The #1 Financial Lesson to Teach Your Kids

As the holidays are just around the corner, parents will soon welcome home their college children who have been off getting that overvalued college education. They’re providing the education that we were always taught children needed.

I say all the time that we were taught to go to school, get a job, save for retirement. But there’s one lesson that seems to be left out: the real price of having kids.

When you think about the price of having kids, the costs that come to mind may include things like clothes, childcare, braces and college tuition.

What probably doesn’t spring to mind are mortgages, car payments, insurance or personal loans.

According to a 2015 Pew Research Center report, six in 10 Americans with at least one adult child say they’ve provided their kids with some financial support within the past year. A TD Ameritrade survey found that parents supporting adult kids gave them an average of $10,000 over a one-year period.

The reality is that your bank account will likely continue to be tapped long past the day your kids turn 21.

Teaching your kids to become masters of their own money is better than just blindly handing it over.

Teaching Kids to Become Money Masters

A friend of mine has a son who likes to spend money. At just 16, he already wanted his own car because “all his other friends are getting cars.” He asked his dad if he could dip into his college savings for the down payment.

My friend came to me and asked if he should let his son buy the car. “It might relieve the pressure in the short term,” I said, “but what would you teach him in the long term? Can you use this desire to own a car and inspire your son to learn something?”

Two months later, I ran into my friend and asked for an update.

“I gave him $3,000 for the car,” he said. “I told him to use that money instead of his college savings…but there was a hitch.”

“What was the hitch?” I asked.

“A little financial education,” he said. “We played CASHFLOW® together and had a long discussion about money and how it works. I then gave him a subscription to The Wall Street Journal and a few books on the stock market. The hitch was that he had to use the $3,000 to buy and sell stocks. Once he made $6,000, he could use $3,000 to buy the car and put the other $3,000 in his college savings account.”

“What happened?” I asked.

“He got lucky early but then started losing ground. He’s probably down about $2,000 right now, but the amazing thing is he seems to have forgotten about the car and is engrossed in his trading activities. He’s got $1,000 left, and he knows that if he loses that, he’s walking for two more years. He doesn’t seem to care. He loves the game of investing.”

“What happens if he loses all his money?” I asked.

“We’ll cross that bridge when it comes,” my friend said. “I’d rather have him lose everything now than do it when he’s our age. This is the best $3,000 I’ve ever spent. The financial education is worth it. He is learning lessons that will serve him for life, and he seems to have gained a new respect for the power of money.”

It Takes Self-Discipline to Get Rich

My friend’s son is learning the power of self-discipline. As I’ve written about before, if you can’t learn to master self-discipline, you’ll never get rich.

Developing cash flow from the asset column seems easy in theory, but in practice it takes mental fortitude to direct money to the correct use. In today’s world, it’s much easier to simply blow money in the expense column than direct it into the asset column.

When you have no self-discipline, your money will flow through the path of least resistance. That is the cause for most people’s financial struggles.

The 4% Rule

The following is an example of the 4% rule.

If we give 100 people $10,000 at the start of the year, I believe that at the end of the year:

  • 80 would have nothing left. In fact, they probably would have more debt by using the money for a down payment on a new car or some other fun toy.
  • 16 would probably have increased that money by about 5-10%.
  • 4 would have increased it to $20,000…or more.

Most people go to school to learn a profession to work for a paycheck. It’s my opinion that it’s just as important to learn how money works for you. Only about 4% of the population gets it…and they’re rich because of it.

You want to be in the 4%.

Buy Luxuries With Cash Flow

Another valuable lesson my friend’s son is learning in conjunction with the power of self-discipline is the power of using assets to purchase luxuries.

I love my luxuries as much as the next person. The difference is I don’t buy them on credit like most do.

That’s the keep-up-with-the-Jones’ trap. When I want something nice, I focus on generating enough income in the asset column to cover it.

The rich, as a habit, use their desires to consume as inspiration and motivation to invest. They focus on creating money for toys rather than borrowing money for them. That takes self-discipline, but it’s more than worth it.

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