’t want to spend money, stay out of the stores. Off-line too!

2. When you do go shopping, do it with a list.
Whether you’re buying groceries, a birthday present for your brother or a new tablecloth, do not go into a store without a list, and never buy anything that isn’t on your list. You cannot use the excuse, “Well, I’ll only have to waste gas coming back.” Put whatever you think you want on your list, and GO HOME. If you still want it in 48 hours, you can go back for it. I’ll bet you save way more money than you end up spending on a second trip.

3. Leave your credit cards and debit cards at home and only shop with cash.
If you don’t have the means to overspend, it’s amazing how much self-control you can show.

4. Make a deal with yourself.
Every time you buy something, you must get rid of something. And it has to be a like-for-like exchange.  This makes you prioritize. What are you prepared to give up to have that new whatever?

The table below shows the tracking error of Canadian bond and commodity ETFs in 2010.

To make sure you understand these numbers in their proper context, see my earlier post on tracking errors for Canadian equity ETFs.

Notes:

1. The 3.3% return of CLF is based on the fund’s net asset value (NAV). The return on market price was just 2.8% — a significant difference. With bonds so unpopular these days, the forces of supply and demand may have driven down the price of this fund.

2. Several of BMO’s bond ETFs launched in 2010, so these returns do not cover a full year.

3. CGL’s return based on market price was 29.12%, two and a half percentage points higher than its return based on NAV, and only eight basis points off the spot price of gold. Just as an aversion to bonds seems to have lowered CLF’s price, the continuing gold mania helped this ETF trade at a premium in 2010.

4. Silver was the big winner of 2010 and investors in the Horizons BetaPro COMEX Silver ETF would have been dancing in the streets with their 77% return. But the large tracking error here shows that precious metals ETFs using futures contracts (as opposed to those that hold gold or silver bullion) can carry significant frictional costs. They may not closely track the spot price of the commodity.

Postscript. Horizons ETFs sent me this response regarding HUZ: “The tracking error is primarily due to the fact that the silver futures contracts are priced in U.S. dollars and HUZ doesn’t hedge intraday currency fluctuations; HUZ rebalances the FX hedge at the end of the day. We believe this accounts for most of the 4% difference in the performance of the ETF versus the performance of its index. Please keep in mind that any ETF, whether it is physically backed or futures-backed, will likely be subject to this currency differentiation.”

Lucy recently got a new job. Now she’s working with a group of people who come from money – old money, and lots of it. So Lucy is feeling some pressure to keep up. While she’s been content to brown-bag lunch for most of her working career, her new work peers eat out often. And they like expensive restaurants. Lucy is making good money, but if she tries to keep up, she’s going to have a lot less money available for saving.

Lucy tried eating out a couple of times a week, using her workload as her excuse for eating her lunch at her desk the rest of the time. But when her work mates come back from lunch having discussed a work issue, coming up with a plan into which she’s had no input, she feels at a decided disadvantage.

The dilemma isn’t very different for Caroline, although the circumstances are not at all the same. Caroline has been hanging out with the same bunch of girls ever since high school. Two of them married very well, and the third has been extremely successful in business. In fact, Caroline is working for her friend, Judith. Problem is, when the girls head off on vacation together, which they like to do a couple of times a year, Caroline has to put her portion on her credit card, which she can’t afford to pay off. The debt has been building for years and Caroline is at the point where she’s putting her family’s financial security at risk for the sake of keeping up with her posse.

Higher incomes often come with higher expectations – a nice house, a new car, and myriad social events. And if you’re hanging with a crowd that’s significantly above your social status, you may always feel like the poor cousin. Or you may be “driven” to spend money you should be saving.  That’s one reason why people making solid incomes often default to using credit to keep up with what they think they should be able to afford.

You know the old saying, “It’s not how much you make, it’s how much you keep.” Income is only the issue when people make so little that they can’t keep body and soul together; then they must make more money. But for most it’s a matter of knowing what’s truly important and sticking to your guns. Income is, after all, only part of the equation. Inflated expenses can go through a big income faster than green grass through a goose.

If you build a life around keeping up, you’ll always struggle with how to save. If that’s the path you choose, just don’t whine about it. You can live your life for YOU and be healthy. Or you can struggle to keep up and flounder. It’s your choice.