By Tom Dyson
You’ve probably heard about America’s huge debt load. The U.S. government’s financial obligations now exceed $663,000 per family. This burden will fall on the youngest Americans. With this giant financial obligation bearing down on them, it’s critical that now, your children learn about money and finance. They need to know the basic principles, like how to be independent, why debt is dangerous, and how to grow money.
They don’t teach finance in schools. If you don’t teach them this knowledge, no one will. They call this financial illiteracy. If our children are financially illiterate, they have as much chance of survival as a swordsman in a gunfight. It’s likely these people will live as indentured servants to the government and its creditors. But if our kids have a grasp of finance and its basics, and they obey its laws, they will have a good chance to grow up rich.
Below, you’ll find the three vital financial concepts all children need to understand. Please pass them on to your children as soon as you can. These three concepts are the starting point for any financial education, and in this case, for any children.
First of all, our kids must know that they arenot entitled to money or wealth or anything for that matter. They must earn money. I want my children to learn that they shouldn’t expect anything to be handed to them. I don’t want them to rely on the government for their livelihood, like many people do right now in U.S.
So many people treat money and prosperity as an entitlement. The government even calls its welfare programs “entitlements”. This word – and what it represents, gets stamped into young people’s brains. Kids act as if they are somehow entitled to toys, video games, and cars. But why should they be? Just because they have parents, it doesn’t mean they should get everything they want or anything at all, for that matter.
I plan to regularly remind my children of this when they are old enough to understand it. And I’m not going to pay my kids an allowance. An allowance would reinforce the sense of entitlement. They can make money by earning it: doing the dishes, making their beds, mowing the lawn.
The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. Like the entitlement mentality, debt is an enslaver. It robs you of your independence. I avoid debt in my personal life and when I’m choosing investments. The best way to illustrate the cost of debt is to calculate the total amount of interest the debt generates in dollars over the lifetime of the loan, instead of looking at the interest rate – like most people do.
Once you look at it like that, you can see how expensive borrowing money really is. For example, say you borrow $100,000 with a 30-year mortgage at 7% per year. Over 30 years, you’ll end up paying $140,000 in interest to the bank. In the end, you’re out $240,000 for a house that cost less than half that. Not a good deal.
The third thing our kids need to learn is the power of compound interest and the best way to harness it. Compound interest is the most powerful force in finance. It is the force behind almost every fortune.
Let’s say, for example, you have $100 earning 10% annual interest. At the end of the first year, you’ll have $110. During the second year, you’ll earn interest on $110 instead of $100. In the third year, you’ll earn interest on $121 and so on. This is the power of compound interest.
The numbers get enormous over time, simply because you’re earning interest on your interest. Because time is the most important element in compounding, it’s an incredibly powerful idea for children to understand. They have the ultimate edge in the market: the time to compound over decades. The stock market is a good example or maybe, the best place to earn compound interest. You buy companies that have 50 years or more of rising dividend payments ahead of them. Then you let the mathematics work.
Another very safe place to save and compound your money is our income for life strategy. It involves using a uniquely designed dividend-paying whole life insurance policy from a mutual life insurance company. This type of policy is one of America’s best kept and most misunderstood secrets.
After that, assuming they have the discipline to follow through, they will be on the right road to become rich. There’s no doubt about it. In sum, you have the responsibility to educate your kid about finance. If you don’t, no one else will, and they will suffer for it. Encourage them to work hard and avoid the entitlement mentality. Teach them the power of compound interest and explain the dangers of debt.
*Tom Dyson is a professional investor, writer and editor for the Palm Beach Newsletter in Florida.