How to Prepare Your Kids for Financial Success
One of the most glaring inadequacies in most education systems has been the total absence of financial education. This is doubly strange in light of the fact a lack of financial education leads to a number of problems, many of which are very difficult to overcome.
Financial success is entirely dependent on a person’s knowledge of how money works and why.
One of the challenges in providing financial education is how to organise and present a curriculum that is practical enough to make a difference. Good advice is self-reinforcing provided the people so advised see results early enough. In a financial context, this usually means higher income, more wealth or lower expenses.
Those three outcomes are often difficult to engineer right away, especially if the student is facing financial challenges of their own. If you are looking for ways to educate your children about finance, here are some things to consider.
Assets and Property
One thing that should be made clear to anyone seeking financial knowledge for the purposes of building wealth and success is the centrality of ownership. People who do not own things cannot ever become wealthy, for all their income and all the financial power they ever control will be drained away renting what they need from others. Naturally those others will become wealthy partly due to the fact they own what they are lending.
Young people in particular should be besieged with facts regarding the difference between lords and peasants, the power imbalance between landlords and sharecroppers and the futility of employment. They should be disabused of the tenant mentality – in most cases, there may well be exceptions.
Low Interest Loans
Part of the problem with most people’s finances is the fact they often don’t know how much something costs until they realise they can’t afford it. Borrowing is a fine example of this. How many people have taken out enormous loans at enormous interest rates and then lost their jobs? A quick glance at the bankruptcy docket should be sufficient to learn the answer to that pertinent question.
Key to anyone’s financial education should be a lesson on how to calculate interest expense and how to amortize a loan. When would-be borrowers are confronted with the reality of the maths, they will likely think twice about that double or triple-digit annual percentage rate.
Student loans are a great example for pre-university children to start learning about interest. Discuss with them how student loans work if they were to take the loan out from a bank. Private student loans are personally guaranteed by the borrower and require good credit to obtain a low interest rate.
It is not possible to build significant wealth in a capitalist economy without equity investments. While some may argue that corporate paper, bonds, annuities and property or land are all fine ways to build wealth, the fact is over time nothing can even remotely compete with the stock market for total return.
Some argue the fact that we fail to educate young people about how to invest in publicly traded companies is at best negligent. Without this basic skill, even if someone is highly successful in their career, they will never be able to overcome taxes and inflation and truly build a legacy for their family.
Combined with an education about assets and property, instruction on how to structure a portfolio and how to manage investments for growth, income or both is key if a person is to have any chance of building true wealth.
Financial success is mostly hard work, but it is all a produce of good education. Understanding the basics of property and money management are crucial to a person’s confidence and ability to execute on their plan. Once they have the knowledge, the work becomes much easier.
Do you remember receiving any financial education? Do your children currently?