As you mature and develop as both an adult and a business owner, your perception of money changes. In life, you’re always learning. How can you help your children to learn about money? What’s the best advice you can give them that will prepare them for the financial realities of the adult world?
Cody Loughlin asked me these questions on the Money Talkers podcast recently and, as I explained to him, there are three important money lessons you can give your children.
1/ Cash is (still) king
When I first started following my entrepreneurial path, and was considering how to finance a business, my dad – who comes from a banking background – told me “cash is king.”
I understood how finance worked when it came to buying a house or a car, but I don’t think I fully understood him then as well as I do now. I mean that from the perspective of self-insurance and the importance of saving and protecting yourself financially.
What I have learned from talking with my children is that we now live in an almost cashless society. We pay for everything by handing over a little piece of plastic. Unless you are careful, and talk about that, your kids will grow up thinking that that is money. They will believe that when you pay a bill, you simply hand over a little card and free stuff magically happens. It’s important to educate your children about the process behind that. They need to understand how cash needs to move from my bank to that little card to enable us to pay for things. If we don’t have the cash to move across, it means we have to pay more in interest. As I say to them: “You want to see how much those pancakes cost if we don’t pay the bill!?”
It’s important to teach them the value of having savings, as well as what you might describe as an emergency fund. If you put cash in the bank, you are protected against bad things happening. If your fridge breaks down, you have money to pay to repair or replace it. They will not necessarily understand that reality unless they are aware of the need to have savings, real money, which offers a level of protection that enables you to respond and carry on when you suffer financial setbacks in your life.
Yes, it is tempting and easy to take out credit, to borrow against your future earnings. However, in the long run, even in the modern age when credit card fees are so small, you are still paying less for something if you pay by cash than if you put the bill on that piece of plastic that you place in a machine.
2/ Learn the difference between needs and wants
I’m fortunate that in many ways I am a minimalist. I don’t buy many things; I certainly don’t surround myself with a lot of “toys.” I’ve tried to pass this on to my children and get them to examine why we need a particular thing they want to buy? You may want plenty of things in life but you don’t actually need a lot. I have everything that I could possibly care about – you can’t put a price on the value of getting a hug from your kids.
It’s also important to discuss what we are going to do with the thing they want to buy. Is it just going to sit there and gather dust? I will say, however, that I finally, after 40 years, have the car I always wanted. I finally got a Jeep – but even that is not a luxury car.
This is probably not the way I would have answered this question when I graduated from college. I wanted to grow up and be a millionaire by the time I was 30, and be an important consultant who jetted around the world. I’m glad things didn’t play out that way because I tried it and it wasn’t fun.
You will have heard the old saying that nobody on their deathbed looks back and wishes they had worked more. But if you take that one logical step further, you have to ask yourself why you are working so hard for things you don’t even need. We get so wrapped up in the day-to-day struggles of life and business that we don’t ask ourselves, what is the worst that could happen if I didn’t work so hard for a particular thing? Very often, that worst isn’t so bad.
The happiest I feel is when I pack my camping gear and disappear into the woods for a couple of days, with or without the kids. In those times I relax and then wonder about all the things in my life that I pay for that don’t bring me joy and cost a lot – and much of it is debt.
3/ But… not all debt is bad
It’s important to discuss this with your children and explain that not all debt is bad. If you can intelligently borrow money and use it to invest in things that bring you returns that vastly exceed their cost, that’s obviously a smart move to make.
I do believe you have to tread carefully when it comes to talking with kids about cash. It’s important to explain that there are undoubtedly good ways to see a good return on an investment like that. I would agree, for instance, with the suggestion that borrowing $100,000 from your company to invest in a way that brings you in an extra $100,000 each year is not a bad debt.
Ultimately, you should not put yourself in a position where you are a slave to the decisions you have made. You should be in a position where you can make smart choices and keep going forward. And, clearly, that includes not taking on a debt that you are unable to service. If you can leverage in a way that doesn’t incur debt servicing costs, you have an escape route – in those circumstances, it’s the optionality of the situation that you have created that means the power still lies in your hands.
When it comes to talking openly with your kids in a way that helps them to understand money, business and the way the adult world operates, I agree that you do not have to be a financial guru. What will make the most positive and lasting impression on your kids is the ability to ask them open-ended questions – and to allow them to ask open-ended questions in return.