I wrote this essay for your children and grandchildren.
You’ve probably heard about America’s huge debt load. The U.S. government’s financial obligations now exceed $663,000 per American family. This burden will fall on the youngest Americans.
It’s unethical. It’s unfortunate. But it’s the reality.
With this giant financial obligation bearing down on them, it’s critical that now – right now – your children and grandchildren learn about money and finance. They need to know the basic principles… like how to be independent, why debt is dangerous, and how to grow money.
They don’t teach finance in schools. If you don’t teach them this knowledge, no one will. They call this financial illiteracy.
If our children are financially illiterate, they have as much chance of survival as a swordsman in a gunfight. There will be no mercy for the financially illiterate in the future. It’s likely these people will live as indentured servants to the government and its creditors.
But if our kids have a grasp of finance and its basics – and they obey its laws – they will grow up rich. They will be in a position to help other Americans, too.
Below, you’ll find the three vital financial concepts all children need to understand. Please pass them on to your children and grandchildren as soon as you can. I have two young children… And these three concepts are my starting point for their financial education.
First of all, our kids must know that they are not entitled to money or wealth… or anything for that matter, even Christmas presents. They must earn money. I want my children to learn that they shouldn’t expect anything to be handed to them. I don’t want them to rely on the government for their livelihood, like many people do right now.
So many people treat money and prosperity as an entitlement. The government even calls its welfare programs “entitlements.” This word – and what it represents – gets stamped into young people’s brains. Kids act as if they are somehow entitled to toys, video games, and cars. But why should they be? Just because they have parents, it doesn’t mean they should get everything they want… or anything at all, for that matter.
I plan to regularly remind my children of this when they are old enough to understand it. And I’m not going to pay my kids an allowance. An allowance would reinforce the sense of entitlement. They can make money by earning it: doing the dishes, making their beds, mowing the lawn… there are a million things. My wife and I will pay them for doing those things. But I’m not going to just give them money.
The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. Like the entitlement mentality, debt is an enslaver. It robs you of your independence. I avoid debt in my personal life… and when I’m choosing investments.
The best way to illustrate the cost of debt is to calculate the total amount of interest the debt generates in dollars over the lifetime of the loan, instead of looking at the interest rate (like most people do). Once you look at it like that, you can see how expensive borrowing money really is.
For example, say you borrow $100,000 with a 30-year mortgage at 7%. Over 30 years, you’ll end up paying $140,000 in interest to the bank. In the end, you’re out $240,000 for a house that cost less than half that. Not a good deal.
The third thing our kids need to learn is the power of compound interest and the best way to harness it.
Compound interest is the most powerful force in finance. It is the force behind almost every fortune. The brilliant Richard Russell calls compound interest “The Royal Road to Riches.” And it’s mathematically guaranteed.
Let’s say, for example, you have $100 earning 10% annual interest. At the end of a year, you’ll have $110. During the second year, you’ll earn interest on $110 instead of $100. In the third year, you’ll earn interest on $121… and so on. This is the power of compound interest. The numbers get enormous over time, simply because you’re earning interest on your interest.
Because time is the most important element in compounding, it’s an incredibly powerful idea for children to understand. They have the ultimate edge in the market: the time to compound over decades.
The stock market is the best place to earn compound interest. You buy companies that have 50 years or more of rising dividend payments ahead of them. Then you let the mathematics work.
As soon as my kids are old enough to understand some arithmetic, I am going to sit down with the classic compounding tables and show them which stocks they have to buy. I’ll use Coca-Cola, Johnson & Johnson, and Phillip Morris as examples.
After that, assuming they have the discipline to follow through, they will get rich. There’s no doubt about it.
In sum, you have the responsibility to educate your kin about finance. If you don’t, no one else will, and they will suffer for it.
Encourage them to work hard and avoid the entitlement mentality. Teach them the power of compound interest and explain the dangers of debt.
If you do this, you will equip your kids and grandkids to survive financially in the difficult circumstances ahead. You’ll provide them with something that nobody can place a price on: the power of independence.
Good investing!
By Tom Dyson, publisher, The Palm Beach Letter
Couples frequently avoid talking about money before marriage. That’s unfortunate, because sharing perspectives about money can help couples resolve the financial issues that doom many marriages.
The following financial compatibility quiz can help couples planning to tie the knot discuss financial issues. Answer “true” or “false” to each of the following statements.
1. We are aware of and comfortable with each other’s money personalities.
2. We have discussed our short- and long-term financial goals.
3. My spouse and I are well versed in personal finance.
4. My spouse and I have discussed a plan to structure our finances.
5. We have planned for the impact that marriage will have on our taxes.
6. We have decided how to divide up the money management tasks.
7. We understand the importance of establishing a realistic budget.
8. I know my future spouse’s investment personality and risk tolerance.
9. I know how much debt my spouse is bringing into our marriage.
10. We have made a commitment to discuss money regularly.
Answering “true” to eight or more statements indicates that you and your spouse are on your way to a stable financial future. However, it’s still a good idea to continue to communicate and work together.
If you answered “true” to between five and seven of the above statements, you and your spouse need to devote more time to planning your financial future together. With a little luck, you can achieve financial compatibility.
If you answered true to fewer than five questions, don’t call off the wedding yet. Instead, make a sincere commitment to discuss these issues and consider meeting with an experienced financial planner who can help you start your marriage on firm financial footing.
Read on to learn more about the importance of each question.
We are aware of and comfortable with each other’s money personalities.
Some of us grew up in families where parents watched every dime; in other families money flowed easily. Some people measure self worth in terms of money and possessions. Some people are natural spenders; others are savers. Understanding your future spouse’s background and values can help avert problems down the road.
We have discussed our short- and long-term financial goals.
Setting financial goals helps you develop priorities and define the type of lifestyle you will lead. Break down your goals into manageable pieces. If you want to buy a house in five years, determine how much you need to save monthly to meet the down payment.
My spouse and I are well versed in personal finance.
Parents and schools rarely provide training in personal finance. Work together to develop your financial knowledge and build confidence by taking a course, meeting with a financial planner, or purchasing a reputable book.
My spouse and I have discussed a plan to structure our finances.
Will you pool all your resources into joint accounts, maintain separate accounts, or devise some combination of the two? There is no right or wrong answer; the key is to come up with a plan that works for you both.
We have planned for the impact that marriage will have on our taxes.
The marriage “penalty” means that you and your spouse together are likely to pay more taxes than you each did as singles. Check with a CPA or tax professional to ensure that you are prepared to meet your tax responsibilities and aware of any tax law changes in this area.
We have decided how to divide the money management tasks.
Decide who will be responsible for balancing the checkbook, filing taxes, and tracking investments, or better yet, set up a plan for rotating these and other financial tasks.
We understand the importance of establishing a realistic budget.
Couples without a budget tend to live and spend from day-to-day. A valuable budget helps you save regularly, utilize income wisely, and avoid misunderstandings about how money is spent.
I know my future spouse’s investment personality and risk tolerance.
Investing styles are different, ranging from conservative to risky. Take the time to arrive at a level of risk where you both feel comfortable.
I know how much debt my spouse is bringing into our relationship.
Couples must enter marriage knowing how much debt they each carry and how it will be paid.
We have made a commitment to discuss money regularly.
Differences are inevitable. How you handle them is important to your marriage.
Whatever your answers, honest communication is the key to a lifetime of financial compatibility.
