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How Do You Teach Your Family About Finance or Business?


Parsad
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After reading the post below by SharperDingaan, I thought this would be a very interesting and useful topic.

 

I manage the family investments as a sideline, & am training 2 nephews in the darkarts of finance - hence the 'we'. Part of their training is that they can each make a BS/PL 'dance', & that they each have to present a new idea on the back of an envelope every quarter-end. If it survives the 20 questions, we put real money on it (a very small allocation from the main portfolio) 

 

They're at the table whenever the major decisions are made, & are there to ask questions & learn by osmosis. Once/year they have to present a business plan to a small businessman, buy some inventory, & then help in selling it through his/her store (preferably something edible in case they screw up)  Real life experience, with 20% of their gross going to charity and another 20% going to travel. Taxation.

 

They also read this board as well

 

So what do you all do to teach family, children, friends or the general public about finance and business?  Cheers!

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I'd start with a balance sheet, and maybe a P&L, or some budgeting.

Get them to manage their balance sheet and grow the asset base responsibly and effectively.

 

I'm not sure where I'd go from there, it depends what you want for them and who they are.

If they're young, maybe you could get them to explore their interests. Maybe they don't want a career in finance/business ... maybe they want something else, like sport.

Or if you want to push them in a certain direction, then give them some money to play with and see how good they are at growing it/investing it.

Or get them to move out and pay the bills, that will really teach them.  ;)

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I've got three kids, ages 6, 4, and 2.  They are way too young to understand the concepts of common stock, but I do talk to them very generally about "owning businesses."  For example, if we go to a Dairy Queen, I explain to them that Dairy Queen isn't just a restaurant, it's a business that is trying to make money by selling ice cream for more than what it cost them.  I also explain that we own a very small part of Dairy Queen.  At some point down the road when they ask how we own it, that's when I'll try to explain the notion of stocks.

 

I also encourage them to be aware of all of the businesses around them.  We were standing outside a pizza shop one day and I asked them, "How many businesses do you see?"  They pointed out the obvious ones quite easily - the pizza shop, a gas station, etc.  Then I pointed to the apartment building across the street and explained how somebody owned that and used it to make money.  I also pointed to the pizza shop itself and said that maybe somebody owns the building and rents it to the pizza guy.

 

In doing this, I'm trying to have them develop a sense that business is all around them.  When they get a little older, I'll slowly start emphasizing the benefits of being a business owner (in any of the many forms).  And then eventually, if their interest holds, I'll start to explain why some businesses are better than others and how much one should pay for them.

 

By the way, I'm very proud to say that my two oldest kids know who Warren Buffett is and can spot him on a magazine cover.

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My eldest (12 yrs.) started a personal balance sheet at 11.  On it, he lists all his belongings, including some stock gifted to him.  He marks his assets to market on Dec 31 each year.  As an incentive, if he does this and if he writes a letter explaining how the year went, he gets paid a bonus of 10% of any increase in his net worth.  He gets a really crappy allowance but can earn money by doing odd jobs around the house. 

 

He is beginning to see the difference between depreciable and appreciable assets.  He struggles, though, with how a stock price represents the health of an underlying business and how they do not necessarily correlate in the short-term.  But, then, who doesn't?

 

Last year, he earned enough money to invest on his own.  He chose common stock.  In making his decision, he asked many of the right sort of questions.  I acted as his analyst. 

 

My next child has also started a personal balance sheet and will go through the same motions.  We will do this for all of our children.  My reasoning is that no matter what they eventually choose to do, there is no reason to be money-stupid.  Even a little savings can add up if dealt with responsibly.

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Guest Broxburnboy

My eldest (12 yrs.) started a personal balance sheet at 11.  On it, he lists all his belongings, including some stock gifted to him.  He marks his assets to market on Dec 31 each year.  As an incentive, if he does this and if he writes a letter explaining how the year went, he gets paid a bonus of 10% of any increase in his net worth.  He gets a really crappy allowance but can earn money by doing odd jobs around the house. 

 

He is beginning to see the difference between depreciable and appreciable assets.  He struggles, though, with how a stock price represents the health of an underlying business and how they do not necessarily correlate in the short-term.  But, then, who doesn't?

 

Last year, he earned enough money to invest on his own.  He chose common stock.  In making his decision, he asked many of the right sort of questions.  I acted as his analyst. 

 

My next child has also started a personal balance sheet and will go through the same motions.  We will do this for all of our children.  My reasoning is that no matter what they eventually choose to do, there is no reason to be money-stupid.  Even a little savings can add up if dealt with responsibly.

 

I recall reading a book on the Rockefeller family, and this is precisely how the original John D Rockefeller, educated his children (the famous 6 Rockefeller siblings.. Nelson, David etc.). They were obliged to keep a balance sheet and income statement from an early age and were rewarded for performance.

 

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We had all our kids quite young, the last of three born when I was 24 and my wife was only 21.  Neither of us had gotten very far in school at that point and it was several years before we were able to start picking away at our degrees.  We both finished school but not before our kids were in high school.  In the meantime, we worked a lot of crappy jobs and were rarely able to amass enough funds to do anything with, so investing wasn't anything we knew much about ourselves, much less enough to teach our kids.

 

We did, however, learn an awful lot about frugality and self sufficiency.  We learned that you can actually be quite comfortable if you live in such a manner as to not need a lot of money, so that your time is much more enjoyable because you're not slaving it all away always chasing a buck.  My parents and siblings all live in far nicer houses and have far nicer things, but I don't think they've ever had a fraction of the fun we do.

 

Interestingly, my nieces and nephews, who grew up in beautiful suburban neighborhoods with all their needs met and the knowledge their parents were investing wisely, not only seem miserable but frankly I think they're all quite lazy.  My kids may look like a bunch of unkempt hippies but they're all in fantastic physical condition, they all know how to grow food, how to cook great meals, how to maintain a house, and what to do if the power goes out of the well goes dry.  Now all in their early 20's, two of them will graduate with hard science degrees this coming school year.  Both have studied abroad and accumulated extensive experience in their respective fields.  Other than a bit of travel support I've never put a dime into either of their educations as they did it all working part time and earning scholarships.  The oldest has been swinging hammers since he was a tot, went into the trades right out of high school, and will earn his contractor's license soon.

 

The most important thing I taught my kids about money was to just hang onto it if you don't have to spend it.  Use it to acquire things that are really useful to you, things that will move you forward on the chessboard.  Don't shy away from having fun or doing anything you want, but make those desires work for you so they become assets rather than liabilities. 

 

It's only in the last few years I've finally been able to start putting money to work, and thankfully I've got a good friend and adviser who's been doing this his entire life so, despite a few missteps related to the collapse last year, things are working out (go FFH!) and I've learned an awful lot from him and examples set by those who post here regularly.  We've talked to our kids a lot about the whole process ever since we started investing and are confident that as they begin to earn once they're out of school, they'll continue to live well within their means.  The particulars of finance and value investing will have a lot more context for them at that point and I imagine we'll spend a lot of time talking about it going forward.  In the meantime I'm just happy that if the sh!t hits the fan, they're all competent enough that they'll never starve, and will always thrive since they'll be the ones who know how to provide what people really need.

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We think that Uncles should only steer, & not force any given calling.

The nephews live across the pond, are aged 11 & 14, & are free to choose whatever they’d like to do.

 

But as a minimum, they will each take the following life skills with them.

 

Wealth & privilege: Wealth is who you are as a person, what’s in your head, how you act amongst your peers (of any age), and how others perceive you. Financial wealth is ashes-to-ashes within one generation. If you had to start over again tomorrow, with nothing & someplace else, would you thrive?

 

Ethics: Live modestly, do the right thing, do no harm, & help others. Buy a bum coffee & a meal – but if somebody crosses you, go to the mat. If I read about what you’ve done in the papers tomorrow, will I be pissed?

 

Ownership: Joint bank account & they write the cheques – mom/dad & I as counter-signers. From that account they’ve bought 100 shares of Manchester United, & units in a music royalty trust. A home football match is a shareholder meeting, and 700 plays on a radio station is a 1p distribution.

 

Heroes & media: The bios/histories of Suleman, Sir Francis Drake, CJ Rhodes, JP Morgan & the odd Mafioso are all required reading. All were bastards, but in their time they were amongst the best at what they did, & the winner gets to write the press.

 

No bubble: Experience how different kinds of businesses are run. Learn how to make friends outside of your circle. Deliberate in your face exposure to life events. Backpack travel abroad once every 2 years. I’m informed that Cairo’s Khan el-Khalili is brilliant.

 

Interesting side-effects:

 

There’s always a swarm of strong minded & fiercely protective girls around these two. I’d like to think their easy leadership is starting to set them apart.

 

The glamour job is ‘Financial Regulator’ ….  but in the Drake/Rhodes/Morgan mold. Steal the money back with a privateering license, 10% personal bonus, & 10% to the underworld ;D

 

SD

 

 

 

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My Kids are 8 & 9, two years ago, when they were 6 & 7, I started explaining to them about businesses, what they are, how they make money (satisfy a human want or need), and how it is possible to not only start your own business but own some small part of businesses that already exist (stocks).

 

At this time I started giving them allowances for doing work around the house. Every week we give them a certain amount of money and they divide it into 3 cups, 1) The Save Cup, 2) The Spend Cup, 3) The Share Cup.

 

The Save Cup is money they save up to buy stocks.

The Spend Cup is money they save up for any other things they want to buy.

The Share Cup is money they save up to donate to charity.

 

We put about 45% in the Save cup, 45% in the Spend cup and 10% in the Share Cup. I explained to them that these are the three things you can do with money. Save it, Spend it, Share it.  When they each had about $1000 in their save cups (not only from allowances, but birthday and Christmas money etc..) I opened a UTMA brokerage account at firstrade.com for each of them (only $6.95/trade) and discussed what companies they might want to invest their money in and why.  I let them pick their own companies out of a list I provided for them.  My son picked KO, DIS, MVL. My daughter picked KO, DIS, MAT.  (they both also own SNS now also).

 

I show them their accounts occasionally and show them how the dividends are reinvested (and try to explain what a dividend is).

 

You'd be surprised how much a child can understand if you are patient with them, after all ownership is something children just know and understand instinctively. As Frank Zappa said:

 

"In every language, the first word after "Mama!" that every kid learns to say is "Mine!" A system that doesn't allow ownership, that doesn't allow you to say "Mine!" when you grow up, has -- to put it mildly -- a fatal design flaw."

 

At times they get excited about saving or sharing and want to put more money into either their "Save Cups" or "Share cups" and nothing into their Spend Cups. I let them do this, but when they want to buy something and want to put everything into their spend cups I let them put more in their spend cups for a week or two but something always has to go into the other two.

 

As for the Share Cups, once a year in December we decide on a charity and donate the year's worth of Share money to it.  The first year it was Toys for Tots, we used the money to buy a toy and donated the toy.  Last year we gave the money to a convent who used it to feed hungry children in Haiti.  My great-aunt is a Nun in this convent so we know 100% of the money went for food for the children and she went to Haiti personally to distribute it.  She sent my kids back pictures of the children they had helped, which was really emotionally satisfying to them.

 

--Eric

 

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Don't buy them an Xbox, or else they'll lose interest in business/finance.  ;)

 

THIS! 

 

Probably the most important thing I ever stuck to my guns on, aside from refusing the have cable TV.  Living in the hills and not getting good broadcast TV reception was just a coincidental stroke of luck. 

 

We always read to our kids every night when they were little and without TV or video games they naturally became voracious readers.  Young readers become high context thinkers capable of looking at the world through a variety of lenses, different perspectives, timeframes, etc.  Sure, they're eventually exposed to video games and all the rot on TV, but by then they've got the intellectual capacity to consider it for what it is and they stand at least a fighting chance of continuing to think for themselves.  My wife runs a tutoring center and the #1 issue she deals with every day isn't stupid kids, it's kids who spend too much time playing video games and watching TV so they never develop the brains they have to begin with.

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My children were given an Xbox but they must mark its value to market every year.  They ain't too impressed with it lately.  That and they are not allowed to use it during the school year or on sunny days.

 

I, too, read to my children - even still to my 12 year old.  They have all picked up reading and it is a sight to see.

 

Broxburnboy, I read Titan on John D. Rockefeller but don't remember reading how he educated his children financially.  Can you remember where you read it?

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Broxburnboy, I read Titan on John D. Rockefeller but don't remember reading how he educated his children financially.  Can you remember where you read it?

 

It's been decades since I read that book but I believe it was called simply "The Rockefellers". It was more about the six siblings who were so prominent in business and politics in the Johnson/Nixon/Reagan era than it was about JD.

 

One more thing about the topic however... It is important that all children (and still most adults) be taught to buy assets with disposable income (things that pay monthly income). This is the start of the virtuous cycle (buy yet more assets with the new income) which leads to financial self sufficiency.

Most people do the opposite... they buy liabilities which depreciate or create other liabilities and creates the kind of downward spiral that is just now coming to a head in the economy.

 

Cheers

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Broxburnboy, I read Titan on John D. Rockefeller but don't remember reading how he educated his children financially.  Can you remember where you read it?

 

 

One more thing about the topic however... It is important that all children (and still most adults) be taught to buy assets with disposable income (things that pay monthly income). This is the start of the virtuous cycle (buy yet more assets with the new income) which leads to financial self sufficiency.

Most people do the opposite... they buy liabilities which depreciate or create other liabilities and creates the kind of downward spiral that is just now coming to a head in the economy.

 

Cheers

 

Ah, nice. Never thought about it that way. I've always been taught/thought to buy stuff that appreciate by certain amounts, i.e. capital gain.

You don't have to earn yield necessarily, but high yield begets capital gains anyways, due to more demand by the market, pushing the yield down (in most cases).

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