Have you ever wondered why the rich get richer? Some say that it is because they can leverage on greater wealth in each successive generation. However for many, the real reason it that the rich teach their children financial skills that stay with them for life. These skills are then used with greater skill in each successive generation leading to a snowballing increase in wealth. This article therefore highlights three wealth concepts that you may consider imparting to your children at an early age so as to give them a financial head start in life. #Concept 1: Good debt and Bad Debt Many people are drowning in debt today and on the flip side, some people stay away from debt as far as they can. A more balanced approach is needed. Debt is important in our economy as it is used to fund large projects. Thus, the key is to learn the difference between good debt and bad debt is the purpose for which it is used. For instance, credit card debt is bad debt when used to purchase depreciating consumer products, while debt can be good debt if you can use it to purchase real estate and start getting a cash flow from the difference between the monthly rental proceeds and the monthly mortgage instalments. Thus teach your child how to use debt wisely. #Concept 2: Cash Flow and Capital Appreciation Many people cannot tell the difference between these two concepts. There are generally two types of financial instruments and some hybrids in between. Most financial instruments are capital appreciation instruments meaning that when the price goes up and someone buys from you when you sell the instrument, you make money. (e.g. stocks & shares) Thus the capital (the principal sum that you paid) has increased in value thus Capital Appreciation. On the other hand there are instruments that give you a cash flow meaning a share of the profits. Examples include real estate investment trusts and other mineral rights trusts like oil trusts where you get a share of the monthly oil income. These instruments are great when you make a large enough sum from your capital appreciation type instruments and you park a portion of the money in them for monthly cash to actually use. Children should be taught this difference early in life so that they can start learning how the free economy works. #Concept 3: Take Charge of your own money Fund managers and analysts love to tout their own horns telling you about how they over performed the market. Actually, the fund managers earn money from managing your money. I.e. they either charge management fees or flipping charges and not whether your portfolio makes money or not. This means they can manage your money badly and still be paid. Studies have shown that at the end of the day that many fund managers at the end of the day may fare no better than an individual in stock selection and giving rise to the report that monkeys throwing darts at random stocks on a dart board may actually fare better. Thus teach your children to start learning more about investing and take charge of your own finances and do your own investing. In conclusion, teaching children about finance at a young age is great and in fact some of the brightest fund managers today talk about their parents and grandmothers analyzing stocks in front of them when they were small. Start teaching children young about managing their own finances and how to understand how the modern economy works and they will grow up better placed to handle the financial world out there. Copyright 2006 Joel Teo. All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.) |
