I don’t really like the above title because it speaks of materialism over finding a purpose in life. There will be those young people who set out, for example, to serve God as a missionary and don’t ever think of becoming rich except with “God’s riches.” (For those who are confused on this issue, the Bible teaches the love of money, not money itself, is the root of all evil.)
Young people will handle money and it will flitter through their hands if they don’t manage it well. And their dreams of serving God will be very limited if they don’t learn lessons about how to build and retain wealth.
An article in the Wall Street Journal (WSJ) asks how you will teach your kids to be rich, to retain wealth if your family already has it?
Wealthy parents fear their fortunes may be squandered by their children who aren’t money savvy yet. A kid who inherits wealth is obviously far different than a self-made man. The WSJ article cites surveys that say 51-57% of parents don’t think their kids will be ready to handle being rich till they are 25-34 years of age.
The author of the WSJ report recognizes kids have to mature emotionally and brain-wise because handling money involves abstract concepts such as inflation, purchasing power, yield, profit margin. Those concepts are not taught in school. But the WSJ article makes no mention of those terms.
Its author suggests kids learn about money by playing board games (Game of Life, Pay Day by Hasbro). But the problem here is that kids are going to get the childish idea that the financial world plays by the rules. In the real world, that is far from the truth.
I think if you are trying to teach your kids anything about money it is that there is a lot of sleight of hand going on.
Work ethic versus lifestyle by credit card
The WSJ article mentions a work ethic in passing, but then suggests kids need to learn social media too. (Huh?)
In case no one told you, social media is a lure where the masses contribute their content (photos, articles, books) for free to websites that the websites then use to drive web traffic that produces click fees and advertising fees. Those who participate are just pawns in the online game. I know no one whose fortunes have risen by participation in Facebook or LinkedIn.
Online schemes versus real businesses
I think the lure of the internet and the get-rich schemes online are as deceiving as 1-lb box of chocolates which a naïve child believes can only add a pound to your weight.
I just heard of a young man who pays others in India (~$200) to write a short book on a topic. The book is just a compilation of gibberish that adds nothing new to knowledge. He has done this a couple hundred times and offers these books under his own pen name at Amazon.com. He makes $50-150 a month off each title. That is how kids are learning how to make money today.
Day-trading stocks is another example. These are schemes, not businesses. Day trading is gambling, not investing.
Yet another online scheme is to set up a social network that agrees to click on a Google Ad and generate phony click fees. The internet is filled with schemes not careers. Try to steer your kids away from these traps if you can.
Teaching your kids to earn their way, to live beneath their means, may be a thing of the past. The Judeo-Christian work ethic has become a relic in a fast-buck world. Our children are learning they can achieve a lifestyle they haven’t earned simply by getting a credit card and going into perpetual debt.
Tommy Bahama shirts, a new sports car, they are just a credit card away. Now you pay interest on this debt the rest of your life. Then everyone is paying homage to the lenders. Bankers sell debt and they want young people to buy it as soon as they set out on their own in life.
Young people: are you buying into an endless life of debt? College debt comes to mind? (The Federal government backed these educational loans just to keep unemployed kids off the streets and off unemployment rolls.) Will the jobs or incomes be there when your kids graduate and need to pay back that college bill?
Savings accounts capitalize the banks for free
The Federal Reserve Bank suggests kids begin to save from an early age and offers online programs for school teachers to instruct kids that they can be semi-wealthy if they regularly put aside money in a savings account. But in reality, that would simply capitalize the banks for free.
What the Federal Reserve doesn’t say is that the current low interest rate (less than 1%) on banked money and the income tax paid on that little bit of interest results in a net loss after years of stashing it away. That saved money may have grown numerically, but lost purchasing power due to hidden inflation. A big lesson parents will have to teach kids is erosion of wealth by stealth inflation. If you don’t teach it (and you probably haven’t learned it yourself yet), no one else will.
Don’t think inflation is what government sources tell you. The target rate of inflation as set by the Federal Reserve Bank is ~2.2%. But the actual rate of inflation (after the cost of gasoline and food is calculated, which aren’t included in the present way inflation is calculated) is more like 9-10% (source: ShadowStats.com).
That means your banked or invested money must make 9-10% per year just to keep up with inflation. If you aren’t getting a pay raise of 9-10% a year you are falling behind.
Just recently the world’s largest bond fund ($244 billion) reported it lost money last year (-1.92%). Now with all of their resources, including a think-tank of wizard investors, they could only come up with a loss. The bond fund actually lost -1.92% plus 9.3% due to inflation according to ShadowStats.com.
The target yield your kids will currently need to stay ahead of inflation exceeds 10%. Wherever your kids place their money, it has to achieve yields that keep up with real inflation or lose value.
Some privileged kids are handed a large bank account earned by inheritance and have no idea that it is eroding in value due to inflation the day their name was placed on the account.
Pathways to wealth you learned may not be generationally transferrable
Another big problem is whether your kids will be able to make money like you did, maybe buying and selling real estate, investing in stocks, municipal bonds, etc.? Those avenues of wealth may be forever closed. Maybe your advice is going to be outdated before it reaches your kids ears.
Can your kids make an independent financial decision?
Many Americans never make an independent financial decision in their lifetime. Their employer invests their money in a pension plan or 401k. So they don’t learn how to invest their own money. That should be a goal – to get kids to learn how to multiply their money on their own instead of relying on some self-interested financial counselor.
For example, financial counselors often suggest mutual funds. But most of the companies offering mutual funds have taken more money out in hidden fees than the investor has gained. Recall that a lot of smart people lost their money by trusting Bernie Madoff. That is because they made their money one way and had no clue how to invest it. After they made it they had to trust someone else to grow it. I have learned it is more difficult to learn how to retain and grow wealth than it is to make it.
Should young marrieds buy a home?
I hear young marrieds being hustled into buying a house before interest rates rise. But the Federal Reserve Bank and Fannie Mae and Freddie Mac are holding trillions of dollars of bad non-performing home loans and when those get dumped onto the market the value of existing homes will crash.
Best to buy extremely low, calculating for the current real estate bubble to crash, or wait to buy, before you end up with an upside-down home mortgage (you owe more than its worth in a resale).
However, my advice falls flat up against home-deprived women. They can’t see a marriage without a home of their own. But that idea is imaginary. In reality the lender owns the home, you just get to pay for its upkeep for the lender for free.
Most homes are bought and resold within 7 years and with mortgages written so the interest is paid in the first 15 years of a 30-year mortgage, young marrieds really aren’t gaining equity for a long time unless the speculative resale value of the home rises significantly. This is just more sleight of hand.
Pull out your mortgage papers
By the way, do your kids a favor, if you own a home, take out the mortgage papers and show them what one looks like and what all the gibberish means there. Otherwise your kids are going to one day buy a home and have that mortgage banker come to your home and expect them to read and initial every page and sign at the end and they won’t be given time to examine its details. Help them understand terms like title fees, points and closing fees. Advise them not to accept a late change in interest rates that they were previously quoted. If your kids eyes have never seen a mortgage document before they are going to be blindsided.
Equity versus debt
I’m looking at a chart that shows the rich own assets (business equity, investments) while the poor own debt. Or as it has been said: “The rich buy stocks and the poor buy lottery tickets.”
For the wealthy, a credit card is something to use so you don’t have to carry cash. But a credit card to a poor person is viewed as a pay raise. They may never pay down the principal.
If this is true, that to be wealthy in America young people have to build business equity or have investments that yield dividends or large payouts when a business is sold, then wealth-seeking young Americans need to be pushed in that direction.
They wealthy receive dividends from stocks or large sums by sell off of a business and often pay only 15% capital gains tax instead of 30-40% income tax. This is how the wealthy get ahead –they pay less taxes.
Obstacles to personal dreams
My wife’s uncle is endlessly inventing things. Over the years he has drawn up inventions on his drafting board that are worthy. Among them: shelving to be used at storage centers, a paint bucket handle that doesn’t dig into your hand, a gun case that requires your fingerprint to open. But good ideas require capital to become a reality. His ideas are still inside a drawer in his desk.
For the small businessman/inventor, filing a patent is almost worthless these days. You have to be able to defend your patent (the cost of patent litigation ranges from hundreds of thousands to millions of dollars). So big business may just decide to run over you. You have to bring your ideas to market on your own and start cash flow and capture market share, then it is valuable and may be bought up for a handsome profit.
By the way, avoid those patent mills that promise to patent and then shop your invention for you. Big business is in the business of figuring out how to get around your patent, not make you rich.
The biggest obstacle to a young person’s dreams is how to raise capital. Capital provides room for making mistakes and learning even more after a new venture is started.
Whether it is starting a restaurant or inventing a new piece of software, the competition will make it difficult for young people to get traction because they have greater economy of scale (can buy at lower prices) and have sophisticated management systems.
Think global not local
One piece of advice is to think about doing something that reaches the masses rather than a local business that is limited by a local economy. A small fish in a big pond may do better than a big fish in a small pond.
You start a roadside diner and it is successful and you sell it for $300,000. Yes, but you could have thought about selling a fabulous chicken recipe like Colonel Sanders did at his roadside diner and sell it for millions. (His secret was the pressure cooker that infused the flavor of herbs into his chicken. That idea was later abandoned and his Colonel Sanders chicken is known by name only rather than its taste. His fabulous chicken flavor has become only a memory.)
Think of global markets. A friend of mine grew up poor and became rich. He wrote a book about it. It’s selling like hot cakes — in China! Chinese young people want the American dream and he is selling thousands of books there.
How do you teach your kids what money is?
Money used to be a piece of gold or silver represented by a piece of paper (currency). Today kids think a piece of paper is money. Whereas money used to be asset based, today it is debt based (borrowed).
A U.S. dollar bill is created into existence by borrowing money from Japan or China, money those countries earned by selling us cars, cameras, toys and computers. That money is as phony as play money. It is backed by $17 trillion of accumulated debt (the national debt) that cannot possibly be paid back.
If your kids learn anything it is that the current currency system is on very shaky ground. There could be a devaluation of the dollar any time. Economist John Williams says a “dollar sell off” may occur at any moment as foreign lenders, realizing the U.S. may never pay back on the principal owed to them from U.S. Treasury Notes, may elect to auction them off at a loss, which would devalue the U.S. dollar in international trade and result in $6-10 a gallon gasoline overnight.
Investment fund expert Marc Faber says: “not to own gold is to trust central banks, and that you don’t want to do in your life.” To learn about real money, learn about gold and silver. Its value is not determined by its current spot price but what it is worth in a financial meltdown.
What is your highest and best worth?
I see kids today and they aren’t aiming high. As the song says: “Mommas don’t let your babies grow up to be cowboys.” They may like the adventure of wearing cowboy hats and riding horses, but that usually doesn’t translate into wealth.
The current generation of young people knows more than I did at their age, so why aren’t they translating that into wealth? One problem is that they have been taught by practice to consume rather than take measured risk. They may not have a shop-keeper’s or an entrepreneur’s mentality. Some mentoring is usually required.
Shop your resumé
Another problem is that they don’t know their value, which is only known when it is shopped.
Once you have become skilled at your job, shown initiative, and become an invaluable worker, it is unlikely your employer will reward you adequately.
Now if you learn to create a resumé and shop it, you might learn what you are really worth. You can’t play games with your employer here. You have to indicate you will take a job elsewhere if a better offer is received. You shop our resume quietly. You go for interviews. If you receive a handsome job offer, you go to your current employer and tell him that you can’t pass up that opportunity. Your employer has to mull over whether he wants to pay you more. He has to think because the cost of re-training someone else may be greater than the pay raise you desire.
I know a young man who is fabulous with computers, who can develop new software, create value out of nothing by setting his sights on new ways to solve problems. But rather than going into private industry he chose public service. Today he is a cop. The municipality he works for uses his computer skills to write programs that streamline their operations.
But if he was doing this for private industry or himself, the software could be distributed and sold widely with greater wealth being earned by this individual. He followed his testosterone over a future of greater wealth. He’s young. Fortunately, he can still chart a course in another direction.
Generally, working for someone else makes them millions, working for yourself makes you millions.
Advise your kids to keep their eyes on the current financial landscape
The insiders know when the big moves in the financial world occur before you or your kids do. The financial world is in turmoil and is volatile. It can change in a moment, and your kids may run to their bank, as many others have in a sudden-collapsing economy, and find a bank run is underway and the bank’s doors are shut and the ATM machine is turned off.
Advise your kids to keep their financial antenna up. Today a bank run in another country could sweep the world. If your kids haven’t been prepared for such an event (they are frequent in history), then instruct them to be watchful.
If you hit your kids with a doomsday scenario they may think mom or dad are just out of date and spreading undue fear and nothing that dire will ever happen. So just advise them to remain watchful.
Requirements for an investment
I think it’s best to advise your children to first invest in themselves rather than the stock market. I don’t know how anyone succeeds in a stock market polluted by insider trading, after-hours trading, fast electronic trading and manipulated markets. You may make money fast on paper, but it can vanish just as quickly.
To finish, some of my rules for investing are as follows:
- Choose a private investment over a publicly traded one.
- Is my money adding value to the company (providing it money to research and develop its product or service, or to expand markets)? Otherwise, it may be more of a gamble than an investment.
- The venture must offer a very attractive profit margin.
- Your investment must not be subordinated by others who have preferred shares.
- Its executives should have a mindset to produce dividends for shareholders, or sell out some day.
- Does the management exhibit immoral personal behavior (example: stepping outside their marriage, gambling after hours)?
- The concept of the product or service should be a trend, not a fad.
- In a world with collapsing incomes that aren’t keeping up with inflation, the investment should preferably address a need rather than a want.
- Its headquarters should not have chandeliers, it executives should not have company cars and it shouldn’t need attractive secretaries.
- The company should be able to monetize (turn stock into money) in a reasonable period of time. The reward shouldn’t be years away. The world is too volatile for that.
- Are there regulatory obstacles that cannot be overcome?
- Are potential customers willing to part with their money for it? Can customers even afford your product or service? At what point is price resistance experienced?
- Has the product or service been market tested?
- Who makes the purchasing decision? For example, if you invent a pill that cures blindness but it puts eye doctors out of business, do you really think they will prescribe it? (Happened to me.)
- How much capital must be raised to bring it to market? Can it be raised?
- Do you really think the product or service can sell in overseas markets where business ethics are not what they are here in the U.S.?
- Can the venture you put your money into develop unique intellectual property? Can that property right be defended?
- Will your big business competitor, seeing a more innovative product or service coming, drop his price temporarily to below his cost just to put you out of business?
- Will your invention just ignite so many shadow-boxing competitors that no one achieves significant market share? (I developed a dietary supplement that has been copied by 432 competitors). Your product should create its own category, its own niche.
- Does the venture have a good brand name in mind?