First grade is a time when students learn to spell three-letter words, sight read, and count up to 100. According to financial experts, it’s also the time when kids should learn about how to handle their money, with research showing that the money patterns that affect us for the rest of our lives are often in place by the time we reach second grade.
If that is the case, what should we be teaching first graders about money? That depends on the level of affluence you want them to ultimately attain.
“Most parents are satisfied if their kids get a college degree and a good-paying job,” says Steve Davis, CEO of Total Wealth Academy. “I wanted more for my kids. I wanted to see them live a life of wealth, which is why I taught them how to become financially independent.”
Total Wealth Academy is an education and mentoring platform that guides its students on how to leverage active and passive investing in real estate to build a second stream of income. The programs offered by Total Wealth Academy provide insights for investors at all levels, from beginner to advanced. Davis has trained hundreds of people through his classes and radio shows, drawing upon the expertise he had developed during his 30 years of active and passive investing.
While Davis believes financial independence is something everyone should strive for, he also is quick to point out that true wealth involves more than just money. “The way I see it, wealth includes health, family, adventure, romance, generosity, and fun,” he says. “If your life doesn’t include each of those elements, you can’t truly consider yourself wealthy, no matter how much money or how many investments you have.”
What is financial independence?
If you are like most parents, you probably think of “financial independence” as having a job that pays the bills, or perhaps you’d go a little further and include having some money left over at the end of the month. The ideal scenario might include having some money in the stock market to provide for your retirement.
Davis believes that definition needs to be revised.
“If you are relying on a paycheck from your job to meet your financial obligations, you are dependent on someone else for your finances,” Davis explains. “You only become truly financially independent when you have a passive income over and above your paycheck that meets and exceeds all of your wants and needs. If losing your job — which could happen to any of us tomorrow — would put you in a position where you couldn’t pay your bills and still have money for travel, romance, generosity, and whatever else is important to you, then you are not financially independent.”
Parents who want to see their children understand and embrace Davis’s vision for a sound financial future should consider taking the following steps.
Lead by example
Anyone who has spent time around young children knows that they learn by example as they constantly observe the behaviors of the adults in their lives, slowly but surely adopting many of them as their own. As a result, being a good role model for kids is critical, especially when it comes to financial behavior.
“If you are in a bad place financially, you cannot lead your kids to a good one,” Davis says. “You must lead by example.”
Statistics show that most Americans have yet to achieve Davis’s definition of financial independence. In fact, a recent survey found that 69 percent of Americans are concerned about their financial affairs, and nearly 1 in 3 said they are worried they may need to take on debt in the near future to simply cover necessities.
“It’s never too late to get on the road to financial independence,” Davis advises. “Start pursuing it now and take your kids along for the journey. As you begin building a second stream of income, your kids will be watching. Eventually, they will start asking questions about it. If you take the time to talk about your experiences and share what you are learning, you will see them get excited about what you are accomplishing.”
For kids learning about finances, risk can be one of the most confusing topics to master. Studies show that most adults don’t truly understand how risk and financial success intersect.
“It’s critical to teach kids that risk is inevitable,” Davis says. “Investing requires us to choose to accept certain risks and avoid others based on their probable rewards. Everything that is valuable in life is on the other side of risk, which means we must embrace risk to reach our goals. To avoid risk is to avoid life. Everything is risky.”
Adults that want to teach kids the value of risk can use the board game Monopoly as a lesson, as they will soon realize after only a few games that they will not win if they never buy a property. Their only hope of winning comes from taking a risk, spending some money, and buying some real estate with the hopes that another player will land on it.
Teach like the rich
In poor and middle-class families, financial education typically involves giving kids an allowance to teach them about earning, saving, and budgeting. While that introduces some important financial concepts, it doesn’t teach anything about financial independence.
“The rich teach their kids differently than the poor and middle class,” Davis says. “Lessons built around an allowance only teach kids what it is like to have a job. To teach your kids how to be financially independent, you must teach them that a job is just the beginning. That is what the rich teach their kids.”
When Davis’s son was eight years old, he handed him a copy of George Clason’s book, “The Richest Man in Babylon,” and told him, “Son, remember, you need a second stream of income.” At nine, 10, 11, 12, and 13, he reminded him, “Son, you need a second stream of income.” At 14, 15, 16, 17, and 18, he told him, “Son, don’t forget, you need a second stream of income.” As a result of Davis’s ongoing encouragement, by the time his son graduated from college, he had 11 rental properties generating a second stream of income that totaled $4,000 per month.
People will say, well, his son must be brilliant and a really hard worker. Steve would agree but add, “So are you.” The difference is not the brilliance and hard work, it is that he was told the right thing to do. How many of you were told at age 8 that you need a second stream of income? Probably none of you. You were just told to get a job and that’s what you did.
To get on the right path, kids need to understand that working for money does not lead to wealth. Rather, they must let their money work for them.
“The worst thing to teach your kids is that climbing the corporate ladder is the only way to become financially independent,” Davis warns. “Kids who choose that path will find themselves working 50 or 60 hours a week with no time for anything else. In the end, making that sacrifice might make them a lot of money, but it won’t make them happy, and it won’t lead to financial independence.”