We learn most of our financial knowledge from our parents and usually have similar spending habits. Unfortunately, money and sex are both subjects that are rarely talked about between generations, resulting in young adults with a poor understanding of both. By teaching children where money comes from and how to manage it, you can set them on the path to a life of security instead of a life of worry. Here are important points to cover.
1. Money can be saved, invested, spent, and given.
When one receives money, it can be saved, invested, spent, or given. Saving provides immediate security. Investing provides multiplication of wealth and future security. Spending provides current enjoyment and the zest of life. Giving allows us to grow and become better people. Children should be taught that an appropriate level of each activity should be part of one’s financial life.
2. Money is earned by providing something of value to others.
In our Capitalist society, one earns money by providing something of value to others. Something of value is something that meets their needs. This can mean operating a business that provides something needed, or working as an employee and providing something your company needs to them in exchange for a salary. It can even mean digging something up out of the ground that is needed, or refining something into something more valuable. The more valuable the thing provided, i.e. the greater the need fulfilled, the more money can be earned. As an employee, the more value you bring to the company, the greater your salary can be.
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3. Wealth and financial security is created by building pipelines.
People who spend all of their wages may seem to be doing well, but they are taking a great risk that something will happen to their ability to produce their wages and end up in financial ruin. Also, except for the few souls who pass away suddenly, they will eventually not be able to earn their wages due to sickness or there will come a time where they do not want to work anymore. Financial security is earned by using some of our wages and our energy to create pipelines – investments that provide income to us. By buying shares of a mutual fund, buying a rental property, writing a book or a song, or building a business we create the ability to generate income without working. This will both supplement our current income (allowing us to spend and give more) and allow us to replace our income when needed or desired. Individuals who become wealthy are those who delay the acquisition of things and/or work additional hours while able in order to build their pipelines.
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4. When we pay interest, we pay for everything twice (or more).
One will never become wealthy while paying 20% credit card interest. Even keeping a perpetual house payment by constantly withdrawing equity for home improvements and other spending will have a huge impact on future wealth. Likewise, if one keeps a car payment throughout one’s life, one will forego over a million dollars in wealth at retirement. If we save up cash and buy things, we will pay substantially less than if we buy things on credit. This in turn will leave more money for saving and investing. Loans should be taken out very rarely, and then the debt should be paid off as quickly as possible.
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5. An emergency fund turns an emergency into an inconvenience and provides more options.
Most people are able to pay their monthly bills, but then sudden emergencies cause them to take on debt. Eventually, they will have all of their income (or more) consumed before the month starts, making it impossible to save or invest. By keeping 3-6 months’ worth of expenses in a savings account, the sudden car repair or minor medical issue can be resolved via a check instead of a loan. Likewise, the loss of a job becomes an issue to work through rather than a crisis.
6. Save up for big things you will need to buy or replace monthly.
Most individuals will need to take out a loan to replace a car, an air conditioner, or a roof. Many put vacations on their credit cards and then pay for them over then next several years. If you regularly save for the big expenses, you will have the money available when the come times. Not only will this result in savings on interest (which will give you more money to save for future purchases). It will allow you to negotiate for better prices. Everyone likes cash-up-front, and may people will give you a discount if you can pay in full.
Teach your children about how to handle money, and you will greatly reduce the stress in their lives.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.