Have you ever learned something and thought, the rest of the world probably knew this for most of their lives, and I was today-years-old when I figured out about it?
We all have. Because there’s a lot to learn. Some big things are going to slip through the cracks, and depending on our circumstances, there are some things that, by pure chance, we will never come across, even if it seems like everyone else already knew it.
I started thinking about these things, and it doesn’t really matter which random facts we all know, but it does matter that we learn the wisdom needed to live and serve the world well. Since we can’t turn back time (I know, Cher, if only…), we can do the next best thing: teach our children.
I’ve compiled some of the best wisdom I’ve learned that doesn’t seem to be common knowledge. The things I wish I had known earlier. Things that will make your kids wealthy in every sense of the word.
Some of these are purely financial concepts, while others are more like life lessons, but they all apply to everyone. And the best part is, you’re the parent so you get to decide which ones to teach your kids. Let’s get started…
1. Mindset is the Key
The primary difference between the wealthy and those who are financially struggling is mindset. This is such a big topic that I was actually nervous to write this section because I was afraid I couldn’t do it justice. I finally accepted that I needed to write it whether I could do it justice or not.
Talk to people in different socio-economic classes, and you’ll see how true this is. Most often, it comes down to accepting responsibility. If someone is willing to accept the fact that, regardless of the cards they were dealt, they are the only one who can change their finances, then they start to do something about it. It’s hard to do anything about it if you’re waiting on someone else to do it for you, or if you just choose to complain instead of act.
I understand that some people need help. I get that some people will have a much more difficult time with their finances than others. You may want to fight for change in that area, socially and/or politically. That’s perfectly fine. But when it comes to you and your kids, all you can do for now is work to change your own finances. And you have to start where you’re at, without blaming anyone else because blaming others for financial problems isn’t helpful. Even if it’s 100% someone else’s fault, blaming doesn’t change anything.
Any sort of entitlement attitude will not serve your child. Sometimes, especially with society, entitlement can be a trait you have to train out of your children. It starts as early as the first time you hear “that’s not fair” out of your kid’s mouth. That’s a teachable moment. That’s an opportunity to explain how they have to decide what to do with things not being fair because things will never be fair.
We’ll talk more about mindset throughout other points below…
2. Buy Assets, Not Liabilities
In any good finance book, you’ll learn that wealthy people buy assets and poor people buy liabilities. That’s actually the main difference between the two groups. If you spend your life buying primarily assets and minimizing liabilities, you’ll become wealthy by default.
This is a mindset. If you get your kids into the mindset of focusing on assets over liabilities, half the battle for their financial success is done.
So what is an asset and what is a liability? I like to keep the definitions simple: an asset puts money into your pocket, whereas a liability takes money out of your pocket. This doesn’t have to be literal, it can include things that increase in value, even if you don’t actually get cash from it. And a liability can “take money out of your pocket” in many different ways.
Is a House an Asset?
There’s been a lot of controversy over whether a house is an asset or a liability. While I think much of that controversy has been a semantics battle, I do think it’s important to talk about it. In my view, an investment property is definitely an asset. Your personal home is more likely a liability unless you pay cash for it. Even then you still have costs that take money out of your pocket, but if you paid cash, you don’t have to worry about paying 3x the value of your home over a 30-year period.
How do you know you’re on track and doing well with your balance of assets and liabilities? You simply track it. You measure it.
Which brings me to my next point…
3. Measure by Net Worth
Don’t measure your wealth purely by the size of your home, or your savings account, or even your IRA. Never measure by how much stuff you have or how nice your car is because you’re basically going backward at that point. Measure your wealth with your net worth.
How do you calculate net worth?
Assets – Liabilities = Net Worth
It’s that easy. So if you have $20,000 in a retirement fund, and you’re $5,000 in credit card debt, you have a net worth of $15,000, and a very easy-to-calculate financial life. If your home is worth $150,000, and you owe $100,000, you have a net worth of $50,000.
Be sure to include everything in your net worth:
- Checking accounts
- Savings accounts
- Real estate
- Personal property
I’d be careful with personal property — I only track the value of our vehicles and I heavily lowball that figure so I don’t have to keep making it less every two days on my nerdy financial spreadsheets.
I know it may seem like I’m harping on having a lot of wealth, but I’m not. Sound financial decisions make it so your children can live a better life. I’m not teaching this stuff to my kids just to get them rich. I want them to understand these concepts, and use them strategically, but I will have failed if they grow up to love money. That brings me to…
4. Time is More Valuable Than Money
This is an old adage, but I’ve seen a lot of click-baity articles recently trying to prove it wrong. Well, not really, but the titles of these articles would make you think they were. They start with something bold like, simply, “money is more valuable than time,” and then go on to explain how you need money to do things in life, and if you don’t have money life will be hard, etc.
Look at the majority of the world’s richest people and the top CEOs of the largest companies… they have money. What many (if not most) of them don’t have is happiness, strong marriages (if still married at all), and time (for self-inflicted, and usually greed-driven reasons).
Simply put though, between time and money, the one you can’t earn more of is more important than the one you can. Sadly, it seems to take around 10 years of our adult life, on average, to learn this. We work hard, rarely see our family, and then wake up one day and realize the world has been going on around us for the last 10 years while we were living and re-living Groundhog Day at work… always trying to earn more money.
Focus more on living, and spending time with the people you love, than on money. It’s that simple. I’ve never known someone who achieved happiness by chasing money, just like I’ve never known someone who achieved happiness by chasing happiness.
And please stop clicking on clickbait. Moving on…
5. It’s Always Better to Not Have Debt
I won’t beat the debt topic to death… because I already did that here. I think we all agree that revolving credit card balances are bad, payday loans are a scam, and we shouldn’t have car payments if we can help it (And we can! We can always help it!). I want to focus more on what’s known as “good debt” to so many people.
Calm down, debt-lovers. I’m not saying that this “good debt” stuff is all bad, but I do want to make sure your kids are educated on what it really means.
I’m also not going to say that your child should never have debt. It’s going to be their decision. I’m just saying when you have the option to do something with debt, or without debt, you’ll always be better off to not owe anything to anyone. Many people use debt as leverage to buy things like real estate at a much faster rate. The problem is, it can be a risky business.
Think about the success-turned-failure stories you hear about former millionaires who lost everything. It’s because of debt almost every time.
We’ll stick with the real estate example. It’s true that you can use leverage and buy more houses faster. You can buy an investment property, and then use the equity to take out another loan, and you can continue this process as long as you keep equity in your homes.
The problem here is that you have to hope nothing drastically changes. All it takes is one huge downshift in the economy, or your specific housing market, to totally take out your portfolio. It happens all the time. It’s true that the Bible says the borrower is slave to the lender 1, and these types of scenarios show exactly how true that is. That doesn’t mean it’s a sin to be in debt, but it is God’s warning against it.
An even bigger concern than the slave thing (which is a big concern) is the greed factor. Ya know, greed, one of the most mentioned sins in the Bible, yet one of the least discussed in many churches. When you start to see how much you can get with debt, it’s easy to get greedy.
Think about two real estate scenarios, since real estate and business ownership are the two main areas people get into crazy amounts of debt. I’m going to keep these scenarios extremely simple to show my point. I won’t cover maintenance costs, taxes, unexpected events, and the like. And I’ll keep the numbers simple and rounded.
Scenario 1: Leverage
Let’s say you buy an investment property on a $200,000 mortgage, with a $2,000/month payment. And we’ll say you receive $2,200 in rent for this home. While you have the loan, you have a surplus of $200/month. Once you have 20% equity in your home (meaning you still owe $160,000), you use that equity to take another $200,000 loan out and receive another $200/month surplus.
You now have a $400/month rental income, and you’re $360,000 in debt. You don’t own $400,000 worth of real estate, you only truly own what you have in equity, so you own the $40,000, but you’re responsible for $400,000 of property. Your total rental income is $400 at the moment.
Now let’s look at another option…
Scenario 2: Single Mortgages
In this scenario, you still buy the first home. You pay the same amount and receive the same surplus. But instead of taking out a second mortgage, you work really hard and pay the first home off entirely. The entire time, you’ve had the extra $200/month to put towards the mortgage, and you’ve been paying much more on top of that to get this house paid off.
Once it’s paid off, you now have $2,200 in monthly rental income and $0 in debt. So now you buy another home on a mortgage. With your second home, you receive the same $200 surplus to put towards paying this home off, except now you have an additional $2,200 on top of that to pay down your second home’s mortgage.
Even if you put $0 down on your second home (which isn’t likely to be an option anyways), you now own $200,000 of real estate, and you receive $2,400/month in rental cash flow. If anything were to happen, you have a huge amount of equity in your portfolio to work with. And a much higher net worth than in the first scenario.
This scenario is like compound interest: in the beginning, it’s a slow-go, but as it builds up, it becomes huge. In 20 or 30 years, you could be sitting with six or seven homes for a total of $100,000 in equity (aka net worth), or you could own three homes, with a mortgage on one, for a total equity of over $600,000.
Sure, the math isn’t really this simple, but I hope it at least makes you think about proposing options like this to your children.
One More Scenario
The third scenario would be like the second, but saving and paying cash for the first house so that you’re never in debt. This is possible, and your kids could do this and be debt-free forever.
It’s not common to do things debt-free, but it’s always going to be the least stressful, and most long-term beneficial plan. I’m not talking about who can make the most money, I’m talking about a plan where your financial well-being isn’t dependent upon a bank.
None of these options were meant to be the best for everyone, but it is important to know that your kids have options. If you want to create more options, free up your time like we talked about in this last point. Want to free up your time? See the next point!
6. Outsource What You Can
If you’re not good at something, or if you prefer to focus on a specific thing, outsource the other stuff. This applies to business owners and individuals. There are so many inexpensive services that allow you to outsource tedious tasks. This is often a great first step before having employees, and it’s also a great thing to implement when you do have employees.
Why outsource? See #4. Outsourcing is a way to get your time back and keep growing your company or side hustle. If you can do a quick calculation and determine that outsourcing a certain task frees up enough time for you to do something more productive with that time, then look into outsourcing as an option.
A basic example is lawn care. If you love to mow your grass, then do it. Some people find it soothing and relaxing. If you don’t like it, and you can find something more valuable to do with that time, outsource it. Now take this concept to other areas of your life.
This is a good idea to instill into your children. Our time is finite, so if we want to do big things, we have to come up with ways to “create” more time and margin in our lives. Getting into the mindset of outsourcing is a great first step towards getting that margin.
7. Insure What You Must
This is probably the most practical point here. So what should you insure? Anything you can’t afford to replace. And that doesn’t just mean physical possessions.
In 2011, a good friend of mine lost several rental properties in a bad storm. He did the debt-free thing so well that he owned all of them in full. The problem was, when you own your home, you don’t technically have to keep insurance on it. He chose not to. It turned out to be a mistake.
He couldn’t afford to replace the homes, so he lost thousands in monthly income overnight. We can’t always take on the “that could never happen to me” mindset.
If you can’t afford to replace it, insure it.
Think about all types of insurance:
- Car Insurance – Obviously full coverage is required for cars with a loan on them. Otherwise, liability is typically your best bet. I think this insurance is obvious.
- Home Insurance – We will always keep some type of insurance on our home. You never know what could happen.
- Health Insurance – Most people can’t afford to replace their health. You can take your vitamins and live a healthy lifestyle, but again, you never know when some crazy medical bills could hit you.
- Life Insurance – Until you’re at the point that your wealth covers itself, you need life insurance. If someone depends on your income in any way, this is a must. Again, that is, until you can afford to replace your income with your wealth. At that point, cut the life insurance.
- Misc. Insurance – Disability is needed in a similar way to life insurance. Umbrella insurance is great for situations where you want extra coverage. You can insure anything. For example, Dave Ramsey has insurance on his voice. Seriously, anything.
Insurance is something we all hate to pay for, but we all need in one way or another. If you pass down the “insure what you can’t afford to replace” mindset to your kids, they won’t run into major setbacks without having a way out.
There are so many things to teach our kids, and it feels like we have so little time. We can only do what we can do. That seems redundant, but we all need to be reminded of it, because we all tend to feel guilty for not doing more.
When we love our kids enough to teach them the life lessons we weren’t taught, we’ll begin to see generational progress. Use teachable moments in life, and give your kids a great head start. But don’t stress out making sure they know every possible thing they need to know.
If you’re a loving and caring parent, and you practice intentional parenting, your kid will do great things. That’s all it takes to be a good parent. I’m not perfect. You’re not perfect. Our kids aren’t perfect. But if you’re intentional in parenting, you’re in the minority, and you’re doing it right. Heck, consider adopting or fostering, because we need more parents like you!