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".

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.

The Best Time to Learn About Money

I am often asked in jest what I would say if my son told me he wanted to be artist, cowboy, or any other stereotypical “lifestyle” career that is perceived to be accompanied by low pay.  Counter to what many assume, I am not trying to dictate or force a career path upon my son by teaching him how money work and financial concepts.  My goal is to provide him a sufficient financial education that when the time comes he can make a decision on career path with adequate knowledge.   

Most of us, including myself, made some of the biggest decisions in our lives when choosing whether or not to go to college, selecting our first job, and electing our lifestyle once we were “on our own”, such as, what car to drive, purchasing a career wardrobe, buying a house, etc.  What society teaches is that you should go to college, get a degree, find a safe secure job, buy a house as an investment, buy the car you “deserve”, and buy a killer wardrobe to look the part for your newly obtained job.  The result, $200,000 in debt in the blink of an eye, and that assumes you got through college without student loans.   Thus begins the rat race.  The next 20 to 30 years, if not the rest of your life, will be spent paying for those decisions and digging out of that hole.  If we had learned about how money works, the different types of income, the benefits and draw backs of each type, and the financial consequence of those decisions, we may have elected very different decisions.   With a solid financial education, we may have chosen exactly same decisions, but we would not have been surprised by the consequences of those decisions.   

My goal in teaching financial education is to empower people to make sound decisions based on knowledge.  The best time to make those decisions is before you find yourself in debt $200,000+. Since most of those decisions are made before we are 25 years old, I focus on educating children.  What are you doing to equip you and your  children with a sound financial education?

What Does Your Kid Know About Money?

Last week, my son and I were invited to teach his first grade class about money. Based on his homework from previous weeks I knew they had been learning about recognizing the different denominations of money, their worth, and how to count it. I asked my son what he thought we should teach to his classmates and he said, "How money works. We haven't learned that at all". We came up with a fun way to teach the kids how money can work for them by teaching them about assets. Now, before your eyes glass over, hang in there because believe it or not there are funs ways to teach what is perceived as a boring, useless and complicated concept to first graders. It can be done in a fun way that will have a lasting impact on how they think about money. If you are interested in learning more, I have laid out the activity we used so you can adapt it and use it as well.  Teaching Kids About Money Class Activity

The first question I asked the students was, "Where does money come from?". The answers I got were "the bank”, “mom”, “from credit cards”, and my favorite, “when you buy something and pay with money, they will give you money back". Admittedly, I chuckled a bit at the answers. They were cute and innocent, but later in the day I began to think about how kids' answers to questions are simply a reflection of what they have been exposed to. For example, my son is a big fan of a pbs cartoon, Wild Kratts. The premise is two brothers save animals from bad guys and in the meantime they teach all about the animals they are saving. Consequently, my son can regurgitate all types of animal trivia, such as, how fast and far a cheetah runs, what a stoop is, the loudest mammal in the world, how long a caterpillar remains in a chrysalis until it becomes a butterfly, and the list goes on and on. He also loves art class, which I attribute to an engaging teacher that presents the information in a fun and creative way. He frequently comes home with stories about artists they studied, the artist’s famous works, and the different experiences they had during their life. As a parent, you have undoubtedly experienced similar things with your child. As I reflected on this, it hit me like a ton of bricks; I had presented the concept of money to 21 students, of which none had been deliberately taught anything about. The irony of it is that money will impact every child in that room, and each person will have to manage money or be managed by it. All of their answers came from what they had seen or experienced but none of them had been intentionally taught about what money is, where it comes from, how it works and what impact it will have on their lives. On the flip side, had I asked them questions about animals, the state flower, the Mona Lisa or a number of other topics, they could have provided me answers. To be clear, I am not discounting this information, and believe that children should be exposed to and taught about many things. What struck me so hard was that money will impact every child in that room no matter what they go on to be, and their only exposure to it entails recognizing different denominations and counting it. 

The good news is that children are sponges, eager to learn and soak up information. Recognizing that financial education and wealth creation will not be taught in school makes it incumbent upon parents to be intentional and deliberate in teaching their kids to be financially savvy. Undoubtedly, our kids will learn how to interact with money, but left to its own accord, it will be shortly after graduating from college with student loans, a new mortgage, car payment, and the bills that go along with it. They will be in the rat race before they even know what it means, and many will spend the rest of their life trying to dig their way out.

My hope is to increase your awareness about the need to teach our children about money, and to help provide you with tools and ideas to do it. My intent is not to have all our children be filthy rich entrepreneurs, as this may not be their life’s plan nor desire, but rather equip them with the information to make educated decisions about money and its impact on their life.

The Gift of Disney

Having young children, we are in a season of life where we are invited to many birthday parties. Kid parties are much more complicated than they use to be. What happened to the days of having your best buddies over to the house and playing for a few hours? Now days it involves renting a venue that can keep the kids entertained for a few hours, providing food and paying for the entertainment, and supplying gifts to all the attendees.

This is the perfect recipe for large birthday parties. What kid wouldn't want to play games at Chuckie Cheese, brave the foam pit trapies, or defend their lazer tag title? On top of that the birthday boy goes home with more toys than he or the parents know what to do with!

Our challenge and opportunity should be to find a meaningful gift. Disney is an amazing company that has made millions of movies and toys for kids for many generations. They have made one gift that never goes out of style, provides an opportunity to teach kids financial concepts they are otherwise not exposed to, and can provide ongoing income. I am not talking about Mater, a Disney Princess, a movie or some other toy that will be broken, duplicated or soon forgotten about.

The best gift Disney ever made is Disney stock. Next time your shopping for a birthday gift, think past toys, dolls, and remote control cars. Leave those gifts up to the others and think about giving a gift that amidittedly may be underappreciated at the time but can set a child on the right path of achieving financial freedom.  

Is that an Asset?

Which of the following is an asset?

a.       Lemonade Stand

b.      Gumball Machine

c.       Your House

One of my favorite definitions of asset is it puts money in your pocket even when you’re not there.  It is easy to remember and easy to apply.  Let’s walk through each of the options listed above.  Let’s start with your house.  Many American’s consider their home their greatest asset, but according to our definition, your house is not an asset.  As a matter of fact, it is a liability.  Every month it takes money out of your pocket.  Even if debt free, you still have maintenance, utilities, and insurance to pay for.  While your lemonade stand can make you money, it only makes you money if you are present working it and selling lemonade.  Your lemonade stand is a job, not an asset.  The gumball machine puts money in your pocket whether you are there or not.  It is the only asset of the three.

So how do you turn your home and lemonade stand into an asset?  Rather than running your lemonade stand yourself, you set up several around town and hire employees to run them for you.  This converts the job into a business.  The house can be a little trickier, but personally we have made an attempt at it. We rent out our barn apartment and some of our horse stalls to bring in monthly income.  While it doesn’t cover all the expenses related to the house it does reduce the impact of the liability.

Brainstorm with your child how she can turn things around her into assets.  To get the creative juices following, here are some things we have brainstormed in our house to help our son build his assets:

1.     He used his earning from last year’s lemonade stand on National Lemonade Day to purchase a gumball machine, which he then placed in a local business.

2.    We wrote and self-published an eBook on Amazon.com to teach children the concept of income.  You can check it out here A Day At The Carnival

3.    He has taken proceeds from his vending machine business to buy baby goldfish and grow them in our horse troughs to about 6 inches long and then sells them to others to put them in their water trough to eat the mosquito larvae and keep algae down.      

Do you have examples you can share?  I would love to hear them! 

Welcome to Financially Savvy Kids

Welcome to Financially Savvy Kids.  Our goal is to equip parents and kids with knowledge about how money works.  Public education does not teach our children what they need to know about money.  Society teaches them to buy what they want through debt and then work hard to pay for it. This vicious cycle typically starts before they are out of college and unfortunately, once in this cycle it can be very difficult to climb your way out, much less get ahead.  Breaking the cycle, once in it, takes great discipline.  Again, a concept counter intuitive to society’s teachings.    We want to educate kids about money BEFORE they fall into the trap.

For instance, you were probably raised with the idea that you should work hard to get good grades, go to college and get a high paying job. I would venture to say most of us want that for our kids today.  This path jump starts the cycle mentioned above and puts our kids at a great DISADVANTAGE. 

1.  As a reward for all their hard work and for securing that high paying job, they will buy a house, get a new car, and acquire a new wardrobe that will make them look and feel like a million bucks.  They are feeling pretty good about their money management skills because they have two new “assets” in their house and car, and they even throw a little money into the company 401K.   In a matter of a couple of months their entire paycheck is allocated to expenses, many of which they wrongly believe are assets, to support their new found and richly deserved lifestyle.  And so the cycle begins.  The ground work is laid for a lifelong pattern of dependency. 

2. They are thrown into the highest tax bracket and once the impact of that is realized, they begin spending money on things they think are assets to reduce their tax bill, such as golf clubs, boats, R.V.s and a second home.

3. All creativity and any entrepreneurial spirit is squelched by the realization that without the pay check they have grown accustomed to, they will  drown in their own expenses, and they are lured into believing working for a paycheck equals security. 

I am getting cold sweats writing this, because it is the exact path that I took.  About 7 years into my professional career and shortly after I had my son, I decided to take on the daunting task of breaking the cycle and replacing w-2 income with investment income.  It has been a long, slow and at times scary process.  I am not seeking a path of lavish luxury and wild riches.  What I am after is even better...financial freedom.  The ability to spend my time with my family, doing the work that I want to do, having the financial capacity to give to my church far and above my ten percent tithe, and to give my son a different example than what he sees among  most of society.  I want to teach him how to make money work for him rather than being a lifelong slave to money!

Through this blog we will share fun and easy ways to teach our kids about making money, spending money, creating wealth and giving back.  We hope to create a forum where you will share what you are doing to teach your kids about money for the benefit of our readers and together we can pull out the entrepreneurial genius in our children!