Some of the core concepts in finance, we learnt pretty late in our life.
How many times have we felt bad that we did not come to know about this earlier? Our kids should not be in similar situation.
For that, we need to teach the financial concepts little buy little from their early childhood.
How can we do that? This episode is to explain that in detail.
Hi. My name is Vijay Mohan. You are watching - Investment Insights.
When it comes to financial concepts, the first thing that we have to teach our kids is "Power of Compounding".
They will be able to understand this concept after they are 7 yrs old.
They should know 3 things clearly, when it comes to Power of Compounding.
1. We should ask them, if I am giving you 1 Rupee and if it doubles 10 times, how much money would you have by the end?
We should ask them to do a rough estimate first. Then we should ask them to calculate using fingers.
2, 4, 8, 16, 32, 64, 128, 256, 512, 1024.
1 Rupee when it double 10 times, it becomes thousand times bigger is the very concept that they need to know.
Next thing they need to know is, first double is just Rs.1, but the 10th double is Rs.512.
They should know well that the compounding will start slowly like this, but will grow exponentially over time.
The third thing that they need to know is, it is same effort to convert Rs.1 to Rs.2 and Rs.500 to Rs.1000.
If they know these three things about "Power of Compounding", they will automatically take advantage of it when they grow.
We should stop at just teaching this once. We should keep reminding these concepts to them whenever we get a chance.
In fact, We should sink this in their mind, so that they should be able to explain these concepts to other kids.
Next thing that we need to teach them is "Savings".
They should know to save the money they get from grandparents, relatives and family friends.
They will definitely ask, "Why should I postpone my purchase that I can do easily now?". Fair question.
So we have to give them a reason for saving the money.
We should make an offer saying that we will double the money that they save by the end of the year by matching their balance.
One year is very short for us. But it is too long for them.
If they don't agree to that one year offer, you can sweeten the deal by making that match double in 6 months.
When they see their doubling 3 times, they will realize the benefits of saving.
Once they realize its benefit, we can start reducing our match %. Instead of 100%, we can reduce it gradually to 50, 40% etc.
All these savings do not have to be physical money with them.
We track our kids savings in a spreadsheet. You can do that as well. Or you can track it in a notebook.
By encouraging savings like this, they learn two things.
1. Money Management. How much money is coming in, how much is spent, how much is saved - all are controlled by them.
By saving, they can double the money. By spending, they get to enjoy instantly. They have to decide which is good for them.
We should not push them to save everything. Some need to be spent now. Some need to saved for future.
They should be capable of making the decision of "Instant Gratification" or "Delayed Gratification".
Another thing that they learn from this savings is "Money working for us".
That is, they will understand that it is not just us working for money, our saved money can work for us and earn as well.
Their money is doubling every year right? From that, they can learn the concept of money working for us.
For this savings behavior to effectively work on them, we should do one more thing. Actually, We "should not".
We should not buy everything that they ask for.
Many parents say, "I grew up struggling. I do not want my kids to go thru the same." and they buy everything that kids ask for.
Some parents go one step further and buy things for kids even if they don't ask for it. There are two problems with that.
1. Our kids will start thinking, "When our parents are getting us everything that we ask for, why should we save? We can instead burn them in fireworks"
2. When they easily get things like this, do you think they can appreciate the value of these? No way.
How would we have treated a cricket bat that we have bought by saving for more than a year?
The same cricket bat, if our parents have got that for us, how would we have treated that?
We would have kept the bat safe in both the scenarios. But in the first scenario, as have personally invested in that, we would be extra careful.
We would appreciate the value of that bat. If we would like to have that ownership in our kids, we should not buy things that easily for them.
We should encourage them to save and buy.
That does not mean that we should have them save and buy each and everything. We should encourage that for things that they are interested in.
If we want them to get exposure on something, then we can buy them to create the interest.
For example, at our home, we bought the first lego to them to develop the creativity in them.
Once they started loving it, we do not buy them new legos any more.
They buy them from their savings and allowance.
When they buy something from their savings, they know the value of it pretty well. They have the motivation to keep them safe.
When they buy something from their hard saved money, and if they end up not using much after some time, they will try to avoid that mistake next time and will think twice before buying anything.
They will learn to differentiate between "Needs Vs Wants". That is, something that they need and something that is not an absolute need, but they would like to have them.
It is important to teach them to appreciate the value of an object like this.
We have seen many failed rich family. When one generation works hard and build their wealth, the next generation do manage to maintain that wealth.
Because they have been thru difficult times when they were kids. They know the value of things.
But the third generation, they would have destroyed the wealth mostly.
There are two reasons for that. Kids not learning the wealth building strategy from their parents and grand parents is one reason.
Second reason is, though they do not know wealth building, they should have at least known the wealth preservation - protecting the wealth they have - without knowing that, they would have destroyed the wealth.
We could be very rich. But if our kids do not know to appreciate the value of anything, they will end up like that as well.
That is why we should not buy everything that they ask for. But we should encourage them to save for that and buy it.
It is better to teach these "Power of Compounding" and Savings concepts before they reach 12.
Financially, even if they don't know other concepts, it is good enough for them to know just these two concepts.
Everything else, they will be able to learn them easily by themselves.
After 12, we can introduce little advance finance topics to them. We can teach them how to think long term.
What would be the impact of the decision that we are making Today in 5 years and in 5 years? They should be capable of thinking that.
For the college degree they are choosing, what is its use in 5 years and in 50 years?
If they are investing on something Today, what is its benefit in 5 years and in 50 years?
Like this, they should be able to see the compounding benefits of each of the decision they are making.
If they are capable of seeing that, they will make right decisions in many situations.
Next thing they need to know is, it is not important how much money we make. But how much we save and invest is important.
Like the book, "Rich Dad Poor Dad" says, we should be focusing on buying assets that can earn money rather than spending money by building on debt.
All people who look rich may not be rich at all, but could be living in debt. We should not get into debt just like them by trying to mimic those fake rich.
Most importantly, they should know that they should not try to impress others with fancy stuffs, but make decisions that is good for their own future.
Next we have to teach them the importance of "Financial Independence".
The should know that, Money is not really a big thing in life. If we have some proper financial planning, we can easily manage it.
We should be able to achieve the financial independence as well. When we achieve that, we will have the luxury to contribute something useful to the society.
We can achieve the financial independence in 4 steps. 1. Develop the knowledge and skills to make good money.
2. Use that knowledge and skill to make money.
3. Save a big chunk of the earnings and invest.
4. Make the income from investment to be greater than our salary.
They should know clearly that if they execute these 4 steps successfully in their life, they will get the freedom to explore other things in life.
When they are capable of thinking like this for long term, they are already half way through that goal. Crossing the rest will not be that difficult.
I have heard many parents saying to their kids - Who is going to enjoy all the wealth that I am accumulating? It is all for you.
It is not a good idea to say something like that to kids. When they know that they got enough wealth from their parents, how would they get the motivation to learn something new?
Instead of saying that, we should try saying - If I can achieve all this, imagine how far you would go.
That will give a good boost to their confidence and motivation.
They will be totally independent of us in the future and will reach greater heights. As parents, nothing else will make us more prouder.
All these are basic things that we should hae taught our kids.
Other than these, we can teach them about - what are all the assets in the market? What are their risks? How much return can we expect from them? What are the compounding benefits of that return?
These topics need some maturity in them to understand better. We can teach them after 15.
Actually, it is not necessary for us to teach them. They can easily learn the financial topics in internet.
They can also subscribe to this "Investment Insights" channel and start watching each episodes. I have published all the episodes starting from foundation.
It is good enough for them to watch all the episodes in the order they are published.
That by itself would build a strong financial foundation for them.
We should remember one thing. As the saying "Monkey see, Monkey do" goes, we are the walking examples for our kids.
They do at least half of what we do.
When we see a Benz car and say, "Wow, that's beautiful...", that is what gets registered in their mind as well.
But instead if we see that as just a car, that is how they will see it as well.
We are indirectly influencing our kids on what to appreciate and what not to.
The option of whether we are influencing them positively or negatively is in our hand.
We will soon meet again in another episode. Thank You.