I have spent most of my life studying, dealing with and writing about money, but my kids’ experiences are limited to playing shop keepers in a sandpit.
Their financial future is already unfolding as I am investing for them, but one day they will have to manage their own money.
When the time comes, I will teach them the most important money lessons.
Here is what I’m going to tell them. Maybe you can learn a thing or two from it too.
1. The True Value of Money is Freedom
A lot of people associate wealth with luxury cars, designer handbags, yachts, jets, worldwide travels and diamonds, but the truth is that the real dividend of money is time and freedom.
The freedom to choose what to do with your time and your life.
Let’s face it: Time is a very precious and scarce resource. You only have so much of it. Most other things you can get more of. But not time.
Money cannot buy you happiness, but it can ensure that you have a better shot at living a rich and satisfying life as you get to choose who to work for, where to work and when to work. You get to decide who to spend time with, as you are not necessarily forced to be away from your family and loved ones for a day job.
2. Invest Early and Avoid Debt
Invest as early as you possibly can to make the best use of compound interest.
What is compound interest? According to Albert Einstein it’s the eighth wonder of the world.
When you invest, your money makes money for you. Later on the new money that you made makes money for you too. That creates exponential growth which on a chart looks like a hockey stick: first a flat development but then later on a steep curve. It takes years for the steep curve to kick in so you have to begin now.
It works the other way around as well: If you have debt, you have to pay interest. If you are not paying off your debt, you’ll have to pay interest on the interest too. Hence the name compound interest.
Avoid debt like the plague.
3. Successful Investing Requires Patience and Consistency
A lot of people think you have to be exceptionally intelligent or lucky to beat the market. You don’t.
Money success requires patience and consistency.
It requires that you invest steadily, keep at it and that you breathe when the market makes wild swings.
Charlie Munger (Warren Buffett’s partner) says:
“You don’t have to be brilliant. Only a little bit wiser than the other guys, on average, for a long time.”
Wiser is not the same as intelligent or brilliant. I know plenty of highly intelligent people who suck at investing.
Wise is about staying calm and rational.
By the way, in my view, consistency is the key to success with almost anything. If you want to be good at something then keep working at it everyday. One step at the time – and no panic if something unusual happens.
4. Spend Less Than You Earn
This is the most important money principle of them all: Always use less money than you earn.
If you always use less money than you earn and invest the difference, you will do alright financially in life.
A lot of people fall into the trap of spending more money than they get each month.
I had a friend who spent her entire paycheck and then some on random designer clothes and beauty stuff. By the end of the month, she had to borrow money to survive.
I asked her about it and she said: “Well, my account fills up next month anyway.”
Living like that is like digging a hole underneath you. The hole gets deeper every month, and it gets gradually harder to get out of it.
5. Your Happiness Can Be Measured in Relationships – not Money
Money is just a means to an end. It’s not the goal in itself.
Be mindful of your relationships because they are the source to happiness – not money.
Warren Buffett says: “Success is when the people you want to have love you actually do love you.”
So how do you build great relationships?
I’m no expert on that matter, but Dale Carnegie is, and Warren Buffett is a big Dale Carnegie fan.
You are on the right track if you are friendly, smile, use people’s names often, show interest in the issues that matter to them, praise them specifically and in front of other people and agree with what they say.
You can learn more about all that in Dale Carnegie’s book How to Win Friends and Influence People.
6. You Are Your Biggest Asset
Never stop investing in yourself, your knowledge and skills. You are your biggest asset (not your stocks and shares).
You are the one who earns the money and picks the stocks to invest in.
What does it mean to invest in yourself? It means getting educated, attending courses, reading books, blogs, newspapers and listening to podcasts.
The value investor Monish Pabrai says: “In investing, all knowledge is cumulative.”
You never know when you can use the knowledge you acquire today to pick a good investment.
Just keep learning, keep reading, keep studying.
You can upgrade your knowledge today with my free e-book on investing here.
7. Be Careful With Seeking Advice From Others
You say that you become the average of the five people you spent the most time with.
I think you become the average of the people who you choose to be inspired by and whose advice you choose to seek (there is an element of will here).
So make sure only to take people seriously if they deserve it. Look at what they have accomplished themselves.
Just because someone wears a suit and a tie and is called an expert by others, it doesn’t mean that you should do as they say. Be very selective about the people you listen to and copy.
Remember, market movements are the sum of many people’s opinions. It’s a flock mentality reaction.
If you chose to sell stocks because they are falling, you are taking advice from a herd. It’s like throwing tomatoes and rotten eggs at someone because you see other people throwing them – without checking who is on the podium.
Do you want to learn more about money management? Read my book on investing here.