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IFB60: Personal Finance 101: Money Lessons to Our 5 Year Olds

money lessons

 

Welcome to Investing for Beginners podcast this is episode 60. Tonight we’re going to talk about money lessons for our five-year-olds.

Andrew and I both have younger daughters and we’re going to talk a little bit about money and what we would teach our kids if we wanted to teach them more about money and I thought I would go ahead and start off and talk a little bit about some of my experiences with my little girlie and kind of go from there.

Just to kind of give you a little bit of background my daughter’s going to be six here very shortly and we go to Walmart a lot to go shopping and stuff and she always wants toys and she wants Toys Toys Toys more toys.

My wife and I have been discussing about whether we should give her an allowance, whether she should earn it and kind of going back and forth on what we should do. And so I thought that I should have her to help her learn the value of money that I should give her some air quote jobs to earn the money that we give her every week.

And so what I thought of was kind of creating basically three buckets. The way I do it is that I have a little chart that we created and Sadie, my daughter and I sat down and we went through everything and we came up with jobs that she could do things like emptying the dishwasher, dusting, helping us vacuum, sweeping the floor, getting dressed every day because that’s something she likes to do at this stage.

All those things we came up with dollar amounts and why not so at the end every Sunday we look at the chart together and then we tally up her money and then we hand it over. And so instead of just giving her the money and just letting her kind of run wild with it and going to Walmart or Toys R Us who was going out of business sadly.

Whether we do any of those things and just let her go run rampant and basically blow all the money. I thought about my life in how I kind of learned money and I love my parents to death but they didn’t teach me much about money and I kind of had to learn it the hard way and I after working in the bank for all those years I noticed that very much so people are really not taught money.

They’re not taught how to use it what its value is how to earn it  how to save any of those kinds of things we all have to learn it the really hard way I’ll give you an example just recently when I was in another restaurant I was working in I was away from the restaurant for a bit and a vendor came in and I needed somebody to write the vendor a check and the other manager that was on duty was a younger guy and I called him up as a hey can you write this check out for this vendor and he’s like no I can’t I’m like why he said I don’t know how to write a check and I thought wah wah ha ha.

And he’s like I don’t know how to write a check and I’m like how is that even possible then I thought about it for a second he’s younger he’s worked in the electronic he’s lived in the electronic age and so with the internet and  the availability of online banking and debit cards and credit cards. Makes sense he’s probably never ever written a check before so I just thought to myself while I was talking to my daughter that this is something that I need to try to help her with.

And so the avenue that I started with to kind of work on this and again this is always going to be a work in progress was I came up with a bucket of three buckets that she should put her money in and encouraged her to try to help her with these ideas.

And so the first the first bucket is kind of your spending money so for five-year-old she doesn’t have to worry about rent or car payments she gets to worry about buying or Toys. What I did told her was is that you could put some of your money in there so that’s the money that we can go when we go to the store to go shopping that you can buy yourself whatever it is you want with the money that you earned it’s your money you can spend it however you want. if you want to buy a bubble gum go forward if you want to buy another Barbie go for it however it is you want to do it.

Then I also thought that she needs to learn to start to save because that’s something that we all need to learn and so I added a second bucket which is her saving bucket and so I ever take 20% of her money and I have her put it into savings bucket and that’s money that we don’t touch and we save it for a rainy day or let’s say that she has a really big toy she wants to save for then she can take some of her spending money out and put it in a savings bucket to help her earn it faster.

I thought that that would be a great way to start teaching her how to save at an early age and then the third bucket I thought of was kind of a giving back a charity bucket so she takes 10% of her money and puts it in there and she can use that however she wants.

When we go to church if she wants to donate her money she can do that if she wants to give it to a charity of her choice of anything like that if they have things at school and all those kinds of things.

I thought that was a kind of a great way to try to teach my little girl some basics about money and how you should start kind of setting up how you think about money as opposed to just thinking of us is a way to buy more stuff.

It’s a tool it’s a tool that you can use to help you get the things that you want either now or future or even more future and also getting back because that’s very important we all need to help each other out there and the life is hard we’re all going to have down times and I feel I’m very much a believer in karma. If you give that it will come back to you in some way shape or form and I just thought that that was a great way to kind of start setting up my daughter to kind of start giving her those ideas.

And I also thought she’s not quite old enough for us to start investing but I have started talking to her about buying assets for a kid for a six-year-old what has been asked that well maybe that’s a really toy that she’s never ever going to sell or it’s a dog or something that she’s going to have for a long time. And start to teach her the difference between having an asset or something that you own as opposed to something like a popsicle that you buy you eat it and it’s gone it’s not really an asset so those are kinds of some of the things that I thought of to try to help kind of start the conversation with my with my daughter and see if that could help her become more financially literate as well as a better citizen and a better person here on earth anyway those are some of my thoughts, Andrew?

Andrew: yeah I love that that sounds more organizing my financial planner honestly I mean like from the assets thing right I guess I’m jumping ahead a little bit. but if you have the idea of okay like you said with the popsicle that’s great right well I eat this popsicle once and then it’s gone and that’s akin to a lot of sorts of different liabilities that we can pick up.

But it’s like maybe one way to I’m just spit balling here but like you can buy two popsicles or you can buy that gumball machine and then every week we come back and then you can buy a new popsicle with the money you earn from the gumball machine that you left at the store or something.

Right maybe that’s one way to teach about assets now I know for certain like I’m not some sort of billionaire. But I have noticed I’ve had times in my life where I was good with money and times in my life where I wasn’t so good and it’s I don’t think anybody’s ever going to be a hundred percent concentrated on finance and investments and money I know I certainly haven’t even though it’s a huge passion of mine life just sometimes gets in the way and so you have to structure things so that this the stuff kind of runs in the background runs on autopilot and that takes away a lot of the effort that might be needed and makes the whole process a lot easier.

money lessons

While I might not be a billionaire I have noticed in my own personal accounts ways that I’ve been able to grow my money and to have my money work for myself in the sense where I’m putting it away and it’s not just a savings account. But I’m seeing real gains and real money that’s flowing into my account and growing income streams through dividends.

And so that’s something that can be very powerful and they can work in behind the scenes for you and as far as the basics of money I was I was very fortunate that my parents did a good job of teaching me the value of money in the sense.

I remember going to restaurants all the time whenever we go out and I got so accustomed to this that ended up being like my preference when I would go out with friends my first went to college everybody’s getting sodas with their meals and I’m getting water and they’re like what’s wrong with you and so it became like a habit that was ingrained in me.

But it was something that my parents were like no you can have water and then if you want like a soda you can get one later at home when it’s not there are four kids in my family had three siblings so three or four sodas of those plus if my both my parents were to have one that’s like 10 bucks right whereas you can get 10 10 10 2 liters with that at home.

It’s like kind of like that little stuff like that and then growing up I got a part-time job and that’s how I paid for my first car my parents offered to help me out with half of the car and then they made me save up if a camera feels like 500 bucks or a grand so this was like a $5,000 car good-looking car by the way and my we nick named it my baby girl but um anyway sorry uh daydreaming over here.

I think my heart’s my heart’s pining for this thing but uh 97 Mustang just in case you’re wondering GT v8 all white beautiful oh so I think I paid five hundred thousand I had to save up from my part-time job and then my parents gave me a loan for the difference and then they also help pay for some of it.

That was really cool show me like what having a car payment was like without having me needing to financially struggle or anything  I think a common mistake I fell in let’s into this too even though I my parents did teach me but I fell into having a really expensive car payment for a while and it can be a very expensive experience.

When you’re paying the insurance on that car auto loan and be if you ever get underwater like I did and you have to sell it really quick and you just watch all the thousands of dollars you throw away but anyway.

But that was something cool that’s something I try to teach to my daughter haven’t gotten to like any sort of financial plan yet maybe I’ll have to talk to you and maybe you can do like a one-on-one consult for her and gather on the way.

I do something which is kind of silly, but I know this there’s like a difference it’s kind of like a skill and if it’s like a habit that you can ingrained in yourself I believe it’s really helpful in the world of money. And so it’s the whole idea of like delayed gratification.

I don’t know if I personally have a problem with this but I hear a lot of stories of people saying they come from like a scarcity mentality where whenever they get their paycheck or whenever they get any sorts of sums of money they just have to spend it all at once which can obviously be very detrimental but if you can kind of learn how to delay your gratification do things like saving and investing then that can obviously put you on the better path and start to compound your wealth and build your wealth so that as you go on you can build income streams and you can let compound interest work its magic.

But the way I kind of do it is um I’ll go to the gym a lot with my daughter pick her up from preschool and then we’ll head to the gym and she goes in the kids club and so I tell her okay they have a TV in there I have a certain schedule she’s only allowed to watch usually like an hour of TV a day so I tell her why you’re in the kids club if you watch TV in there then you can’t watch TV at home. But if you don’t watch TV in the kiss club and you play around or you do drawing or whatever then when you get home you can watch TV. and so I think she’s picked that up because every she’s not she’s watching the TV and then she’s hiding it from me and telling me she didn’t watch so she can watch at home.

But I did ask the people who watch her and they say no she’s not watching it or be she’s learning that okay well when I enjoy this late at a later time it’s going to be that much sweeter and so  that’s kind of one way of delaying the gratification.

In the world of investing how that works is instead of paying interest you start to get interest paid to you and so it becomes more than like the whole TV thing it’s kind of like a one-for-one exchange but when you get into finance you the scales start to tip and the longer you can delay gratification the more you can save the more you can invest the bigger that output way they’re on in the future.

It really comes down to kind of like the power of compound interest and how that can really grow over time.

 

Dave: I really like that that’s a that’s a great analogy I love the delayed gratification that’s a great way to teach saving money I mean that’s really kind of what it comes down to is having a priority and setting it forth.

I remember reading a while back were people were talking about kind of the differences between wants and needs and I think that’s what I’m trying to instill in my daughter is when you’re thinking about  when she’s at a store and she wants to buy something do you need it or do you want it?

There was a difference and if I can hopefully instill that in her at a young age that will help her be more responsible with her finances as she gets older and I wish truthfully I wish that was something that I had learned at a much younger age.

I had to go through some financial hardships like everybody the to kind of learn to be more frugal with my money not always the easiest thing to go through and you wish he had learned it when you’re younger and that’s hopefully what we can help illuminate and show people a little bit.

We have as parents we have this huge responsibility to raise our kids in this is an area of opportunity that I don’t think is taken advantage of enough and again as seeing this in the banking world that there are just so many people out there that just don’t know how to manage their money.

Every day I had people that were spending more than name earned and a lot of cases it was just because they thought they needed something and they were willing to go out and spend it an overdraft their account and we can get into the whole discussion about how much banks charge for overdraft which I think is ridiculous.

But anyway the fact of the matter was is they were spending more than they earned and no business can survive that no nor can an individual and Tesla included not everybody again that can handle it that can handle that.

I just think that this is I wish this was something that was taught in school so it’s not so Andrew and I are here to try to help fill that void humbly.

And I just think that  what we can teach our kids and the money lessons that we could teach them as we’re growing up is going to help them so much in their in their lives and it’s one of the greatest foundations we could set for them because you think about our civilization we’re all based is all based on money and that’s one of the most important things that we have to deal with for the rest of our lives once we are out of college or out of high school and we’re working for a living we have to deal with it.

And the fact that we aren’t taught those lessons of  spending wisely earning  earning as much as you can making your money work for you compounding saving money being frugal. I’m not saying that you got a deny yourself that Starbucks twice a week I mean if you enjoy it do it but also we got to think on the back end okay I spent that money on those Starbucks. Now I got to think about saving money on the back end of something.

I guess my point with all this is that  we have a huge responsibility for this and this is something that I wish my parents had taken seriously it sounds like Andrews did and he’s is all the better for it and I’m going to do my best for my daughter to make sure that I can provide for her as well as teachers some of these lessons so that she can learn some of this before she’s out on her own and she has no idea how to pay for her rent and buy groceries and have all those things yeah those are my thoughts.

Andrew: all right so you kind of alluded to when maybe when she’s seven years old how you would teach her a little bit more about assets so let’s take the scenario where maybe she’s seven or she’s nine or she’s 11 or maybe she’s a new listener to the podcast who knows nothing about money. Yeah what kind of topic would you maybe segue into next and try to explain that you believe is important regardless if you’re a stock market investor you’re a real estate investor you’re just a businessman or entrepreneur or you’re somebody who just wants to work hard go home and forget about money.

What’s something besides what we talked about we kind of talked about saving the warrants we indirectly talked about the importance of a budget and then obviously briefly touched into making her money work for you in compound interest. But what would that kind of lesson be that you would try to distill to somebody.

Dave: that’s an interesting thought well assets are obviously something that’s going to earn you money and you think about and you think about the jobs that we all had when we were first kids  paper routes what was your first job?

Andrew: I actually had a trash business trash business okay tell ya my buddy. I basically took his business model and stole it and moved it to my neighborhood basically okay basically cloned it so he had this trash business.

What he did is printed out a bunch of fliers and then why now and was like oh I’ll move your trash cans because on their Street it was like Wednesday night or something the trash would come out so you’d have to put the trash cans on the street and then the next day bring him back so he had charged a dollar a week and you had I think like ten clients so he was able to make like 10 bucks a week for 10 maybe 10 minutes of work one day and 10 minutes the second day so pretty good per our income.

So I kind of took that and then being the entrepreneur I am I did I was like okay the hard works getting the customers once I have customers that I can outsource the work. Then what I do is my customers then I hired my brother and then I had my brother do all of the work and then pay me back for it like basically pay me like a royalty get a residual.

He got tired of that pretty quickly I was like man I did the work for you I guess the idea of me just sitting on my ass and getting paid did not fit well with him yeah I mean I was probably making 10 10 bucks a week as well.

Dave: that’s awesome so that’s kind of a classic example of creating an asset because you created a business that allowed you to get paid and if your brother had not reneged on his end of the deal could be a billionaire by now.

But I guess the point of that though I think which is kind of perfect is if you created this asset which was your business and that business was going to pay you for creating the business and you had employees  you had a business model you went out and hustled and marketed and did all those things.

And that’s creating an asset it doesn’t always have to be a printing machine or a grill at a restaurant it could be exactly what you just did and I think those are examples of when you think about an asset. I always think about something that’s going to create money for me and ideally you want it to be something that you’re not going to have to put a lot of time and effort into as well as a lot of capital in other words buying more of them.

I had an idea when I was younger of creating a lawn mowing business and cuz all the neighborhoods the they need to be mowed and so I thought if I could find four or five other guys that would borrow their parents a lawnmower so I wouldn’t have any capital outlay in other words I wouldn’t have to go buy more lawn mowers.

I would go out and find people to mow that one of the yards mowed and then I’d have my friends go mow the yards and then they would get a cut and I would get a cut and I had some clients that I took on as well so I did wasn’t just sitting on my butt collecting all the money I was actually leading by example and generating some income so that my friends were more willing to do it.

It lasted actually it’ll actually I lasted a whole summer it worked out pretty good I think I mean like six or seven hundred bucks that summer it was kind of fun. But yeah the next year the guys didn’t want to do it and they found out I was making more money than they were and they weren’t happy about it.

But means of capitalism yeah exactly. but I guess my point being is is that for somebody that’s just kind of getting into this this could be something that when you look at an asset you’re looking at something you want to try to create that’s going to create revenue for you whether it’s a dividend whether it’s buying a gumball machine and leaving it someplace and then it makes you money every day or buying a gumball machine if you’re a lot older.

There’s all kinds of different ways that you can go about creating these things to generate more money for you.

I actually one of the books that we read that we talked about just recently the Joel Greenblatt book you can be a stock market genius as well is that no the little beetle no it was The Little Book that Beats the Market it still beats a market.

He starts off the story talking about this kid that would buy a pack of gum and then go to school and sell it for a doubt a 50 cents of piece so he’d pay like $1 for the whole thing but he’d make 5 bucks off the whole pack kind of thing and I thought that was brilliant and that’s creating an asset.

Because that’s making him money every day and it was brilliant and I think when I think of assets those were kind of the things I think of and those are the kinds of ideas that I would talk to Sadie about would be as you get older you can start working on trying to come up with ideas of how you can make more money for yourself besides just working a job.

You can find other things that could make you money outside of just  mowing the yard or they’ll throw in a newspaper well those papers are kind of dying now but you can’t get my point.

Andrew: oh yeah uh why don’t they have what you just said in accounting books because I would make understanding assets and liabilities I feel like so much easier. Well thanks used to tell me um money that money doesn’t grow on trees money doesn’t grow on trees and I was they would tell me oh you can’t have this you can’t have that or you need to work for this or they would do the same thing with the chores.

But when you do buy assets it’s obviously not like a tree in the sense that it’s free but it does provide shade kind of like Warren Buffett says best time in the plan tree was yesterday second best time is today.

And so they’re these assets can give you cash flows and income for years and even decades and so a big way we try to teach as the ability to do that is by buying stocks collecting dividends and investing in the stock market and that’s one example of an asset that you can start to buy and accumulate and the more you do buy them the bigger your orchard grows if you catch my drift.

Dave: yeah that’s really good yeah that’s a very good analogy.

All right folks will that is going to wrap up our discussion on money lessons and some of the ideas that we would pass along to our five or six year olds I hope you enjoyed our discussion and you picked up a thing or two that could be helpful if you have any ideas of things that you do for your kids or you would want to teach your kids about money we’d love to hear from you please let us know.

Without any further ado we’re going to go and sign out you guys go out and find some great intrinsic value invest with a margin of safety emphasis on the safety. Have a great week and we’ll talk to you next week.

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