I DON’T KNOW ABOUT you, but there are things I wish I had learned when I was young—say, at the ripe old age of three or four. I wish I had learned another language. I wish I had started the violin. I wish someone had taught me math and not just how to count to 10.
I believe we can learn all these things and more at a very early age. Why? Because we are human sponges when we’re children. At that age, we’re wonderfully efficient learners. Children are literally wired to absorb information.
It takes thousands of hours of practice to become a good violinist. Even after putting in that effort, the odds of becoming a virtuoso aren’t great. On the other hand, far less time is needed to master the fundamentals of finance. It isn’t rocket science—far from it—and the payoff is far more assured. If you’re looking for a large reward for relatively little effort, I would argue that few endeavors can rival learning about finance.
We all need someone to teach us about money when we’re growing up—and yet often it simply doesn’t happen. It seemed like there were two taboo topics that my parents never discussed—money and sex. Sex education is now taught routinely in our schools, but not finance. Isn’t that ironic in a society as materialistic as ours?
Two years ago, I decided to act on these convictions by writing a financial guide for my two children, now ages 11 and 13. I ended up distilling everything I had learned about finance into series of laws. Below are four of the most important:
Law No. 1: Compound interest is the most crucial notion in finance. This simple concept has enormous practical implications for both investors and borrowers, including the virtues of starting to save as early in life as possible and the tremendous cost of carrying credit card debt.
Law No. 2: Nothing else will matter if you don’t learn to save. The overwhelming majority of finance books focus on investing. These books are alluring, because they promise a quick road to riches. But unfortunately, there are no shortcuts in finance. The most important things we can do to ensure financial success is save money. It isn’t nearly as exciting as investing—but it is indispensable.
Law No. 3: Borrowing, except for a mortgage, is the road to financial slavery. Put bluntly, non-mortgage debt is toxic to your financial wellbeing. Like so many things in finance, debt is more than just a money issue. It’s a behavioral issue. We’re constantly encouraged—by family, friends, colleagues and advertising—to buy things we can’t truly afford, and yet we don’t even realize it.
Law No. 4: Know your net worth. An increasing net worth is a sign of financial health. If I could only know one thing about a family to assess their financial health, I wouldn’t ask about salaries or the size of their house. Instead, I would want to know their net worth and what’s happened to it over the past five to 10 years. Net worth and its long-term trend speak volumes about the state of a family’s finances.
John Lim is a physician who is working on a finance book geared toward children. Follow John on Twitter @JohnTLim.
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Law #1 with added emphasis on time, starting as early as can be done.
Front loading by saving up until you acquire an infant’s social security number and deciding on an appropriate portfolio to invest it in for decades will make most of the difference in the long run.
Thank you. Just excellent. Excellent!
I like the way you think! Being able to open an “IRA” account for your infant might actually go a long way toward alleviating the underfunded retirement problem for future generations. I talk a lot about the power of time and compound interest in chapter 1 of my book.
Great post. Please come back to let us know when your childrens’ book is launched.
Thanks Ben. I will certainly do that. Appreciate your support.
I have to take issue with Law #3. There is zero doubt that behavior or lack of discipline drives a lot of debt. I’m all for Dave Ramsey style, no debt absolutism for the people who don’t have the discipline to manage it.
But there is also zero doubt that for many – even in the middle to upper middle class – avoiding non-mortgage debt entirely is very difficult to do. I manage my money with great care and even as an upper middle class family we’re not at the point where we can plunk down enough cash to purchase a car without a loan. (At least not without dramatically curtailing other savings goals.) Given the rising cost of college, I’m doubtful we’ll be able to put our kids through without at least some borrowing, despite our efforts to save.
Debt is a tool that can be useful when used in moderation and destructive when abused. Let’s call it that instead of attaching charged words like “slavery” to something that the vast majority of people will encounter and need to understand how to manage responsibly.
Thanks for your thoughtful reply. I agree with you that avoiding non-mortgage debt is very difficult to do. It is my belief and hope that a better understanding of money and debt, especially starting at an early age, may stack the odds in one’s favor.
I applaud you for working on a finance book for our children!
Thanks. I feel like David (vs Goliath) but I guess all movements have to start somewhere.