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Please review this trifold which summarizes our financial education program.
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At one time or another most children are asked what it is they want to do when they grow up. Consensus is building that the answer to that question is not a single answer anymore.
Financial planners consistently tell us that we should have diversity in our investment portfolios. Diversity, they say, provides a hedge against the risk of a single investment failing. I am a strong supporter of diversity in income sources. Multiple streams of income can provide a hedge against an interruption of a one income stream. It is a reality of the global economy that almost everyone is vulnerable to a layoff. If your current job is your only source of income, a layoff is potentially devastating to your family’s financial health. If you are a business owner and one sales market suffers a setback, your business can quickly fall apart. Multiple income sources protect you and your family from financial catastrophe.
But there are other advantages to having multiple income streams. First, not all income sources require significant active management. Many of them are passive or semi-active, meaning that you can create them and they enrich you without significant effort. Among all the types of income, earning from working a job is the most time consuming and often the lowest paid. Passive income sources, such as investing in dividend producing stocks, or semi active sources, such as rental real estate or options trading, can be very lucrative with only a few hours of your time a month. Even the most motivated person cannot work more than 2 or 3 jobs, but one can manage dozens of passive and semi-active income sources with proper care and investment. Over time, by the mathematic force of multiplication, it is possible to eclipse your active income sources with the passive and semi-active sources. This is the dream of the investor–becoming one who can safely afford to retire from work life with no sacrifice in lifestyle. Indeed, with the increase in free time, you will be free to realize ever larger increases in income because you will be able to devote yourself entirely to building new income sources.
More importantly, there is a huge difference in the type of person you can be when you have multiple sources of income. In times of financial stress or insecurity, people often find themselves in ethical dilemmas. Your employer may ask you to cut corners to increase the company bottom line. You may find yourself having to choose between eating and falsifying your tax return. You may even be tempted to steal from those closest to you. Financial stress may drive you to do things that you would never have considered doing if you didn’t feel the stress. Actions that you resort to in times of great stress may haunt you for the rest of your life, either physically in the case of imprisonment or psychologically with regret and shame.
Multiple income streams, therefore, help you build a firewall to protect your moral and ethical self. They allow you to always do things on your terms and empower you to say “No!” when your conscience tells you to do so.
- Image by james.thompson via Flickr
Suppose you buy a valuable piece of art for $15,000. Further suppose that a month later a major economic slowdown occurs and as a result, the amount of money art buyers are paying drops substantially. Perhaps today, if you wanted to sell the art, you might be able to sell the painting for $10,000. If you intended to sell the painting, what would you do? Most likely, you would try to wait for the market to correct and try to recoup the initial investment. You aren’t motivated to sell the piece of art. It’s not costing you anything not to sell it, so why not hang on to it.
But what if you bought that piece of art on credit? Even at a relatively good interest rate of 5 percent, you would still be losing over $60 a month in interest and spending about $300 per month in total payments. Having that piece of art costs you money every month. In this case, you are much more motivated to sell the art for $10,000.
However, what if you had a credit card that carried zero interest (or in the range of 0 to 0.25%) and if you can borrow money on that card at will without fees. In this case, you are not losing substantial money to interest and you can borrow more money whenever cash flow gets tight. In this case, your debt no longer pressures you to move the problem forward. Although the market has priced your painting at $10,000, you are behaving as if it is still worth $15,000. You are arguably denying or deferring reality.
Now I don’t think there is anything particularly wrong with this delusion. Everyone can bury their head in the sand, but these people should be penalized to clinging to delusions. But these days, banks do not feel the pinch.
In a market correction, asset holders need to substantially mark down the price of their assets to get them sold. In a macroeconomic sense this is called “finding the bottom” where prices come down to a point where sufficient buyers are available to meet demand. Once the market finds its bottom, new growth occurs.
- Image by Getty Images via @daylife
For years now, banks have reaped the benefits of policy based on monetary theory. After making loans to millions of people who couldn’t afford them, banks should have been suffering from huge cash flow issues due to the lack of payments and loss of principal on these assets. However, since banks can borrow money at will from the Federal Reserve at essentially no cost to them, banks have plenty of cash to meet their needs. Banks have little motivation to turn around their growing foreclosure inventories by reducing prices.
Because of this false support of overvalued properties, real estate property values continue to fall, not in a quick fashion, but a slow laborious multi-year fashion. When the correction could have taken a year or two, real estate values are still falling. Wise potential home buyers see this and are choosing not to buy. It is important to note that record low mortgage rates also played a huge role in driving home sale prices up. Home buyers realize that once interest prices do rise, there will be even more downward pressure on home prices.
These phenomena add up to one conclusion, sellers are hesitant to sell and buyers are hesitant to buy. Raising interest rates, though painful in the short term, may offer the best hope for escaping the economic holding pattern we’ve been in for years.
Although I wouldn’t characterize myself as necessarily religious, there are often a number of great lessons one can learn by looking to biblical wisdom. The seven deadly sins tell us that many things that are inherently beneficial to our souls and spirits can rapidly degrade into destructive behavior if driven to excess. Self confidence is good, but excessive pride is a detriment. Slowing down to enjoy life is great at helping us to appreciate what we have and where we are, but sloth prevents us from moving forward. Eastern religions also revere the concept of balance.
Much like the seven deadly sins, there are seven types of financial “people” which although based on a good foundation, will cripple your child if he or she relies too much on one type of character. Like everything else, balance is the key.
Scroogy – Like Scrooge from A Christmas Carol, when these kids get their hands on a dollar, they tuck that dollar away. They enjoy watching their hoard of gold grow. Saving is a great skill to master, but Scroogy kids take saving to an unhealthy level. Money is a tool. If kids hoard their money, they are not developing the skills to manage it. Money is a medium of exchange. You can’t eat money. Kids must learn to use money to fulfill their needs and to the extent practical their wants.
Spendy – Like all people, kids like stuff. Our commercialized culture sends our kids messages on a continual basis that consumerism is the way to happiness. Adults, with supposedly more refined critical thinking skills, often fall victim to the messages, so is it any wonder that our kids are often more susceptible. Spenders believe that the stuff they have will bring them respect and acceptance from others. These kids need to learn that stuff won’t bring them happiness and the good feeling they get from showing off something new will quickly fade. Kids must learn what adults must learn if they ever want to get ahead. The race to keep up with the Jones’s is one that only produces losers.
Scrapy – Scrapy kids are ones that have taken the concept of frugality to an extreme and have crossed over to cheap. They beat up vendors on price and they don’t like spending money at all. Rather than go to the movies with friends, they’ll stay home and watch TV. Frugality and bargain hunting are good skills to develop, but should not take a back seat to enjoying the zest of life. These kids turn into adults that have a hard time indulging themselves in anything. They lose out on opportunities to connect with others. Finally, they have a hard time giving.
Wanty – All of us have wants. One step on the road to maturity is the concept of delayed gratification. Another is the realization that sometimes wants must go unfulfilled in life. Asking for what you want is not necessarily a bad thing. Desire is healthy, but that desire must be matched by a work ethic that will push our child to achieve those desires. The sooner kids learn this, the better off they are going to be.
Givey – Some kids are just naturally generous. They give away everything. I, myself, gave away a bag full of matchbox cars to a friend down the street when I was about 5. They know it intrinsically feels good to give and they know they get great messages of approval when they do so. Generosity is noble, but generosity without a willingness to look after oneself through life actually promotes lower self esteem and an unhealthy level of altruism. These people are ready made victims for con artists, moochers and abusive spouses. When your children choose to give, make sure also to give them messages that promote self worth and how worthy they are to keep things too.
Whiny – Whiny kids have achieved success in nagging parents about things they want until the parents finally relent. They are learning that “work” consists of scheming or begging others until someone else fulfill their needs and wants for them. The epitome of the entitlement culture, these kids are on course to becoming passive souls clutching at victimization to explain their lack of success.
Trader – Kids are excellent negotiators. Few parents have not had an experience where the reflect upon a conversation with their child and ask themselves “Why did I agree to that?” It’s hard to say no to our kids and most kids know this. Traders, however, take advantage of this excessively. These kids learn that everything is negotiable, without regard to the merit of the idea. Parents who tolerate their kids to be Traders run the risk of their kids becoming amoral – people who truly believe the ends justify the means. Negotiation skills are important to develop, but kids who are used to always getting what they want through bargaining often end up without a moral code, because they’ve never had to fight for what they really wanted.
Conclusion
Take time to observe your kids. Chances are your kids show signs of one of more of these characters. Remember that balance is what to strive for. Balance is what will help kids to become well rounded, mature kids with good notions about handling money, versus kids with significant financial blind spots and life-long money problems.
