June 8, 2022

Sabir x Luke Hohmann


Luke Hohmann is an expert in participatory budgeting (PB) and financial literacy and he disuses his most important strategies and teachings in the latest episode of This Week With Sabir.

PB is just as important as it is difficult to say. It’s all about giving a budget to the beneficiaries and allowing them to make the decisions.

Not only does it lead to more impactful and positive results, but it also teaches those people about financial literacy. It is an invaluable tool that can prepare kids for adult life.

After all, the lack of financial literacy is why…

  • Millions of Americans have more debt than they can manage
  • Highly educated people (Doctors, Lawyers, Writers, Artists) often go bankrupt
  • Lottery winners lose all of their money and end up miserable
  • Students acquire huge sums of debt before they hit their 20s

It’s also one of the reasons we have a society built on consumerism, debt, and waste, and why young Americans are more likely to spend their hard-earned savings on a Rolex or a Gucci accessory than stocks and bonds.

Financial literacy is the root of entrepreneurship, and if you want to be rich and successful—or just financially stable—then you must read the following guide.

The Importance Of Financial Literacy

The US personal debt reached $15 trillion in 2021, and the average American has around $90,000 when mortgages, credit cards, personal loans, and student loans are considered.

Debt is a part of life in the modern world and for the most part, it’s perfectly acceptable. But for a growing percentage of Americans, debt is the result of poor financial management and living beyond their means, and that’s when it becomes a problem.

Luke Hohmann is an expert in financial literacy and using his book, Innovation Games, and his company, First Root, he has taught countless individuals, families, and organizations how to properly manage their money and improve their financial literacy.

I invited Luke onto This Week With Sabir to discuss financial literacy and the social problems connected to it.

He began by stating that while there is no emotion in math, it is inherent in financial literacy, which is basically “math applied”.

For Luke, and indeed for myself, financial literacy is the root of entrepreneurship and you’ll struggle to find a successful person who isn’t financially literate.

The Skills Needed For Financial Literacy

There are three aspects to financial literacy:

  1. You need the knowledge: What are stocks? What are bonds? Why is real estate important?
  2. You need the skill: How do I compare stocks and how do I buy bonds?
  3. You need to understand yourself: How do my views align with those stocks? If I’m an environmentalist and my choices are between a green energy company and an oil company, I should choose the former.

Parents teach kids the basics of financial literacy by integrating them into their lives.

In my experience, my father owned a toy store and I would do inventory for him. I would count, my brother would count, and we would compare to see if we had a match. My father essentially taught me the financial literacy skills that would later shape my life, but he didn’t do that on the basis that I would grow up to be an accomplished math student, business owner, and entrepreneur, he just wanted to make me a part of something that played a big role in his life.

We have a lot of exposure in our early lives. We understand how commerce works. We know that to buy food from the store you need to have the right amount of money, give that to the shop owner, and then collect the goods. We also know not to spend more than we can afford.

But that knowledge doesn’t negate the need for personal finance education.

The world is constantly changing. Car loans, mortgages, credit cards—these things are changing drastically from one generation to the next. Things are much more complicated now than they were when our parents were young, and they are vastly different from what the world our grandparents knew.

Imagine explaining cryptocurrencies and NFTs to a 20-year-old version of your grandparent. They have their house, car, and stocks. They have a good job and they’re preparing to settle down and start a family, and now someone is telling them about 7-figure non-fungible tokens that exist in a virtual world and can be owned by one person and everyone at the same time.

They’d think you were mad, and yet that’s the reality that people now have to deal with as they progress into adulthood.

It’s important to keep teaching kids about financial literacy because the landscape is ever-changing. By the same token, it’s important for adults to keep educating themselves because the rules they were taught at school are now basically obsolete.

The Affluent Poor: Why You’re Not As Prepared As You Think You Are

Doctors go bankrupt at a disproportionate rate, and the same is true for many other professions that require highly-specific skillsets unrelated to finance.

The problem is that they have spent their lives learning and improving, but very little of that education has related to financial literacy.

In other words, they have a lot of money but don’t always know how to manage it.

To someone earning less than $30,000 a year, the idea that a doctor earning $400,000 can struggle to manage their money is preposterous. But it happens all of the time. I’ve seen it myself.

The problem is that they have the cash flow and so they have the comfort. But then they start spending. Their quality of life goes up. They spend more on food, clothing, and vacations. They buy a better car, a bigger house, and they spend more lavishly. Before they know it, their finances are teetering on the edge, and as soon as they encounter a major problem, they slip dangerously into the red.

To a struggling family on the poverty line, that problem could be as simple as a broken washing machine or car. It could be a medical expense. To someone earning over $400,000, it might be a lawsuit or a major house renovation. But the end result is the same, as it’s an unexpected expense that serves to tip them over the edge, and once they cross that line, it’s hard to go back.

It’s not just doctors, either.

Famously, you see the same issue among lottery winners. They go from earning very little to suddenly having $10 million in the bank, but their financial skills have not improved.

It’s more money than they have ever seen in their lives, and just like the doctors earning $30,000+ a month, they start spending erratically.

They buy big houses and cars. They give money to friends and family. Their $100 a month grocery bill turns into $2,000 a month and they start dropping 6-figures a year on clothes and accessories.

Before they know it, that $10 million payouts have dwindled to $50,000 and they now have a very expensive lifestyle, not to mention a house that is costly to repair a cleaner and gardener who need to get paid, and a car that guzzles gas.

The next step is bankruptcy and an entry on one of those “lottery winners who blew it all” YouTube videos.

In many ways, lottery winners are in an even worse predicament than doctors, as their transition from “low earner” to “millionaire” occurred in a matter of minutes, not years, and they don’t have a steady stream of income.

How To Use Participatory Budgeting

Participatory budgeting (PB) is one of Luke’s specialisms and something that he discussed several times during our interview.

In essence, it’s about giving control to a group of people and letting them choose how a certain budget is spent.

For example, Luke spoke about a school in Queens that gave the kids a budget of $2,000 to spend.

There were two stages to the budget. In the first stage, they were asked to come up with ideas of how and where the money might be spent. This was a creative process and one that led to a range of sensible and not-so-sensible options.

In the second stage, they were asked to make those ideas a reality and to plot how that money would be spent.

This process is key, as we tend to lose track of reality when we’re given the freedom to think, create, and plan.

We can refer to the lottery example again here.

Imagine that you have just won the lottery and have $1 million to spend, how would you spend it?

It’s a game you’ve probably played a hundred times, and one I’ve heard many times myself.

Maybe you’d buy a sports car. A new house. Some designer clothes. A Rolex watch. And you could also give $100k to your loved ones.

But when you actually look at the sums, you’ll realize that those expenses are closer to $2 million than $1 million, and that’s before you consider the tax.

If you didn’t undertake the secondary planning stage and actually were given that amount of money, you’d start buying those things, splashing the cash, and before you even made it to the Rolex store, you’d have spent every cent.

PB, therefore, is a focused strategy that allows for a democratic budgeting decision. It’s effective, it’s sensible, and it’s also fair.

It’s not perfect, nothing is. Luke recalled a time when they asked kids to participate in PB and they all wanted a 3D printer. It wasn’t fully within their budget, but by opting for the cheapest option, they were able to secure the printer.

After a month, it broke, and because they purchased it from a cheap, offshore manufacturer, they couldn’t find the parts to fix it.

But all was not lost, as those kids now understand the importance of value and will likely never make that mistake again.

It’s a lesson that we all must learn at some point, but like all important lessons, the best way to learn is to experience. You can hear the phrase, “Buy once; buy twice” a million times and never truly grasp it, but when you buy something cheap that lasts for a week and something expensive that lasts for years, you’ll understand it.

PB doesn’t just apply to schools and organizations. It’s something that also works on a familial level and this is something that Luke’s company, First Root, can help with. It offers free services for families and helps them to get a grip on their budgets.

Not only can a family budget help your kids to become financially literate, but it can also make your life easier as a parent as it teaches them some of the things that kids often struggle to grasp.

When I was a very small child, I remember an adult complaining that they only made $1,000 a month. I was shocked to hear this because to me, that was a lot of money.

When I heard “$1,000 a month”, all I could think about was how many games, candies, and toys I could buy for that money.

Just think how much I would have!

In reality, once you accounted for bills, taxes, food, and fuel, there was very little money left.

Try telling a child that you can’t afford to buy them the latest iPhone right after they discover you earn $3,000 a month. To you, it’s the national average wage and doesn’t leave much room for luxuries. To them, it’s enough money to buy three iPhones a month!

When kids are brought into the family budget via PB, they see the reality of the situation. They learn about all of those adult expenses that can turn a seemingly generous paycheck into little more than a fleeting memory.

They will understand why you can’t always afford to buy them the latest luxuries and why they need to practice a little more restraint when they want the latest gadget or pair of sneakers.

More importantly, as they grow up, go to college, and start acquiring funds and debt of their own, they’ll be able to manage it more effectively.

Fraud Lives In The Dark

Luke Hohmann’s company, First Root Inc., creates a PB system whereby everyone can see where the money is being spent and can decide if it’s too much.

If someone claims a budget spend of $300k that everyone can see, someone else can argue that it should only cost $200k.

It highlights the importance of clarity because as Luke noted during our discussion, “fraud lives in the dark”.

America is one of the least corrupt countries not because American leaders and businessmen are more ethical, but because they are closely watched. If you make deposits of more than $10k, they are recorded. If you send someone $5k a day for many weeks, it will be flagged.

Fraud and money laundering require atypical behavior, and the US system often flags that behavior. The clarity that it provides ensures the system stays clean and fair, and that’s not always the case in other countries.

Kids need to learn about how these systems work and should be given some insights into budget processes that affect them. That’s what participatory budgeting is.

By the same token, a major part of financial literacy is learning about how an individual can be the victim of fraud, whether through outright scams and hacks or devious phishing attempts.

It goes back to what I said above about older generations being detached from certain aspects of modern finance because it differs from what they were taught in school.

It’s one of the reasons why seniors are more vulnerable to financial crime and why they are often targeted by scammers.

A 40-year-old or 50-year-old might understand the importance of two-factor authentication and can probably detect a scam, but that’s because they keep an ear to the ground with a career, education, or personal life that necessitates an ongoing financial education.

But for the retired 80-year old who spends their days caring for grandkids, playing bingo, and chatting with friends at the coffee shop, there is no such need.

They drift away from that financial education, they lose the knowledge that keeps them sharp, and so they are more likely to fall victim to a scam.

They’re not the only ones, either. Scam victims exist across all demographics and while greed, ignorance, and opportunism play a role, many times it’s because they don’t fully appreciate the risks and are not competent in financial literacy.

The $100,000 Question

Teach your children that living within your means is the best way to create wealth.

That was Luke Hohmann’s number 1 piece of advice—his $100,000 insight.

It seems a little counterintuitive, as we live in a throwaway society that often expresses wealth as something that’s easy come and easy go—something to be flaunted. Frugality and wealth creation are at separate ends of the scale. But they are not, and oftentimes, you need one to get to the other.

Unless you have a lottery win or sign a multi-million-dollar recording contract, you need to be frugal and sensible to afford investments. Those investments will then give you some financial stability, and from there, you can start thinking about adding more to your portfolio and expanding your wealth even further.

Being wealthy isn’t just about making it big as an influencer, actor, or rock star. It’s not all-or-nothing. It is the result of living within your means and using the money that you save to invest.

About Luke Hohmann

Luke Hohmann is the Founder and CEO of FirstRoot, a Benefit Corporation devoted to creating great economic equality. A serial entrepreneur, Luke’s last company, Conteneo, was an enterprise software company that helped global companies manage investment portfolios using Participatory Budgeting. Luke is now leveraging the experience he gained working with some of the world’s largest companies to help prepare our children for their future by bringing Participatory Budgeting into schools to teach financial literacy, civics, and design thinking.

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