Lending vs Giving Money to Children – Episode 412

This transcript was auto-generated and may contain errors.

[00:02] Hello to partners. On this episode, the topic we’re covering is lending money versus giving money to your children. Kim, we would love to hear your insights. Absolutely. And I have a fun story to share that is not about children, though it’s about the same idea that I think will be instructive. And that is after one of the hurricanes that was pretty devastating. I’m sorry, I don’t remember which one. We were down in the US Virgin Islands and also in the British Virgin Islands. In the US Virgin Islands, the US gave money to those residents for the damage of the hurricane. In the British Virgin Islands, the Britons lent money to the residents of the British Virgin Islands for the damage of the hurricane.

[01:00] So in BVI, lent money. In USVI, gave money. Guess what we experienced. This is going to be interesting. I would say that track record shows those who don’t have to earn probably waste. Absolutely. The US Virgin Island residents were evidently lazy. They were still wandering around. Construction had not started. Deconstruction had not started. Cleanup hadn’t started. We were not made to feel welcome. We were made to feel guilty. Like you have money. You’re traveling. Help us out. It was night and day to the British Virgin Islands who were actively working to clean up, deconstruct, reconstruct, put businesses on the beach if they had to in order to run their business while their building got rehabbed, welcoming us, thanking us for coming

[02:05] to visit their island. It was night and day. It was so surprising to us. And we actually didn’t know this information when we were down there. We did the research afterwards and figured it out. And it was so instructive. So think about your own children. And of course, any habit that we want to install in our children should literally start day one. Now, obviously you’re not going to be talking about lending a two-week-old baby money. Nevertheless, I am such a believer that if we want our children to be self-sufficient, self-reliant, if we want our children to be disciplined and responsible, then that must start at day one in whatever way it can. And a lot of our listeners know my all-time favorite book on the subject is called My First 300 Babies by Gladys Hendrix.

[03:04] And it talks about the importance of putting a baby—yes, a one-day-old baby—on a schedule so that that child can learn how to self-regulate and be self-reliant and start them with little 10-minute alone times, growing to 20-minute, growing to 30-minute, growing to an hour, etc. So if you think about the first time that a child is probably going to be conscious of money as an exchange—one of the definitions of money is an exchange, it’s a medium of exchange—is usually at a grocery store and usually around either a toy or more often some type of candy or, I think probably even more often than that, the cereal box aisle. So you literally at that age are starting a habit. If that child thinks that

[04:01] every time they go to the store they’re going to get a treat, call it candy, toy, cereal, whatever it is, then that’s what they’re going to start to expect. And if that child is not taught something different, then what else should we expect them to expect? And again, not that you’re going to necessarily lend money to a two-year-old so that they can learn how to pay it back, but at age-appropriate levels, starting to train them in the way that you want them to grow up is so critical. So as an example, I know from a parental standpoint, we would want to start to teach a child to save. And so as early of an age as possible, which really is probably around three years old or so when they start to learn

[04:53] how to count. For example, if you want to give them a dollar, maybe it’s for a birthday, maybe it’s just because, give it to them in ten dimes and have them count and have them start to learn the concept of saving. Saving as a verb is the most important financial skill. And so they can learn the concept of having one dime put away and maybe you choose to have a second dime put away for charity and even a third dime to help them understand a concept of taxes. I mean, that’s probably taking things a bit far, but it’s so important that they understand the idea of separating out parts of money, saving for later. A cute story, just to skip ahead to a 15 year old. This gal joined our truth training last week and she was

[05:47] there to help her mom who was helping us run the event, but she was really interested in personal finance and she didn’t understand the concept of opportunity cost. Well, no surprise. I mean, as a financial advisor, when I was new in the business, I didn’t understand it either. It took me a long time to learn it. And though it’s something that we are taught in high school and college, it’s something that usually doesn’t stick because we’re taught it in some big economic way that just doesn’t relate to us personally. She kind of got the concept, but I wanted to re explain it to her before I answered her question, which was how to calculate it. So I’ll share my description with our listeners. And I said, let’s say you have

[06:26] 20 bucks and you go into a store and you can buy a bunch of candy and eat it and it’s gone, or you can buy a shirt and have it for a long, long time. Now I made clear to her, typically we wouldn’t actually calculate opportunity cost on things like candy and clothes, but I was helping her understand that the opportunity cost of eating the candy disabled her ability to get the shirt and she got that. She’s like, yeah, I understand what opportunity cost is as it relates to that. Well, the way to calculate it is to apply an interest rate and it’s really hard in today’s world because our savings accounts rates are so low. But if you could say, well, I know where I could store money or save money,

[07:13] save as a verb or in a savings account with save as a noun to earn, let’s just say 3%. And I realize that might be a stretch for some people, but we’ll just go with that for now. Well, then you would calculate your loss opportunity cost at $20 times 3% times, let’s say the shirt lasted two years and whatever that $20 times 3% times two years would be, cause it’s going to compound, right? That would be your opportunity cost. And so it’s not just 20 bucks wasted, well spent in this case on candy. It’s 20 bucks plus whatever the opportunity cost is. Again, that’s taking things maybe a bit far and I certainly wouldn’t recommend calculating opportunity cost on food and clothes. Nevertheless, I thought it was super cool that she understood the concept, but wanted to know

[08:06] how to calculate it. So now I’ve shared both something at the really early stage, as well as something more appropriate for high schoolers. Spencer, you’ve got middle school age kids. How would you answer this question about the opportunity cost or about lending versus giving money about lending versus giving? And I did get a little sidetracked there. I apologize. Oh, no problem. So, uh, one, I want, I want to zoom out because there’s a bigger principle of the living lending versus giving, because I want to teach them to be resourceful individuals. And there are times when, and I’ll just say it this way, my kids understand that there are outside parties, you know, be it grandparents, family members that may give them money for

[09:03] birthdays, holidays, whatever those things are. And, um, and that is a gift that they don’t have control over, but that is not something that they should be anticipating. What they need to do is they need to be resourceful and to be earning that. And so what we do is we find ways that we can be teaching them this. So I’m going to share a story that I think is completely in line with this. So this happened about a week and a half ago. It was on, and I remember this perfectly. Wednesday night, um, my wife read a story to our daughter, Ellie, and it was a fancy Nancy. I believe it’s her name is the kid’s book. And she was walking dogs. It was on a Tuesday night. So Wednesday morning, Ellie wakes up,

[09:55] we’re talking and she goes, dad, I want to do dog walking. So, okay, that’s great. Um, I take it as just a kid saying something, want to do, and I encourage it. Well, a couple hours later, she comes to me and says, Hey, I’ve made a poster of flyers so that we can give it out to people on it. Wow. Okay. She’s a little bit more serious. So I did my part and I said, well, let’s go get some copies of it. So we drove to the FedEx copy shop and it happened to be closed. So the next day, this is on Thursday afternoon, we went to the UPS store. We made copies and I went around the neighborhood around grandma’s neighborhood and Ellie went and she knocked on doors and gave people the flyer about her Ellie’s

[10:44] professional dog walking business. I love it. This is her idea. That wasn’t mine. Right. As we were walking, um, I kind of, I said, Hey, how are you going to pitch this? And I would listen, but I was from the sidewalk. I was not involved at all. And I would listen and then she’d come off and say, well, how did that go? And I’d help critique her each time. And finally she had it nailed. Well, people called, they texted she at nine years old was making $15 an hour walking dogs. That’s resourceful to me. Um, now could I have given her money and overpaid her for things? Could I have lent her money to go and try other stuff? Yes. But I wanted to teach this to her and possibly by all these other lessons that have compounded over the years, made it possible that she wasn’t entitled

[11:43] that she went out and tried to earn it. It will serve her so well. And we know all the other good things that she picked up in that process. And that’s what I think is so awesome about parenting is we get a chance to teach things that maybe we wish we had learned or things that we know are important to learn and lending money teaches things. And does it get tough? Yes, absolutely. More self-reliant children. There’s a book I love, it’s called raising self-reliant children in a self-indulgent world. And there are fabulous ideas in that book that enable the good that we get from not only lending money to children as opposed to giving money to children, but also I can think of a friend of ours,

[12:43] potentially helping them see the consequences when loans don’t get paid back. This friend has lent money to his children so that they could go ahead and buy an iPad as example that they needed for school was warranted, wasn’t critical, but would have been helpful. And one of those things that is way more helpful to have now rather than in three months when they raised the money and then they were to make payments on that iPad, they signed a note, they understood all the pieces and parts and it didn’t happen. So that iPad got repossessed. And was that a tough thing? Yes, absolutely. And yet, oh my gosh, the good learning that occurred for that child at that time. Stan Oh, I love it. He just took me back. This is probably about five years ago and I

[13:34] did that for my oldest. He had a big purchase. So on the fridge, it was a payment. It was a 10 payment installment loan from me. And he knew it. And you know what? Every single Friday when that was due, he was ready. And the surprising thing, when he had about three or four payments to go, he came to me with a lump sum and he just said, Dad, I mowed a bunch of yards, I helped the neighbor. Can I just pay you off early? I love it. So what a great example that you’ve shared with us, Kim. And you know, I think for all of our listeners, as we listen to the different teachings here and the principles inside this podcast, we realize, A, if there are children in our lives, be it grandchildren or our children or other family members, there’s a way to teach them this. And second,

[14:33] maybe if we aren’t the best on track with this, there’s something we can learn and apply it as well. We just are always continuing to learn in this process. So thanks for sharing that with us, Kim. Absolutely. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.