How to Raise a Rich Kid

October 19, 2016

"Success is nothing more than a few simple disciplines, practiced every day." - Jim Rohn

 

Sadly, too many families neglect a critical aspect of raising children: teaching them to be financially savvy. That said, many clients have written to say that they read and discuss my financial emails at the dinner table with their children. That's a nice start.

 

But if you want to raise kids who can create and manage wealth, there are a handful of critical rules that are foundational.

 

Here's the main one: Postpone spending.

In economics, "deferred consumption" is the very definition of wealth and capital. So ... defer your consumption, kids! Everything you don't spend today is wealth. Only what you don't spend today is available for investing. And since money makes money, what you don't spend today can provide a lifetime of income to spend in the coming days.

 

Teach them this: Wealth is what you save, not what you spend.

Most of the younger generation is under the false impression that wealth is based on the luck of a big salary. Nothing could be further from the truth. According to the now-classic book The Millionaire Next Door by Thomas J. Stanley, the affluent tend to answer 'yes' to these three questions:

 

1.) Were your parents very frugal?
2.) Are you frugal?
3.) Is your spouse more frugal than you are?

 

So how did they build their wealth? According to Stanley's research they did it slowly, living well below their means and investing about 20% of their household income each year. And because money makes money, over time, they grew gradually richer and richer.

 

Imagine you purchase a pair of shoes for $50 every year (obviously, some are more expensive, some are less -- the point is the analogy here). The person that makes do with the old ones and only buys shoes every other year will be able to save and invest the difference. After seven years and at a normal interest rate, their savings will be earning enough interest to pay for a new pair of shoes every other year. After eleven years, the interest from the investment will pay for the cost of buying new shoes every year, forever.

Because being frugal early in life produces great wealth later in life.

 

Due to the seeming wealth of our American culture, it is difficult to learn to distinguish between needs and wants. Very few purchases are "needs". Other than food, shelter and clothing, everything else is optional. In the United States, we show our extravagance even in these three essentials.

 

Practically speaking, you can learn to postpone spending one purchase at a time. When our children were very young, we required them to wait one week before spending money on a toy. Often, after waiting a week, they wanted a different toy instead. Then, they had to wait another week for that purchase.

Simply learning to delay and avoid impulse buying can cut your children's spending in half.

 

So teach your children: Wait now ... profit greatly later

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