Learn About Wealth & Money Early in Life: Lessons for Young Minds

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Introduction

Parents of today, who have children aged between 1 year to 20 years are from a different era of the world. Some of them are from the Baby Boomers era (57 to 75 years old), Generation X (41 to 56 years old), and Y (28 to 43 years old). In their prime age (18 to 45) the Baby Boomers moved from an Agrarian Society to an Industrial society, Gen X saw the collapse of the Cold War, the rapid growth of Globalization, and electronics, telecommunication, and computer tech advancements. Gen Y saw the advancement of Social Media platforms, IT and ITes industries across the world, and mass movement of people around the world. The next generation is witnessing the rapid growth of AI and other technologies. The point I am trying to make is, that in every generation, the scope of advancement has taken place in a different area, hence, the wisdom from the previous generation or its framework if applied to a new generation will definitely lead to failure. However, some frameworks are ear agnostic and can fit into any era in the future as well. While for Baby Boomers, Gen X, and Gen Y the major professional goal was to get into a job was the pinnacle, the same can not said about our youngsters who will be entering into the world of work from 2030 onwards.

I am not saying that the concept of a formal job sector will vanish totally, but the percentage of that keeps reducing every year with the AI-istation and Automation of work continuously with every bit of advancement in technology.

So, how and young students studying the school or college now prepare for the unknown future?

We need to educate young students about money, emphasizing the importance of creating wealth and reducing reliance on traditional employment, which requires a nuanced approach that incorporates psychological and practical financial insights. Drawing from "The Psychology of Money" by Morgan Housel and "Rich Dad Poor Dad" by Robert Kiyosaki, one can offer a comprehensive view of financial literacy that addresses both mindset and action.

Why not Talk About Money Early?

Money is such an important part of our ¾ part of our lives, yet in the formative years, there is no formal education about money, and financial literacy for young children in any educational system across the world. The reason for this could be that the early school education systems across the world were developed in the 16^th to 18^th century and the same structure has continued to be used even today, though with slight modifications in the subject. The world of the 16^th and 18^th centuries was more of an agrarian society, The population was around 0.5 billion and today we are close to 8 billion people occupying the same earth. The Industrial Revolution & agriculture in the early 20^th Century pushed the population growth to a level of 6.15 billion at the end of the century. Since then another 1.5 to 1.7 billion people added in just 23 years. The pressure on basic human needs is coming under tremendous pressure and hence the way we work as well.

With the above evolutionary concept, clarity lets now look at the insights from very important books written in the later part of the 20^th century and 21^st century.

The two foundational books are, "The Psychology of Money" and "Rich Dad Poor Dad,"

Understanding Money's Value

Psychology of Money Insight:

The future of work is multiple contracts and not really formal jobs. In such a scenario, it’s very important to save money on instruments, which can provide freedom and make your life easier in times of break from your contracts. The money you earn from your contracts is not just a means to accumulate goods, which you don’t want. It's not about how much you make in your job or contract, but how you save them and make them work when you are on a break from your job or contract.

Rich Dad Poor Dad Insight:

Contrast the mindset of working for money vs. money working for you, emphasizing early financial education's role. When you start investing in financial instruments early in life, they work 24/7 for you. When you stay invested for a long period, these investments provide very handsome returns.

The Importance of Creating Wealth

Psychology of Money Insight:

The wealth is what you don't see (saved money) rather than what you spend. Wealth is accumulated savings and investments that bring financial security. Again, to reiterate the future of work is not a very long-term and permanent job. It is more of a short-term, knowledge-based, skill-based contract. So, the money you make in these standalone contracts needs to be carefully invested, which will make the money grow more.

Rich Dad Poor Dad Insight:

A typical person has a job and earns a salary, then he/she spends the money to pay for his/her expenses and taxes to the government. Only a very small fraction of the money he/she can save into important assets building exercise.

So, the small investments made by this salaried person are termed as Assets. And the expenses incurred for living are the liabilities. So from a young age, if we can encourage our children to focus on creating assets however small they may be, the concept of clarity will help them in their future lives as well.

Financial Independence vs. Job Dependence

The formal job sector will continuously shrink. Even if someone starts with a formal job in the future, the longevity of those cannot be guaranteed or predicted. The reason is, that even the makers of AI and other related technological advancements are not sure, how powerful the AIs will be in the coming years. So, no domain knowledge or skill will remain unaffected for a very long time. Hence dependence on permanent skill-based jobs is fraught with danger.

In the years to come, there will be several disruptive technologies embracing everyone across the industry. So everyone whether in a formal job or as a professional will have to go through several upskilling processes throughout the same. With constant upskilling, the professionals will remain relevant in the world of work through contracts. So financial independence has a direct linkage to contact up skilling and also constantly focusing on creating assets, that work 24/7 irrespective of anyone’s presence.

To understand the concept, let's take two hypothetical people/friends Ram and Shyam. Both of them are college graduates working with the same company in the same department. While Ram is additionally trained on how to manage his money and create assets, Shyam knows only how to spend money on his lavish living. At the end of financial year, new technology was introduced and made both Ram and Shyam redundant from their position. Out of a job, Ram could sustain thanks to his assets created in the past. When Shyam was out of money and out of ideas on how to manage his life. From the above, you can understand how it is important to create a sense of financial independence in the years to come.

Rich Dad Poor Dad Insight:

Robert Kiyosaki, the author of the book Rich Dad Poor Dad understood the concept of financial education and financial independence right in early childhood. His own father always encouraged him to study well, get good grades, and get into a good job. Whereas his friend Mike’s dad made both Robert and Mike understand the concept of financial freedom from the early days.

Mike’s father made him and Mike work in his company for free for many weeks to make them understand the importance of making money and building assets, which in turn made more money while you were still not working.

Practical Steps to Financial Literacy for Young Students

Basic financial concepts like budgeting, saving, investing, and understanding taxes.

Budgeting

You must have come across this word many times in the past. The governments make a yearly budget, accordingly collect taxes, and spend money on various activities of running a country. Along similar lines, budgeting for an individual is basically how much money you have or earn and how you can send that money to your different needs.

If you spend money beyond your capacity, you get into a situation of debt, which is basically borrowing from others to spend on something you need. If continued for a long time, borrowed funds can lead to something called a debt trap. A situation, where you are funding your old debt with your new debt, and that downward spiral continues.

The golden rule for personal budgeting is, to spend money for which you are not borrowing money from others. Spend within your means and not beyond your means.

Saving

A part of your earnings through a job/contract needs to be set aside for a long-term saving or investment into an asset that keeps growing over a while. Now what percentage should be saved is up to the individual, but essentially the habit of saving some amount for a long-term unforeseen future is very important. Because the future of everything, work, relationships, society, etc is totally unknown and unknowable. And saving into a typical bank savings account will be counterproductive because those rates of interest don’t even meet the rate of inflation. Hence suitable, index funds, Mutual Funds, Stocks, gold, etc are better saving instruments with a history of good returns over several decades. When you are starting your journey, always take the support of a professional. The importance of starting early helps to compound interest and small investments grow over time.

Understanding Taxes

There are several types of taxes but can be broadly categorized as direct taxes and indirect taxes. Let’s delve deeper into the world of taxes and explore the distinctions between direct and indirect taxes.

Direct Taxes: Direct taxes are levied directly on an individual’s income or wealth. The taxpayer pays these taxes directly to the government, and they cannot be shifted to someone else.

Examples:

Income Tax: Individuals fall into different tax brackets based on their earnings. They file income tax returns annually and either pay taxes or receive refunds.

Corporate Tax: Companies operating in India pay tax on their profits.

Securities Transaction Tax (STT): Levied on securities transactions in recognized stock exchanges.

Advantages:

Inflation Control: Adjusting tax rates during inflation helps reduce demand for goods and services, thus curbing inflation.

Social and Economic Balance: Well-defined tax slabs and exemptions balance income inequalities.

Indirect Taxes: Indirect taxes are imposed on goods and services, not directly on income or revenue. These taxes can be shifted from one taxpayer to another.

Examples:

Goods and Service Tax (GST): Replaced many earlier indirect taxes in India.

Customs Duty: Import duty on goods from outside the country, ultimately borne by consumers and retailers.

Central Excise Duty: Previously paid by manufacturers, who then shifted the tax burden.

Characteristics:

Transferred Tax: Indirect taxes can be passed on to others in the supply chain.

Consumption-Based: Collected from end consumers.

Investing in Knowledge

One might be tempted to make fast money rather than wait for a long period. In the real world, there is nothing called quick money. The quick money also goes away like quick spending. While dealing with money, fear of short-term losses or greed for short-term gains are both very dangerous and should be understood and avoided at any cost.

Robert Kiyosaki explains the concept of Minding your Own Business in the 3^rd chapter of the book, Rich Dad Poor Dad. If you are in a job, please remember you are investing your time and a meager salary to make the owner or investor of the organization. Don’t get too emotionally attached to the job. At the end of the day, it is a transactional relationship for your skill and time invested with the company. The day, the company feels your services are not required, they will find someone else to carry out that role, which you did diligently. So while in the job also, keep an eye on how you are making your assets and how are working for you. This concept is very important to understand and implement in own life. This can be the savior of mankind in the years to come.

Challenges and How to Overcome Them

Earlier we briefly discussed budgeting and debt traps. So, if you are not consciously rationally controlling your mind, there is a danger of falling into a debt trap unknowingly.

One way to control such behavior is to start forcefully saving a large percentage of your early salary or income into saving assets, which are medium to long-term in nature. This will leave very little to spend on frivolous stuff, which is not useful but bought without a thought.

Another way to control is to create financial goals, which one needs to achieve. This keeps you grounded in the path of less distraction.

Building a Mindset for Wealth Creation

Creating wealth is akin to nurturing a mighty oak tree. It doesn’t sprout into existence overnight; it grows steadily, drawing sustenance from the soil of patience and long-term vision. Let’s delve into the art of wealth creation:

 

Patience: The Silent Architect

Patience is the cornerstone of financial success. Like a seasoned gardener, you sow seeds of investment and allow time to work its magic. Warren Buffett, the sage of Omaha, exemplifies this virtue. His wealth didn’t materialize in a flash; it evolved over decades. His secret? Unwavering patience.

Compound Interest: The Eighth Wonder

Albert Einstein called compound interest the “eighth wonder of the world.” It’s the snowball effect: your money earns interest, which then earns interest on itself. Buffet’s wealth snowballed due to smart investments held for years. He understood that compounding is a marathon, not a sprint.

Long-Term Vision: Beyond the Horizon

Buffet’s investment horizon stretches far beyond the next quarter’s earnings report. He thinks in decades, not days. His company, Berkshire Hathaway, owns businesses across diverse sectors—insurance, energy, railroads—because he sees their long-term potential.

Quality Over Quantity: Picking Cherries

Buffet doesn’t chase every stock that glitters. He cherry-picks quality companies with robust fundamentals. His famous quote: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Embrace Volatility: The Rocky Path

Buffet doesn’t panic during market turbulence. He views volatility as an opportunity to buy great stocks at discounted prices. His mantra: “Be fearful when others are greedy, and greedy when others are fearful.”

Learn and Adapt: The Evergreen Mindset

Buffet is a voracious reader. He absorbs knowledge, adapts, and evolves. His wisdom: “The best investment you can make is in yourself.” In the grand tapestry of wealth creation, patience, foresight, and unwavering principles weave the most enduring threads. So, my fellow financial gardeners, tend to your investments, water them with discipline, and watch them grow into majestic oaks of prosperity.

Conclusion

I can’t emphasize more that financial success is rooted in a combination of mindset, knowledge, and action. As young students you should start the financial education journey early, making use of resources like these books and others.

This chapter aims to bridge the gap between academic education and practical financial knowledge, leveraging timeless wisdom from "The Psychology of Money" and "Rich Dad Poor Dad" to prepare young students for a financially literate future.

Reference:

Rich Dad Poor Dad

Psychology of Money

Books and Articles by Warren Buffet
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