Monday, November 12, 2012

Let Mickey Mouse Work For You

One way to teach kids about how money works is to explain to them that the things they love the most are companies owned by someone or often times many people. Their favorite hamburger place, toy store, yogurt shop, movies, or amusement parks are all someone's assets used to put money in the pocket of the owners. Without the owners we would not have these favorite things in our lives.

Not only are many of these companies owned by many people but often times they are public companies and can be owned by your child.

The concept of a public company can be difficult for a child to grasp. We need to break it down and make it visual. Think of company ownership as a big puzzle. They break the company into millions of puzzle pieces and then sell each piece. Selling stock/puzzle pieces raises money which is used to make more movies or toys to sell. The more toys they sell, the more money the company makes (profit). As an owner of the company you will get a piece of the profit back in what is called a dividend.

Encourage your child to buy pieces of companies of their favorite things.  To make it visual you can decorate puzzles pieces and put them in a photo album or scrapbook.  You will know your child has grasped the concept of company ownership when they insist on buying friends and family gifts made by the companies they own so they can make more money!


As Christmas rapidly approaches, I challenge you to buy your child or grandchild at least one asset to go along with all those toys (liabilities) you have planned to buy.  Buy them a scrapbook as a visual symbol of their company, stock for one of their favorite places or things,  and their first puzzle piece to put in their scrapbook.  While I am not a licensed broker and cannot recommend specific stock to buy I will share with you my son’s portfolio of companies he has purchased or been given as gifts to give you a feel for stock prices of the things that he loves.

Company (Stock Symbol)

Price/share as of Nov 9, 2012

Ford (F)

$10.93

Disney (DIS)

$47.06

John Deere (DE)

$84.29

Leap Frog (LF)

$8.29

Target (TGT)

$62.02

For a fun and simple way to teach your child what a company is and how it works check out "A Day At The Carnival".

Monday, November 5, 2012

The Bounce

From the time he could talk, I taught my son very simple definitions of assets and liabilities. This came in handy for his 5th birthday. Our hometown had recently added a business called The Bounce. They had inflatable slides, bouncy houses and mazes. We had been to several birthday parties there and my son was looking forward to celebrating his 5th birthday party there. The Bounce was strategically located next to Toys R Us. We would frequent it often during the holidays to buy cousins and friends Christmas gifts. One heartbreaking day we noticed The Bounce was closed. Upon further investigation we discovered they had gone out of business. My son took the news hard and personally. He could not understand why they would close knowing he wanted to have his birthday there in just 2 months. Equipped with very basic definitions of assets and liabilities, I was able to teach him a grown up concept that even a 4 year old could understand. The conversation went something like this.  

Mom: "do you remember what an asset is?" 

Son: "puts money in your pocket" 

Mom: "do you remember what a liability is?"  

Son: "takes money out of your pocket." 

Mom: "every company has both assets and liabilities. To go to the bounce you have to give them money. That is how they put money in their pocket. There are also liabilities that take money out of their pocket. They have to buy the bounce houses. They have to pay to turn their lights on and they have to pay the people that work there. Unfortunately more money came out of their pocket than went into their pocket, so The Bounce ran out of money and was a liability."

Son: "oh"

Now I realize this is an over simplification and with a tepid response of "oh" I was not sure if message delivered was message received until about a month later his preschool teacher sent home a note saying my son had taught the class about assets and liabilities. When I inquired the next day, his teacher said another student brought up The Bounce and Sam explained to the class AND the teacher what assets and liabilities are and why the Bounce was a liability.

Kids are sponges wanting to soak up information. I often hear from friends that because my son has a working knowledge of financial concepts that he must be really smart. As his mother, of course, I want to believe this is true and who knows he may turn out to be brilliant, but the reality is he has simply been exposed to a topic that most kids (and adults) are not exposed to. My hope is that he will be smart, but my goal is to be intentional and diliberate in teaching him financial concepts so where ever life takes him he will be smart about money.

I have looked for a developed program, ciriculum, or at least educational videos to teach kids about money, but I found very little. I have discovered there are many opportunities day-to-day life presents to teach us how money works. Because of this, we have decided to document our learning experiences through inexpensive electronic children's books that will teach financial concepts even a 5 year old can understand. Our goal is to peak the interest of children, lead them to ask questions, and bring out the entreprenueral spirit in them. Check out A Day At The Carnival and begin the journey with your child.

Thursday, October 25, 2012

Making Money is Making Money...Right?

We tend to focus on “making money” to become wealthy, while necessary, it is only one small piece of the pie. Much more important, is the type of income you are generating and how you spend your income.  Before we can dive into income we need to define wealthy so we will know when we have achieved it. 
 

WHAT IS WEALTHY?

 
I have heard many definitions of wealthy, most of which are complex and require a financial dictionary to understand. To me, wealthy simply means I have more income from assets than I have in total expenses. In other words all of my expenses are paid for with the income collected from assets. This is a concept I was first exposed to reading Rich Dad Poor Dad 10 years ago and it resonated with me at the time and has stuck with me. In this definition my expenses drive my need for income. If I have very low living expenses, say $1,000/month, then I only need $1,000 from income each month to be wealthy. On the other hand, if I have extravagant taste, fancy cars, a big house and expensive vacations I will need a lot more income from assets to cover my expenses.
 

TYPES OF INCOME

 
To fully appreciate this definition of wealthy you need understand that there are 3 types of income.
 

Stick with me, sounds complicated but we are going to break it down so that even a preschooler or elementary student can understand it. Earned Income is money you make for performing a task or service. It is the money you work for. Your paycheck. Your allowance for performing chores. Money for mowing lawns. Lemonade stand money. The critical distinction is that if you are not present to do the work the income stops. If I do not mow lawns tomorrow, I will not get paid. If I do not sell lemonade, I will not make money. It is what most of us spend our time trying to achieve and what we help our kids obtain, however based on our definition of wealthy, regardless of how much earned income you make you can never be wealthy if this is your only source of income.
 
The other two types of income, Passive and Portfolio, is the money you receive regularly from your assets. Rather than drawing a distinction between passive and portfolio income, I want to draw a distinction between capital gains and cash flow income. These are the two ways to make money from assets. Capital gains come from buying and selling assets. For example if you buy a piece of silver for $25, hold it for a year and then sell it for $45 dollars your income is capital gains. The same would go for buying and selling real estate, stocks, bonds and businesses. While you can make big chunks of money from capital gains, it is not regular or predictable. Cash flow, on the other hand, is the regular money you collect from assets you own. For example it is the money you make on rental property, the quarters you collect from vending machines, the dividends you make from stocks, or the dividends you make from a business you own. It is more predictable and easier to plan for and should the primary income you try to achieve. I like to invest for the cash flow to pay the bills and the capital gains are “gravy on top”.
 
Now that we know they different types of income, let’s identify how you should spend each type of income your make. Earned income, once spent, is gone forever unless we get up tomorrow and go to work to earn more. This cycle is often referred to as the Rat Race. If this is how you spend your money you will wake up every day working for money. In order to become wealthy we want the money to work for us. In order for money to work for us we have to buy assets. We use EARNED INCOME to buy ASSETS. The assets will continue to produce money, even when we are not there. Now the money is working for us. We use PASSIVE and PORTFOLIO INCOME to pay for expenses (i.e. toys, nice cars, etc.) and to buy more assets.  
 

APPLYING IT AT HOME

 
Our son set up a lemonade stand on national lemonade day in May. His net profit (what he made after his expenses) was just shy of $150. With that money he tithed to his church and used the rest to buy a gumball machine. He put the gumball machine in a local restaurant. It was difficult for him not to immediately buy a great toy, but for his patience, he now collects quarters from his gumball machine every two weeks. Of that money, he tithes 10% to the church, saves 25% to buy more gumballs and spends the rest on whatever he wants. If he continues to buy machines and grow his business he will grow the amount of cash flow he makes each month and one day will have a business he can sell (capital gains). He will be able to use that money to invest in a new business or other assets. With an understanding of how money works, you can equip your children to avoid the rat race all together. Something that is unheard of in today’s society. What are you doing to give them the gift of financial freedom? Please share your thoughts and ideas here for the benefit of all us parents trying to equip our children.
 
For more on teaching your child about income, what it is, and how to apply it in their daily, check out the eBook A Day At The Carnival on Amazon.com. Subscribe to this blog our like on Facebook to be notified of future posts.