Teaching Your Kids About Money - Part 5: The Business of YOU
Writing this series "How to Teach Your Kids About Money" really got me thinking. For one thing, I realized how little my parents taught me about managing money, and it's no wonder I did some dumb stuff in my 20's and even my 30's.
No hard feelings, Mom and Dad. Like many other parents out there, my parents dropped the ball when it came to teaching their kids how to handle money. They were figuring it out on the fly, and by the time they had it figured it out and obtained financial security and independence for themselves, my sister and I had long since moved out of the house.
I forgive them. I do. But, as the father of two very young girls, there's no way I'm going to repeat the same mistake. My girls will be financially literate long before they move out. This series aims to help you do the same!
In the first four posts, we covered the basics of money - earning, saving, giving, budgeting, etc. In this post, we'll dip our toes into the grown-up, high-level wealth wisdom I wish my parents taught me!
First, we'll cover a critical mindset shift that will help you manage your money more effectively and ultimately guide you towards realizing your big financial goals. Next, we'll talk about two essential tools you and your children can use to help you effectively manage and steer your finances in the right direction. Finally, we'll cover two strategies that can help just about anyone acquire and build their wealth.
The Business of You
Successful business owners understand their numbers, inside and out. They know precisely how much money is coming in and going out. Revenue, expenses. Profit, loss. And the total net worth of their company. They know their numbers because that's what it takes to run a successful business and stay afloat in a competitive world.
Well, you know what? Successful individuals, financially speaking, are the same. They, too, know how much money came in this month and how much went out. They know how much cash is left over. They know what their assets and liabilities are. And they know what their total net worth is on any given day or week.
If you don't measure it, you can't improve it. So that's just what financially successful people do. They track, measure, and manage their money, so they're empowered to take action to improve, grow, and optimize their finances.
The first step on your way to financial success is to think of yourself and your finances as a business. Getting your kids to do the same from a young age will have dramatic ramifications on their financial life. You now own a business, and it's called the business of YOU, Inc! And as the CFO of You, Inc., it's time to track, measure, and manage your finances as you take steps forward towards your biggest financial goals.
Once you've adopted the proper mindset, it's time to start using the right tools and putting the most effective strategies to work for you.
Your Personal Cash Flow Statement
The first tool we'll look at is your personal cash flow sheet. This is a sort of dashboard for your own financial machine that tracks money coming in and going out for a specific period of time. If your budget is what you project, expect, and plan to spend and earn for a period of time, your cash flow statement is what you ACTUALLY spent or earned for that period. It's a tool meant to track the "flow" of your cash IN and OUT.
Your cash INFLOW can include:
Salaries and income
Income from a side hustle
Dividends from investments
Interest from savings accounts
Capital gains from the sale of securities
Your cash OUTFLOW can include:
Do you hear yourself asking, "If I already have a budget that works, why do I need to go through the trouble of tracking everything in a cash flow statement? I have enough paperwork."
Good question! There are a few reasons:
The primary reason to use a Personal Cash Flow Sheet is to keep your finger on your financial pulse by monitoring your net cash flow.
Your net cash flow is simply your total inflow minus your total outflow. If more money came in then went out, you've got yourself a positive cash flow. If more money went out than came in, you've got a negative cash flow.
Again, your budget is your EXPECTED expenditures and income, and your cash flow statement is what REALLY happened.
Sure, you've got every intention of sticking to your budget. There's a proverb that goes something like: people plan, God laughs. Plans rarely (read: NEVER EVER) come off exactly as planned. And that's why it's crucial to track your cash flow!
Your personal cash flow statement is a pretty straightforward tool to create and manage. You can draw a line down the center of a piece of paper and record your monthly expenditures on one side and your income on the other. Add each side up, and the difference between the two is your cash flow.
Of course, it makes sense to take care of this sort of thing on your computer. Here's a free Excel template you can use to create yours.
Your Personal Balance Sheet
The next tool we'll look at is your Personal Balance Sheet. Your balance sheet is a snapshot of your financial health, and it includes all of your liabilities, assets, and the difference between the two, which is your net worth.
Let's start with a few definitions, shall we?
Liabilities - essentially, your liabilities include everything that takes money out of your pocket. It's all the money you owe, such as student loans, mortgage, credit card debt, or auto loans.
Assets - your assets are the opposite of liabilities, of course, and it's everything that puts money into your pocket or could put money into your pocket in the future. Assets include cash, checking and savings accounts, share certificates, treasury bills, IRAs, 401Ks, stocks, and so on. They also include things you own like your home, land, vehicles, collectibles, jewelry, and so on.
The name of the wealth game is to minimize your liabilities and maximize your assets. While you likely need liabilities for various things in your life - to attend college, purchase your home, buy a new car, for tax purposes - your ultimate goal is to reduce that debt and reduce your total liability. And at the same time increase your total assets. I.E., grow your 401K, IRA, mutual funds, stocks, etc.
More assets, fewer liabilities.
Now, your net worth is the sum of your assets minus your liabilities. Typically, these are recorded on a document called a balance sheet. You list your assets down the left side and your liabilities down the right. Then the difference at the bottom, which is your net worth.
Now, don't freak out if your net worth is negative! That's very common—especially earlier in your adult life. When you graduate college or purchase a home, you'll likely be in negative-net-worth-territory. That's okay! But now it's time to get to work reversing that situation. You'll work to pay off your debts, aka your liabilities, and increase your income and assets - more on that in the next post.
Remember, you can only improve what you measure. Your balance sheet is an excellent tool to measure and track your net worth. Once you have your balance sheet, you can grow your net worth and take it from potentially south of zero, north into wealth country. In the next post, we'll talk about key strategies to do that. But the first step is to start tracking your net worth. Here's a template you can use to get started:
Once you have your Personal Cash Flow & Balance Statements set up, you will be ahead of the majority of society, financially speaking. You'll be armed with two powerful tools to help you move swiftly towards your financial goals. And now you can share the same power with your children!
Lead by example and show them how you set up these systems and use them every day. Share your personal documents with them, or at least some version of them. This will give your kids a much better idea of how much money it really costs to run a life. Most kids have no idea how much money comes and goes and how much goes into running a household. It will also set them up for a brighter future.
Once you've walked them through how you do it, help them set up their own financial system. Chances are it will be pretty minimal, and that's great! It'll be all the easier to set up when things are simple.
Here are some of the items that might be included in their cash flow document.
Income from household chores
Income from raking the neighbor's leaves
Get your kids in the habit of tracking their cash flow while they've only got a few items in each category. That will make it all the easier to make it into a habit.
And items for their balance sheet:
A loan from the Bank of Mom for a new video game console
1999 Ford Focus
Simply keeping these documents updated will give your kids a different view of money and their finances. If these practices become habits that they take with them into adulthood, they will be poised for a more successful financial life than the vast majority of people. Imagine growing into an adult with the express goal of minimizing your liabilities while maximizing your assets. They will be set up to win!
Coming up in future posts: compound interest and multiple income streams...for kids!
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