Raising Millionaire Babies
If you’ve got any sense in your head, you realize you’ve got more responsibilities to your kids than a roof over their heads and food on the table. You’re responsible for teaching them the lessons and values that they will carry with them for the rest of their lives.
Remember this: You’re not raising the child, you’re raising the adult that you want them to become.
Good financial habits isn’t something you’re born with, but it’s something you can be taught, and it’s something that can become automatic. If they aren’t given good habits and principles intentionally, they’re going to get bad habits and principles accidentally – and it’s a tough road to unlearn bad habits once they’re set.
Every parent-child combo is a little different. This article will talk about key lessons kids need to learn, it’s up to you to decide how to get them to learn it. There are three main pieces to learn: Saving, Debt, and Investing.
Teenagers are exposed to more advertisements everyday than their great-grandparents ever saw in a month. Every year, businesses dream up new ways to make easier and faster ways for customers to spend their money. If you don’t teach them the right skills upfront, advertisements will train them to be short sighted and impulsive.
Remember, the younger the person, the more they’re used to receiving things whether they worked for them or not. They also think in shorter the time horizons. They need to learn:
- Work equals Money.
- Money equals getting things they want.
- Harder work equals getting more things they want.
- Smarter work equals much more money, and much more things they want.
That’s the foundational cycle of working and spending. They can learn it young with encouragement / a kick in the ass.
Adding ‘Saving’ into that picture takes more work. Adults can plan a decade out, teenagers a year out, preteens a few months out. Saving is about learning to forgo spending money now for something bigger in the future.
The important part is that they set a stretch goal, with a payoff that makes it worth it. They need to learn to save longer than they think they can. You want them to be able to look back at successful reference experiences from their past.
Saving for a trip, or a big purchase that takes months, or even a whole year is a good example. Saving for anything big after that is psychologically easier because the habits are the same, it’s just the numbers are bigger.
As they get experience working for money and saving money, you should have regular conversations with them about what they’re learning to make sure they understand the principles. They need to understand and articulate why their moves were good or bad, and what they think they can do better in the future. These aren’t mindless behaviors, you want them to start changing the way they think.
Saving is the keystone skill. It must be learned first.
Most adults don’t really understand debt – so teenagers don’t either. Understanding debt requires some education upfront. As they get experience, there should be more conversations about the impact and implications of the choices they’re making.
Fundamentally they need to understand:
- Interest (and the difference between monthly and annual interest)
- Compound Interest
- The Principle
- Consequences for late payments (extra fees, bad credit, getting things repossessed)
That’s the math side of it. The other side of it is that they need to understand the difference between Good Debt and Bad Debt.
Bad Debt is borrowing money to buy something that shrinks in value, and you have to pay back the money with interest.
Good Debt is borrowing money to buy something that grows in value, and ideally becomes more valuable than the repaid money AND the interest.
They need to be able to explain what all these things mean in their own words, and be challenged to think of ways to apply the concepts.
Most young adults first exposure to debt is credit cards – which are almost always used for consumer purchases, I.E. bad debt. The best lesson they can learn is to make the full payment every month. It’s a good habit, but not the ideal first exposure.
A young adult with good savings habits would understand saving money to buy a used car outright. A very clever young adult would understand buying a car with a loan, then paying off the loan/insurance/fuel/maintenance by becoming an UBER driver.
Once they pay off the loan, they’ll still have a way to earn cash and they’ll be developing a business sense. This is a way to use debt in a good way – challenge them to think of others.
When other people’s kids are looking at taking on mortgages for a place to live, your kid would understand why they would be better off buying a property and renting it out. Food for thought.
Bad debt is a trap, and good debt is a force multiplier. The earlier they understand this, the better.
Investing is the third component because it builds on the first two skills. They already understand how to save. They understand interest and compound interest. Maybe between the two, they’ve figured out some clever ways to make come up with some extra money.
The final piece to understand here is time.
With debt, there’s structured timelines. Credit cards work on monthly cycles. Car loans over a few years. Mortgages last for a few decades. Investments, on the other hand, can last generations.
Young adults have two advantages relating to their young age. They can have a very basic understanding of investing and beat a sophisticated investor ten years their senior. Why? Because compound interest favors the young and those with long lives. They can invest smaller amounts early and have bigger impacts in the long run.
The other advantage of their young age is that they can wait out good times and bad times in the investing market. All investments go up and down. Sometimes there will be a dramatic drop – all your children need to do is stay calm and wait it out.
As you know, teaching these lessons take time and patience. As you know, the effort will be worth it. They need to understand the reasons behind what they’re doing and to take ownership of them. They should be able to explain and to demonstrate these good financial habits – it will put them light years ahead ahead of their peers. Maybe even inspiring some of their peers to follow their example.