I last wrote about this subject in my 3rd quarter 2006 Financial Forum and received some very favorable feedback. In that article, I listed 10 ways to help teach children about money. Over the past two years, I have tried very hard to implement these steps and now feel it appropriate to write a condensed version in case some of you are struggling to teach your children ten steps about something as abstract as money and would prefer to start with just two. By the way, if you do not have children or if they have already moved out of the house, you can still apply these to yourself or your grown children. Like everything else with kids and adults, if you stick with it long enough, it will stick. If you did not get a chance to read the original article, just send me an email and I will forward it to you.
1. Form a Habit of Savings
When my son was about eight, we broke open his piggy bank, drove down to our bank and opened a savings account with the money he had saved. The process was a lot of fun and a great learning experience. He learned about interest, savings and balancing his account on a monthly basis. Each month he added a little of his working allowance and his gift money to the account. The account has grown to about $2,000, which is a lot of money for an eleven year old.
Recently, he started complaining about the amount of interest he is earning on the account. I suggested he take the money out of the bank and buy a stock or mutual fund with the possibility of earning more on his investment. We have had many discussions on the merits of Starbucks, Quicksilver and other public companies he was familiar with. He was not too happy to learn that stocks can go up and down sometimes rather drastically. However, it gave us the opportunity to talk about investing in general and about risk. Because he had saved the money himself, it really mattered to him that he not lose it on a speculative investment. I was willing to let him invest in whatever he wanted as long as he understood the risks relating to the investment.
After discussing the options, he finally said that I had a very boring job and that since I did this for a living, I should decide. I was happy to see that my brilliant son had the presence of mind to outsource his investment selection process. We decided to close the account and move the $2,000 he accumulated to two ETF funds (SPY and EMM). While this may seem very basic, it has been a very powerful experience for both of us. My son learned several important facets about money. He learned the value of saving, working for money, compounded interest, investing, and risk.
My daughter will be a new challenge. She is not as materially oriented as my son and as of yet, sees no real use for money. I will update you on our progress in a few years!
2. Create an Abundance Mentality with Regards to Money
Most people grow up with the perception that money is a limited resource that is only readily available to a few lucky people. They spend their lives chained to this concept, which keeps them forever a victim of money. Having an abundance mentality about money is a self fulfilling prophecy. It comes from these two principals:
Money flows to the greatest perceived value.
The less you need, the more you have.
Money flows to the greatest perceived value
Let’s review the first one from an adult perspective and then break down to the kid level. Take two attorneys, for example, that both focus on small business owners. One makes about $150,000 per year and one makes about $3 million per year. Why does one get 20 times the income of the other? The one who gets 20 times the income creates 20 times the value for her clients. One is focused on hourly billing, while the other is focused on the success of her client. This concept is focused on in Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable
Now, let’s look at it from your child’s perspective. Apprehension about college and job selection begins as early as age 16. As I have already said, my children find my job boring and thus will most likely pursue some other career. The teaching opportunity is not to focus your child on the jobs that pay the most, but on creating the greatest value in a job they will love. “Talk about what is of interest to them and how important it is to be happy with what you do,” says Dr. Jaye Roseborough, a director of career services for a small university in Vermont. In order to create extraordinary value in your career, you must be truly passionate about what you are doing. You cannot do this if you are pushed by your parents into a career you do not love. Examples of creating incredible abundance through creating tremendous value include Oprah Winfrey, Bill Gates, Chef Michel Richard, Lance Armstrong and thousands more.
The Less You Need the More You Have
Separating your needs from your wants is a powerful distinction I learned from my father at a very young age. Most children and adults have a never ending list of “needs” that drives them to immediate gratification with an endless supply of junk. In reality, 99% of these “needs” are really “wants”! “Needs” are things like food, shelter and medical care. “Wants” are everything else. Once we make this distinction, we can choose whether or not to make the purchase. If we can make this shift, the new “need” becomes the savings or investment account rather than the latest electronic gadget. One of the quickest ways to implement this distinction with your children is to ask them to pay for what they “want” with their own money. It is absolutely amazing to me how quickly the drop in desire is for this particular “want”. When they really want something, they will work hard to get it. This also instills the concept of delayed gratification which is an extremely healthy way of life. If you are having trouble with this concept, read the Dalai Lama’s The Art of Happiness.
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