4 Things I would teach my kids about money

So I’m 3.5 months away from becoming a father. Everyone I’ve spoken to, especially my colleagues and friends that have recently become parents have all told me that my life is about to change forever. Some say for better and others say for worse. The ratio is about 50:50. Feels like an exciting game of Russian roulette!

I have been thinking a lot lately on the values I should be teaching the newborn as he progresses through the world. It must be such an exciting time for a baby to see the greatness our planet has to offer for the first time. He will be starting afresh and has the whole life ahead of him to look forward to. Thus as a father, I will be his role model and my thoughts and behaviours will have a strong imprint in his development and hence my success will contribute to his.
Naturally an important subject that I’ve given a lot of thoughts about is the relationship he should be having with money.
Growing up, I never had any formal education on money or wealth. This subject was not (and regrettably still isn’t) taught in schools and my parents only provided piecemeal training for me, mostly through memory-inducing incidents like becoming the most expensive mortgage lender in the country.
Here are the 4 principles I’d like to teach my kids about money and wealth.

1. Actions speak greater volume than words

Kids are truly remarkably learning machines. Between the age of 0 to 1, their synaptic connections (linkages between the various neuron in the brain, a critical aspect of cognition) develop at an astonishing rate of 2.6 trillion per day as a result of interacting with the outside world and taking in everything for the first time. Every experience they encounter will form the first part of their memory and imprint a strong and lasting impression on them, informing and guiding their thoughts and behaviours.
Equally their first encounter with money will become the pivotal starting point on their later relationship with it and that first encounter often rests with us as parents.
I remember vividly about the piggy bank which I had written about previously, where my parents would enforce a “no change in the house rule”, meaning that every loose coin from every outing would be deposited into that piggy bank before stepping into the living room. It meant that we managed to save on average £2,000 per year without even it consciously registering in our minds or noticing a change in our lifestyle.
This experience taught me 2 things:
  1. Saving is good, because that’s what my parents do (kids always perceive their parents actions positively).
  2. Saving is easy, because we did so effortlessly.
These lessons accompanied me all the way into my adulthood and saving remains an integral part of my daily habit. Nowadays I often tuck away more than 40% of my monthly income into various saving and investment accounts.
Key takeaway: if you want your kids to behave in a certain way then you must get there first yourself.

2. Wealth is abundant in this world whereas the willingness to obtain is scarce

Our world isn’t short of money. Seriously. Here are 2 interesting facts:
  • There are $280 trillion worth of wealth in the world, making it just shy of $47,000 per capita.
  • The annual Gross World Product (GDP of every person combined on the planet) was $107.5 trillion in 2014, making it $16,100 per capita.
These numbers are astronomical! A trillion dollar looks like this “1,000,000,000,000”. The sheer number of zeros just makes my head spin. $47,000 may not sound enormous but you can do a lot of things with that. Just look at the type of homes you can buy with $50,000 or less.
Simply put, the world is not short of wealth. What we lack is our willingness to obtain more.
5 years ago, I ran into financial difficulties as a result of committing myself to a rather expensive holiday. I was faced with 4 stark choices:
  1. Cancel the holiday, suffer a 30% loss on my booking
  2. Go ahead with the holiday and put it onto my credit card and suffer the crippling interest
  3. Ask my parents for a bailout
  4. Make some more money
#1 was simply silly.
#2 was beyond stupidity for me.
#3 was shameful and knowing my parents, they’d probably ask for an arm and a leg to teach me a lesson.
So #4 was the only choice.
At the time, I had 2 spare bedrooms in my house so I immediately put them to use on Airbnb. I arranged for artisan photos to be taken (for free at the time as Airbnb was busy signing up as many hosts as possible) as well as setting the rent to be below market average in order to minimise void period.
Sure enough, over the space of 2 months I earned more than sufficient rent to cover the cost of the holiday with plenty of pocket money to spare, which I sensibly parked into my savings account.
Key takeaway: money does grow on trees as long as you are willing to seed and nurture it.

3. Don’t trade time for money

What I discovered through side hustling as a freelance consultant as well as a landlord is the stark contrast in terms of effort requirement.
  • As a consultant, my earning potential is limited by my hourly rate and the max number of working hours.
  • As a landlord, my earning potential is limited by the number of properties I have.
Consequently my earning potential as a consultant is directly proportional to my effort level whereas being a landlord is correlated to the size of my property portfolio. I can tell you that the hourly rate as a landlord is vastly superior than being a consultant.
My favourite game is Monopoly where the possession of asset in itself generates a cash flow. Consequently I would encourage my kids to accumulate as much cash generating assets as possible rather than being solely focused on their careers. The fact that return on labour being inferior than capital forms the central thesis of Thomas Piketty’s now acclaimed book “Capital in the Twenty-First Century“. I strongly recommend you reading it or its summary to understand how wealth interacts with the economy.
Key takeaway: return on capital is higher than return on labour. Focus on building up your capital buffer.

4. Balanced gratification is critical in healthy wealth accumulation

I once analysed my spending habits a few years back and discovered that I spent on average £600 per month eating out, which equated to £7,200 per year. To put that into perspective, in the same year I only contributed £6,000 to my pension.
If I had halved the spending on this habit then I would have an additional £300 per month available for investing, compounding at 7% per year would lead to over £52,000 in 10 years, before even taking tax rebate on pension contribution into account.
Delayed gratification has been extensive documented along with the benefits it brings. By teaching kids to have 2 candies tomorrow rather than 1 candy now, they start to comprehend the value of money and it’s potential to generate more.
However instead of delayed gratification, I propose a concept called Balanced Gratification. The problem with delayed gratification is that if left unchecked, it could lead to unhealthy frugality which borderlines on stinginess.
For example the idea of deferring discretionary consumption into investment is a great concept as a capital invested today will produce an exponential return down the line whereas the same amount consumed today will generate nothing in the future. Yet if all consumption was treated that way then our economic order will collapse overnight as everyone would become savers and investors, thus destroying growth. Furthermore people would live a extremely primitively with zero fun as they would spend all time performing tasks by themselves just to survive.
Balanced gratification however acknowledges that there are certain discretionary spending that would enhance our well-being.
  • It’s OK to go to a fancy restaurant once in a while.
  • It’s fine to go on an exotic beach holiday.
  • It’s alright to hire a maid to clean your house so you could focus on your passion.
However the key is to maintain a balance which ensures that these habits are kept in check and the fine line between time efficiency and being lazy is not crossed.
So after some self reflection, I decided to cut my eating out expense by half. I put 70% of the savings into my pension and the remainder, well, to buy better raw ingredients such as organic produce in order to produce better meals. I still spoil myself and Mrs WB40 with the occasional fine dining. We are now healthier, wealthier and happier.
Key takeaway: you should enjoy a balanced relationship with money. It is there to serve you, not the other other way round. 

Wrap up

As a parent my action speaks volumes. I will teach my kids our world is filled with wealth and opportunity and all that it needs is the willingness to achieve and he will be live in abundance. Equally he should maintain a healthy balance between immediate satisfaction and delayed gratification to live a balanced and fulfilling life.
What would you teach yours kids about wealth? What have you taught them? Please comment away.