The most important lessons I’m teaching my kids about money

The best teacher in life is regret and holy shit do I have a few.

They say you only get one chance in life. But that is not true. Through the gift of children, we have the opportunity to not only live again through them, we have a chance to do it better.

How many times have you said to yourself, “if I only knew then what I know now?”

Well, you have a chance to teach your children not to make the same mistakes you did. And that is exactly what I am doing. I have made my share of mistakes and now have regrets and I plan to do my best to make sure my kids don’t repeat my bad decisions.

Without further ado, here are 9 things I am teaching my kids about money.

Lesson #1: Money CAN’T buy happiness but it CAN buy opportunity which DOES lead to happiness.

They say money can not buy happiness and this is true. But what money buys is the opportunity to spend your time in ways you prefer rather than being obligated to work for wages.

Have you ever had to say no to an opportunity to do something you really wanted to because you had to work? Now imagine a lifetime of those.

There are Fathers out there who always miss soccer games and recitals due to work. There are Mothers who missed out on their child’s birthday dinner because they got stuck at work late. Maybe you are single and you haven’t met the man or woman of your dreams because you are always working late. I can promise you, if you are always working, you never will.

Money may not buy happiness but what it does buy is the freedom to say yes to opportunities you might otherwise decline because work got in the way. If you do not need to work for money, you remove that obstacle and can live a better, more fulfilling life.

Lesson #2: Time IS money

“No amount of money ever bought a second of time” Robert Downey Jr as Tony Stark quoting Howard Stark to Howard Stark

No matter how much money you have, you can never replace your time. If you spend money, you can go out and earn more money. But time keeps on tickin’. There is no replacing time once it is gone. Time is the ultimate currency. There is nothing more valuable or scarce and fleeting as our time on this earth.

Unfortunately, we all need to give up some of our time in order to make money. The lesson we must learn is how to give up the least amount of time to earn the most amount of money.

One day I will get off my ass and create the ultimate money to time converter app. Every time you try to spend money frivolously it will convert the cost of the item into how many hours you will need to work to pay for it. A hand will then come out of your phone and slap you in the face just before saying “what are you stupid” patent pending

All jokes aside, thinking about my spending in terms of time rather than money has really helped me to cut down spending on useless junk. Look around the room you are in right now and start adding up the costs of some of the crap around the room that is essentially useless.

Maybe you have an overpriced painting on the wall or some foo foo decorative schmopsies on a shelf you paid 40 bucks for at Khols on sale. Add it up and then divide by your hourly wage, that is how much time you spent at work to be able to buy those things.

Was it worth it?

Ask yourself every time you want to spend money on a non necessity. Will the enjoyment I get out of this item be worth the time it cost me to get it.

If the answer is no, then maybe you need to skip it and save that money for something else.

Lesson #3: Spend less than you earn, Save and invest the rest

When I was younger this one was simple. Credit was not quite as available as it is now. My children will grow up in a damn near cashless society where spending is as easy as handing over a card… and when the transaction is over, they hand the card back.

When you use cash, once the transaction is complete, the cash is gone and you need to go out and earn more cash. I have a bad feeling that teaching my children spending limits is going to be quite the challenge especially as they get older and have access to easy credit and debit cards with overdraft protection.

Lesson #4: The Incredible Power of Compound Interest

Compound interest is incredible. Compound interest is simply when you earn interest on top of interest on top of interest, and so on in perpetuity. Compound interest is what allows us to grow our money exponentially to the point where the interest eventually far exceeds the initial investment.

Take the following example…

If you invest $100 a month and can earn 7% per year, in a little over a year you will have about $1500 and be earning $100 a year in interest. It will be like putting away an extra month worth of savings each year.

Below is a chart showing the year by year growth of a $1000 principal over 10 years at 7% and 10% interest rates compounded annually.

Lesson #5: Inflation is a bitch

What would you say if I told you that the last car you ever buy in life will cost more than the first house you buy? Sound crazy? If you were born in the 1950’s or earlier you know exactly what I mean because you are living it right now.

The average cost of a home in the US in the mid 1970’s was about $30,000. Thanks to inflation, today’s cars, even on the low end, will run you about the same.

If you let it, inflation will destroy your savings and keep you running on the financial treadmill to nowhere. On average, inflation eats away about 3% of the value of your money each year. Therefore if you simply stuff your money under your mattress and then take it out to spend it 40 years later, it will have lost most of its purchasing power. Items that cost a dollar, will now cost over $5. The cost of stuff increased over that 40 years but your stash did not.

If you stand any chance at retiring, you will need to find investments that beat inflation.

Lesson #6: Every time you get a raise, save it

Do not fall victim to lifestyle creep.

Lesson #7: Automate

There is a reason the government takes income tax from you right off the top of your weekly wages. They know that if they waited until the end of the year for you to cut them a check, the money would have already been spent and they would never get paid.

You need to treat your savings and investments the same way. Automate your savings so every time you get paid, a set amount comes right off the top of your paycheck and goes into your account. Just like the government does. Otherwise you will spend it and never get around to saving.

Lesson #8: Invest only in things you understand

Once you have learned to spend less than you earn and have committed to saving and investing the rest, you need to make smart investement decisions so you don’t lose all your mony. You worked hard to earn and save and now you must protect your money.

“Never invest in a business you cannot understand.” – Warren Buffett

If you can not reasonably understand how a company makes money fairly quickly, then you need to pass on it. I have no idea how some of these oil companies can pay out a dividend that is higher than their earnings and still be of any value. So I don’t invest in them.

Coke on the other hand is about as simple as it gets. If you invest in something you can’t understand, you are setting yourself up to lose money. Coke may not be the most exciting investment in the world, but at least it won’t leave you scratching your head every time they report earnings.

Lesson #9: Taxes suck but are inevitable

There is a reason they say the only things certain in life are death and taxes. They both come to us eventually. No matter how much it sucks, you will need to pay your taxes. Unless you want men with guns showing up at your door to collect you for prison, pay your taxes.

You can bitch all day that they are unfair or unconstitutional, trust me, I myself went through this phase but at the end of the day, you can not defeat the government.

Pay your taxes. Whenever budgeting or preparing for your future retirement always include taxes in the equation because they are not going away. Failing to do so can and will be more costly in the long run.

Pay someone who understands this stuff to take care of them for you and dive through every loophole you can find, but pay your taxes.

The Ultimate lesson

Money is a means to an end. Do not let it define you. People have become consumed by the almighty dollar to the point they forget the human interactions necessary to facilitate, pretty much everything.

Money is important. Money is necessary. But money isn’t everything. Learn to use it as a tool to help you achieve the things that are important to you.

Earl