Have you ever thought about why the rich get more money? Some say it's because they can get more money from each generation that comes after them. But for many, the real reason is that rich parents teach their kids about money that they can use for the rest of their lives. With each new generation, these skills are used better and better, which leads to a steady increase in wealth.
So, this article talks about three ideas about money that you might want to teach your kids at a young age to help them get ahead financially in life.
First, there are good debts and bad debts.
Many people today are in so much debt that they can't pay their bills. On the other hand, some people try to stay away from debt as much as possible. We need a more balanced approach. Our economy needs debt because it helps pay for big projects. So, the key to learning how to tell good debt from bad debt is to look at how it is used.
For example, credit card debt is bad if you use it to buy consumer goods that lose value over time. On the other hand, debt can be good if you use it to buy real estate and start making money from the difference between the monthly rent and the monthly mortgage payment. So, show your child how to use debt in a smart way.
#2: Cash Flow and Appreciation of Capital
Many people can't tell the difference between these two ideas. There are two main types of financial instruments, plus some that are a mix of the two. Most financial instruments are called capital appreciation instruments, which means that when the price goes up and you sell the instrument to someone, you make money when the price goes up and someone buys it from you. (e.g. stocks & shares) So, the value of the capital (the main amount you paid) has gone up. This is called "Capital Appreciation."
On the other hand, there are instruments that give you a cash flow, which means a share of the profits. Real estate investment trusts and other mineral rights trusts, like oil trusts, are two examples. With oil trusts, you get a share of the monthly income from oil. These instruments are great if you make a lot of money from capital-appreciation instruments and put some of it in these instruments to get cash every month to use. Children should learn about this difference when they are young so they can start to understand how a free market economy works.
#3: Be responsible for your own money.
Fund managers and analysts love to boast about how well they did compared to the market. In fact, the people who manage your money earn money by doing so. That is, they either charge management fees or flipping fees, regardless of whether or not your portfolio makes money. This means that they can do a bad job of managing your money and still get paid.
Studies have shown that at the end of the day, many fund managers may not be any better at picking stocks than the average person. This has led to the rumour that monkeys throwing darts at random stocks on a dart board may actually do better. So, show your kids how to start learning more about investing and how to handle their own money and invest on their own.
In conclusion, it's great to teach kids about money at a young age. Some of the smartest fund managers today say that when they were young, their parents and grandmothers helped them analyse stocks. If you start teaching kids when they are young how to handle their own money and how the modern economy works, they will be better able to handle the financial world when they grow up.
All rights reserved. Copyright (c) 2006 Joel Teo. (You may publish this whole article as long as you include the following author's name and only live links.)
