Carrigg Wealth Advisors

5 real life financial lessons from playing Monopoly® with an 8 year old

 
Over Max’s February vacation, we passed the time between outdoor playdates and ski turns by playing a little Monopoly®.  I was amazed at all the important real-life personal finance lessons that can be found in this game, originally published in 1935.  You quickly learn important lessons about debt and cash flow management, the optimal amount of cash reserves, and the pros and cons of owning rental real estate.
 
Before I go forward, I must mention, we play by the actual Monopoly® rules; that includes NOT getting money just by landing on Free Parking and auctioning off properties if the person landing on it decides not to pay the list price.  These rules are important for 2 reasons: 1. It makes the game only last a reasonable period of time; important when playing with an 8 (or 48) year old boy. 2. It emphasizes the harsh realities of life in a capitalist society.  
These are my top 5 lessons from the week:
 
1. Cash Reserves are important.  In the game of Monopoly®, much like the current real life environment, cash earns 0, but that does not mean “cash is trash.”  Just like in life, it is important to have some cash around to pay your bills, take advantage of opportunities and get yourself out of the occasional jam. But, just as it is important to have some cash, it’s also important to realize that too much cash, doesn’t do you much good either.  That cash is likely better deployed in high rent properties such as houses, or even better, hotels.  
 
2. Debt isn’t always your friend. Whether it is a business or student loan or a mortgage to buy a house, borrowing can be a wise short term or even long-term decision.  And let’s face it, sometimes it’s your only option.  However, debt/leverage/borrowing can create a vicious cycle if things stop going your way.  Monopoly® can teach these lessons very quickly. There is a famous line in Ernest Hemingway’s The Sun Also Rises – “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually, then suddenly.” I experienced this firsthand on more than one occasion, courtesy of too much debt.
 
3. Liquidity. Real Assets like land, houses and hotels can generate significant income but if you need to sell quickly, you might not always get your money back.  The rules of Monopoly® dictate that houses and hotels are liquidated at a full 50% discount to their original purchase price.  Though this rule is extreme, it proves the point; if you need to sell an illiquid, private asset in a hurry, you might not always like the price. 
 
4. The Golden Rule.  You may be expecting, treat others the way you want to be treated.  I am referring to the other golden rule – He/She who has the gold makes the rules.  In Monopoly® that translates to the owner of the land, houses and hotels generally wins.  One major caveat (see rule 2) - these assets must be unencumbered by a mortgage to be productive. Unlike real life, the landlord receives 0 rent when there is a mortgage on the property. Again, maybe harsher than real life but it proves the point.
 
5. And lastly, Luck. Just like in real life, luck plays a major “roll” in Monopoly®.  Yes, I believe “the harder I work, the luckier I get” or “you make your own luck.”  But, whether it is a game like Monopoly where you literally roll the dice or the real world of random occurrences and circumstances, we all must acknowledge the impact luck plays in our lives.