FOOL ON THE HILL
An Investment Opinion

Teach Your Children Well

By Bill Mann (TMF Otter)
September 24, 1999

Do your children understand how much a dollar is worth? I'm not talking about how much a dollar can buy, but rather what it is worth. Maybe we should back up a little bit. Do you understand what a dollar is worth?

We at The Motley Fool are constantly amazed and saddened by the unsound financial practices we witness around us. People on the edge of bankruptcy financing a brand new car, juggling credit cards, and unable to control even their most rudimentary spending habits. Most among us have had similar experiences, at one point or another learning a financial lesson the hard way.

But this should not come as a surprise because, as in all things, we reap what we sow. Almost nowhere in the American educational system are the fundamentals of personal finance taught. A high school graduate has a better chance of knowing how many wives Henry VIII had than how to calculate compounding interest rates. I am an avid supporter of liberal arts education, but why do we insist upon turning generation after generation of financial illiterates out into society?

The cost is tangible, and it affects all of us. The American Bankruptcy Institute reports that 1.39 million households filed for bankruptcy protection in 1998. In the Central District of California, bankruptcies increased nearly 18% from the prior year. Think about it, the region with the most explosive income growth in the 1990s has been skyrocketing with people going broke. Staggering. And the companies losing money due to consumer bankruptcies have to make up their losses somewhere. Can you guess where?

That's right, you're paying for it, as a part of every transaction you make.

Obviously, for each bankruptcy there is an underlying reason. There is no doubt that illness, injury, or unexpected economic hardship hits thousands of people annually. For such people, bankruptcy may represent the only path to recovery. But how many bankruptcies could be avoided if people educated themselves about money, credit, and spending? We hear the spectacular stories of Elton John and MC Hammer going broke on millions per year. But how many people out there are driving a new car they can't afford, eating out at the best restaurants, dressing to the nines and taking "well-deserved" luxury vacations with money they have yet to earn?

Much of the content at The Motley Fool is dedicated to investing, but we also have an active message board and content dedicated to personal financial management and getting out of debt. The Foolish investment advice will not help you unless you are debt-free. You must clear your consumer debt before you invest the first red cent in common stocks. After all, if Joe Consumer has a $5000 credit card balance at 19%, he would have to earn an additional $950 in his first year on his equities to break even. Why keep that weight chained to your leg? Get out of debt first, Fool!

This is not glamorous stuff. I'm sure we'd all much rather be talking about whether America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> or Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> is a better place to put our money. But I'm here to tell you, if you've got a credit card balance, there IS no better place to invest. Handle the debt first.

These lessons should have been taught to us when we were young. Some children have a natural proclivity to squirrel away their money, but most, myself included, couldn't find a place to spend it fast enough. If there's one thing I hope you take from this article, it is this: It is never too early to teach your kids about the value of money. Let 'em earn their spending money. Teach 'em how to save. Help them make rational choices, keeping in mind that a dollar saved now is worth more down the road. Show 'em how to invest. Show 'em how if you had bought one share in Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> when you were their age (let's just be kind and call it 30 years ago, when it was priced at $82.25) and reinvested all dividends, it would now be 88 shares valued at $4578.34.

When I was young, my sister and I had our own savings accounts. No matter what, it seemed when I had $300, she had $400; when I had $600, she had $1000. I could never figure out how she did it. I was certain that my parents gave her more money. It never occurred to me that when I was buying GI Joe with the Kung Fu grip or my Captain Insano's Super Chemistry Set that she was saving more than I. Straight through college, when I single-handedly funded Anheuser-Busch's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> pension fund, I never had enough money to do anything. But it was not for lack of earnings, or largesse from the parents, but because I completely lacked discipline in my purchasing decisions. It was not until I survived a few months on Ramen noodles and bread sandwiches that I got the message.

How long will it take your children to get the message? Not long if they are held responsible for their financial decisions. In The Millionaire Next Door, authors Thomas Stanley and William Danko discuss financial outpatients. These are people who, though grown up, still depend upon their parents for money so they can enjoy a lifestyle beyond the reach of their means. These are adults who have never had to learn the value of money, nor have they suffered the consequences of their inability to save. The authors make it clear that the fault in such a situation lies with the parents, that the child's dependence is a result of parents' inability to teach financial responsibility.

Rest assured, your child will learn about money, for better or for worse, and the choices they make will largely depend on the lessons they learn from you. Will they grow up choosing how to spend their money, knowing that it came as a result of work they did around the house? Or will they learn that if they scream loud enough that daddy will give in and buy them whatever toy they want? The pressure will come from your children, but have no doubt that the lesson learned is derived from your response.

Just as they will learn about alcohol, drugs, sex, and everything else we would like to protect them from, money is a powerful and inevitable component of our existence. Would you rather they learn how to use it from you, or from a credit card company, enticing them with the benefits of spending but letting them discover the horror of consumer debt? Let's all make the Foolish vow to be a positive influence in our children's financial lives, by letting them learn early on that every financial decision they make has an impact, that the money they save will be worth much more in the future.

If all else fails, show them the chart on Coke and tell 'em how many GI Joes with the Kung Fu grip (or Malibu Barbies, if you please) they'd be able to afford by investing in a Foolish long-term stock like Coca-Cola. Or Cisco. Or Gap. Or�

Just teach 'em, OK?