Most children have one thought about money: Spend! Or even three: Spend! Spend! Spend! Perhaps this is natural, a first part of freedom. It certainly was for my eldest daughter when she could first go around town after school with her friends. Money put the fun into shopping.
And when they’re young why should they think of the future. Being old one day is impossible for them to imagine. They look to the future with boundless optimism. They’re invincible.
Saving for the future means saving for driving lessons, something we might think short term. Perhaps we’re happy they’re saving, showing that maturity. We might overlook it’s really a deferred spending plan.
I like this delusion. I regularly apply it to my eldest daughter. But Julie in the podcast about Sibling Relationships mentioned a point that made me think, and that was the possible pressure her daughter might feel to get a well-paid job because she has a brother with additional needs. Julie didn’t make assumptions about what her daughter might feel, but sometimes the different earnings potentials between our children is the elephant in the room. The difficult conversation none of us wants to have.
I’m no different. If I die tomorrow with £100 in my pocket I will leave it to the daughter who needs it most. If I die with a £1,000,000 I will split it equally. I would like to think I’ve given my eldest daughter every chance in life, and it’s up to her to make her own way. But without giving her a sense of money management, I probably can’t hold that claim.
I believe to get her to place where she has all the money she needs I only need to teach her one thing: the difference between an asset and a liability. Robert Kiyosaki, author of Rich Dad, Poor Dad, says people buy liabilities that they think are assets, but they’re not assets at all because they take money out of their pockets each month. For him the goal is to buy assets that produce passive income; that is, buy things that put money into your pocket each and every month.
Passive income comes from things like shares, where we don’t do anything with them. We buy them; they pay dividends every so often. You sit and wait, and the money rolls in. Or rental properties, where rental income pays the mortgage, provides an income and if we are in the right place growth in value of the property.
Robert Kiyosaki believes:
What is missing from education is not how to make money, but how to manage money…. A person can be highly educated, professionally successful, and financially illiterate. These people often work harder than they need to because they learned how to work hard, but not how to have their money work hard for them.
This is not a position I want my eldest daughter to be in. Kiyosaki argues that wealth comes from how much money we keep for ourselves. He says it isn’t money that solves people’s money problems, but financial intelligence.
A typical example, according to him, is where a family buys a house they think of as an asset, but this asset takes money out of their pocket. This is a contentious point, I feel, because we all need to pay for somewhere to live. While a home can be an asset, as soon as we start to borrow from a house to fund holidays, a new car or some other similar expense, it definitely becomes a liability – Robert Kiyosaki puts it more strongly than this. This sort of borrowing not only means we are living beyond our income and have to incur debt to sustain our lifestyle, it also means that we are working to service debt each month. That car on the driveway isn’t an asset because it is taking money from our pockets in loan payments.
Kiyosaki’s solution for buying this car would be to first buy an asset – something like a rental property that puts money into your pocket each month. Then from that income generating asset the money earned could be used to buy that car. The subtle difference in this approach is we’re not working to pay the loan on that car. We have bought an asset that is servicing that loan. At the end of it, we will still have that asset and we will also have the car too.
My over-simplified explanation doesn’t do justice to Kiyosaki’s originial philosophy on money. His book was, and still is, a best seller for 20 years. He has a version of it specifically aimed at teens called not surprisingly Rich Dad Poor Dad for Teens.
Maybe my eldest daughter isn’t ready to go out to buy assets just yet, but I want her to understand the difference between them and a liability. Only without extra expenses or debt will she be well off. I think this is a vitally important lesson for her to learn. After this, her whole financial future follows. I don’t want her to learn the hard way, as I did. I want her to learn how to manage money early in life so she will always be comfortable. I don’t want her to work any harder than she needs to get the things she wants from life. This way she will end up with a much greater net worth than me, and so much quicker.
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