The best financial gift to give your children or grandchildren

  • By Todd Colucy
  • September 28, 2013
  • 429
                        
No matter which side of the political isle you are on, one thing both liberals and conservatives can agree on is that our national debt keeps growing and is out of control. It’s unconscionable to me that our country continues to borrow money and to operate without a balanced budget. Someday, and I’d say it’s sooner rather than later, the bill is coming due. It’s unfortunate and unethical that our children and grandchildren will be the ones who will feel this financial burden the most. So what can you and I do as parents, grandparents, aunts and uncles for the next generations when it comes to their finances? Help them grasp the basics of personal finance. Here are three vital concepts that are the building blocks to successful personal finance. First off, the next generation needs to realize that they are not entitled to wealth. A good word for our society today is entitlement. I want my children to realize that they are not entitled to anything, not even Christmas presents. It’s so vitally important to understand at a young age the value of a dollar. One way in which I’ve tried to instill this is by only paying half on big ticket items my children want. I did this with both their cars. The second concept that needs understood is the use of debt. Debt can be a tool to help accumulate assets but when debt is used improperly, it can destroy a person’s future and make them a slave to those they owe. It is so depressing knowing that every dollar of every paycheck already has someone else’s name on it even before you get the paycheck. Debt robs people of their independence and prevents saving. One of the worst feeling I had regarding debt was back when I borrowed money for cars. I can vividly remember when the excitement of the new car wore off and the reality of x number of car payments remained. I hated that feeling. Finally and what I would consider the most exciting and misunderstood personal concept about money and finances is the power of compounding. Compounding interest is the most powerful force in finance. It’s a mathematical guarantee. And the more years a person has to work with the more magical compounding becomes. Here’s a simple example. If a child or grandchild has $100 and to keep the math simple earns 10% on the money, at the end of the year they have $110. In the next year, they earn interest on $110 not the original $100. This concept is so powerful, it can make every 19 year old very wealthy by retirement age. If a 19 year old invests just $2,000 a year starting at age 19 and never increases that amount but continues to invest $2,000 until retirement age of 67 earning 7% a year, there are plenty of ETF’s that average well over 7%, at age 67 the account value is just over $706,000 and of that compounding accounted for $610,000 86% of the balance. The point is time is the most important element in compounding that’s why it’s so important for children to understand. This gives children and grandchildren the ultimate edge in accumulating wealth. If these three simple but profound financial concepts are understood, even with the difficult financial times that our nation is going to face in the future, the children that grasp these concepts will be positions well financially and they will possess something way greater than money. They will possess independence. Here’s to wise use of debt and the power of compounding.


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