Always do your best. What you plant now, you will harvest later.
– Og Mandino
These last couple weeks, I’ve been ruminating on how the rich can "act" poor. And there have been a variety of responses — and the questions: "Jon, fine — but how about what it takes to teach wealthythinking?"
A great question — and the internet abounds with answers, of course. "Abundance thinking", investment schemes, business ideas and many other such mechanisms clamor for our attention. But I like to think that the real answers are found in the wisdom of the ages — and the aged.
You see, our grandparents’ generation saw wealth-building as a more fundamental battle against our own worst impulses. And, could it be that the recent decade has proven their model to be more correct than we would like to think?
Now, I’m not taking a pessimistic view here … but I’m simply wanting us to "return to the ancient paths", so to speak, when it comes to how we pass along wealth-creating wisdom to our children.
So, at the risk of seeming old-fashioned, I’ve put together a tried-and-true method for teaching your children to grow their wealth, even now, but especially, as they move into adulthood…
"Real World" Personal Strategy
How To Raise Wealthy Children
Sadly, too many families neglect a critical aspect of raising children: teaching them to be financially savvy. That said, many clients have written to say that they read and discuss my financial emails at the dinner table with their children. That’s a nice start.
But if you want to raise kids who can create and manage wealth, there are a handful of critical rules that are foundational.
Here’s the main one: Postpone spending.
In economics, "deferred consumption" is the very definition of wealth and capital. So … defer your consumption, kids! Everything you don’t spend today is wealth. Only what you don’t spend today is available for investing. And since money makes money, what you don’t spend today can provide a lifetime of income to spend in the coming days.
Teach them this: Wealth is what you save, not what you spend.
Most of the younger generation is under the false impression that wealth is based on the luck of a big salary. Nothing could be further from the truth. According to the book The Millionaire Next Door by Thomas J. Stanley, the affluent tend to answer ‘yes’ to these three questions:
1.) Were your parents very frugal?
2.) Are you frugal?
3.) Is your spouse more frugal than you are?
So how did they build their wealth? According to Stanley’s research they did it slowly, living well below their means and investing about 20% of their household income each year. And because money makes money, over time, they grew gradually richer and richer.
Imagine you purchase a pair of shoes for $50 every year. The person that makes do with the old ones and only buys shoes every other year will be able to save and invest the difference. After seven years, their savings will be earning enough interest to pay for a new pair of shoes every other year. After eleven years, the interest from the investment will pay for the cost of buying new shoes every year, forever.
Because being frugal early in life produces great wealth later in life.
Due to the affluence of American culture, it is difficult to learn to distinguish between needs and wants. Very few purchases are needs. Other than food, shelter and clothing, everything else is optional. In the United States, we show our extravagance even in these three essentials.
Practically speaking, you can learn to postpone spending one purchase at a time. When our children were very young, we required them to wait one week before spending money on a toy. Often, after waiting a week, they wanted a different toy instead. Then, they had to wait another week for that purchase.
Simply learning to delay and avoid impulse buying can cut your children’s spending in half.
So teach your children: Wait now … profit greatly later.
To You and Your Family’s Peace of Mind!