How to Teach Kids About Money, Saving & Investing: Lesson 5

The Average American is a Millionaire

A report from Zippia, a career information site, found that the average person earns nearly $2.7 million over their lifetime. Imagine if we captured half of those earnings in a savings account? Even without investing it, that would be $1.35 Million dollars. That’s quite a full picnic basket for the average American bear. In other words, the average American would be a millionaire if they simply saved half of their earnings. It is important to realize that the only thing preventing the average American from being a millionaire is their spending addiction.

I also want you to call to mind what the impact of a 50% savings rate is on your retirement age or working career length. Recall the post “The Hope and Simple Math of Extremely Early Retirement.” Recall that with a savings rate of 50% you only need to work for 16.6 years before you can retire. And if your savings rate were 65% you would only need to work for 10 years before you can retire. Your working career could be cut in half or even in a quarter as long if you could temporarily curb your spending habits.

A Lifestyle of Financial Freedom

Our spending habits are hard to change once we have become accustomed to a certain lifestyle. It is not easy to downsize to a smaller house, drive an older vehicle, or give up the organic grocer. But what if the trade-off was a lifetime of freedom, no need for a job, and a lifetime of stress-free financial security?

Now imagine you have all that without giving up the lifestyle in the first place? That is what I am trying to teach my kids. I am trying to show them a life where needs are fulfilled, stress is minimized, and options to pursue passions abound, a life filled with happiness, purpose, and freedom. I am teaching my kids to live in financial freedom from the beginning.

Hope of a Better Future for My Kids

My hope for my children is that they will be able financially independent if not their entire life at least before their children are born so that they can be present for their kids and have the option to be the primary caregiver for their children’s upbringing. My hope is that they can see every precious moment as their kids, my grandchildren, take their first steps try their first foods, and speak their first words.

Passive Income

Please don’t misunderstand me. Now I am NOT saying they are not going to work. I know full well the only reason I am on this path is my hard work. I am raising my kids to have a strong work ethic and I am teaching them that money only comes from work and savings. The concept that I am teaching that it is wise to front-load your working career to maximize lifetime gains. By taking advantage of the sequence of returns gains kids can work smarter rather than harder.

My hope for my children in that they will learn the power and understand the benefits of passive income. I hope that they will be financially provided for indefinitely and wise enough not to waste it. A lifetime of golden eggs is lost if you slaughter the goose that lays the golden eggs.

Income Independent of the Corporate Career

My dream for my kids is what I wish I would have learned earlier for myself. There is a better path than spending the best hours of their day and years of their lives reporting to a 9-to-5 job, contributing their deepest creativity and most rigorous energy working towards someone else’s goals and dreams in the persuit of income.

While others are enriching the companies and bosses they work for my hope is that my kids will quickly achieve financially independent so that while they have youth and energy they can peruse projects that they are genuinely passionate about in environments that fit their values with people that they actually enjoy and chose to surround themselves with.

It’s my hope that they will not have to go to the 9-to-5 grind when all that they want to do is spend time with their children. That’s the motivation of this entire post. to share the system that I have set up which will enable my kids to achieve financial independence and retire extremely early so that they can be present for the things that matter far more in life than commuting to a cramped cubicle (unless that is their idea of fun.) Rather, they can raise their own children, spending quality time with their spouse, travel, create or do whatever they value with the few wild and precious moments we have in this fickle and fleeting experiment called life. If that sounds appealing, keep reading. I am about to unpack my system to give my children the financial freedom I wish I had while I was young.

The Investment Bank of Dad: Saving

When my kids started to earn money I instituted what has been labeled before as the investment bank of dad. I got this idea from an acquaintance of mine Mr. Money Mustache. And then made some tweaks to accelerate the learning curve. I mandated that my kids save half of everything that they earned or were gifted. Whether it was cash in a birthday card, allowance from choirs, or money that they earned from a lemonade stand, I required that they save half of any incoming money regardless of source, into the Investment Bank of Dad.

If You Can Make Them Bathe You Can Make Them Save

And yes, I made them do it. They did not yet possess the maturity and longsighted bent to save with candy aisles thoughtfully engineered to captivate the attention of the little ones. It wasn’t until many years later that they would adopt this rule s their own and practice it as an intrinsic principle and way of life. Trust me if you can make your kids bathe until they see intrinsic value in the activity, you can make your kids save until they see the intrinsic value.

I chose half because it was simple for the kids to comprehend and easy for them to count out. Remember, I started my kids at the age of 4 years old. You could certainly choose 65% if you are so inclined.

The bank is a highly sophisticated device of impenetrable security. Okay just kidding, it was a Masson jar.

But the complex calculations that went behind it… also, nothing impressive. My ledger was actually a scrap of paper. On which, I wrote down the date, the balance, the interest rate, and how much that equated to each month.

While the physical bank may be lackluster, the concept it taught was priceless.

Inspiring Kids to Invest

The real magic was and how it worked. Each month I made a point of building up excitement to investment bank of dad payday (kids mirror your energy and emotional state). I would sit down with my kids and maybe let them have a treat that they wouldn’t normally get like candy, a popsicle, or sugar soda.

Now that the experience was framed around and therefore subconsciously associated with positive experiences, we look at how the stock market had done recently and estimate the percentage rate that I might want to pay them. It relatively reflected how the stock market had performed recently because I wanted them to get a sense that the growth was proportional to how the market did. I always gave them a positive interest rate even if the market had move negatively. Again surrounding the experience with positivity.

I believe this inspired an interest in them to check the market and see how things were going. Friends at parties always found it entertaining when a six-year-old asks his dad how the stock market did today. For the sake of my adult friends, I hope it was an inspirational kick in the pants for them to investing when my then six-year-old was more savvy on the market and investing than they were.

Compounding Your Kids Interest

I chose to pay out the interest monthly because I wanted it to be felt. I wanted it to be frequent enough so that the kids could see their money grow and see the value increase I wanted to convey quickly to them the power of compounding interest so I amplified the frequency of compounding periods, monthly rather than annually, to make it more experiential for them. After all, (caution dry dad joke coming) I wanted their interest to compound. Yup, I really typed that.

After a while this started to add up and as my monthly payout started to approach a hundred dollars! Parenting was getting expensive. Now I could have backed down on the interest rate or the frequency of compounding of course but I had a better idea. The teaching objective of capturing their interest in interest had been achieved.

I realized that it was time to open an actual investment (UGMA) account for my kids so that the market could be paying their interest rather than me to continue to pay these increasingly costly payouts. And that was much better on my wallet.

Next week join us for how to initiate your kids as financial representatives of your family before I demonstrate that my kids have a higher net wealth than 69% of American adults all based on their own earnings, savings, and investing.

Recommended reading for a deeper dive:

A few weeks ago, I heard about this book, “The First National Bank of Dad” by David Owen, based on the title, I imagine it is about this concept and since it was published in 2003, likely the origin of the concept I spoke about above.

Keep the FIRE burning my friends.