Financial Literacy – Episode 579

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We’re going to be talking about the art of becoming financially literate. There’s an art and there’s a science and there’s a prosperity that meets in the middle that takes both of them. So Kim, help us understand what financial literacy means to you as a definition, and then we’re going to dive into it. Thank you, Spencer. This is such a joy. My parents were teachers and so I grew up in a house of learning and it was instilled in us that you learned your entire life. And the high schools and colleges and even middle schools of today are working, striving to teach about financial literacy. But unfortunately, and this is true of the media as well, I think they’ve missed the mark a little bit.

[00:55] And financial literacy is a really big buzzword. But what that actually means is subject to a lot of different definitions. And for example, in high school, our kids were taught about picking stocks. And there’s nothing wrong with picking stocks. That is one element of financial literacy, yet it is only one element. And that is all that they were taught in their classroom. Now, this was a few years ago. Nevertheless, I know from research that the bulk of 25-year-olds today view financial literacy as how to pick cryptocurrency. Their dad’s thing was stocks. Their uncle’s thing may have been mutual funds, which is basically stocks. Their thing is cryptocurrency. And believe me, I’m a huge fan of Bitcoin,

[01:46] but I’m not so much of a fan of any of the other cryptos. You want to put a few dollars in there and have fun? Absolutely. But please don’t treat that as a serious investment. And yet they are. So what else should financial literacy have? And it comes down to time, value of money. And this is where I’m going to layer in another word, which is financial competency. Because a lot of people can learn about the time value of money or not learn about it. If we were in a room and said, raise your hand if you can succinctly describe the time value of money, I think about half the room would struggle with that, no matter what age they were. And yet when you look at the five elements of all financial

[02:38] decisions, which are present value, the amount of money now, future value, the amount of money in the future, okay, right there, time is involved, the interest rate, of course, the payment, the fifth element is time. And the reason that there is a disconnect between the financial literacy that is out there in financial competency, which means actually knowing what to do with the information is largely because of these tiny handheld calculators, or the one that’s on your phone. If you’re watching on YouTube, a handheld calculator or a simple calculator on your phone, which is of course where most people use them, is not the place to do financial competency work. Because it does not have the time value of money,

[03:31] which is necessary in order to make any financial calculation proper. It must come from a financial calculator, which you can get those on your phone as well, but most people don’t. So I am not often, sometimes I’m a contrarian, but I want to be a contrarian today. Is that okay? Yeah. You made a statement that high school teachers are teaching financial literacy, or parts of it, we’ll say. I want to argue and say, they’re not. I want to argue and say, they are not because they don’t know it, they don’t have the skill for it. And essentially, and I’m very libertarian, so my kids are homeschooled, they go through the Tom Woods government program, they go through Connor Boyack stuff, very libertarian-minded and capitalist-minded.

[04:27] I think that teachers and schools are some of the best sales programs for the financial institutions that are going to give people loans. So how do I view this in a more prosperity way? Because I have a disdain for it. Well, it is very true, because the banks of America, literally, the Wall Street institutions are the ones that are often literally providing the books and the workbooks and the computer programs that these teachers are using. And as a debt-oriented society, and frankly, most teachers don’t have the financial competency either. And so they will make comments like, a 15-year mortgage is better than a 30-year mortgage. But have they taken a financial calculator and actually worked out the math with the time value of money

[05:28] incorporated? And my guess is most of them have not. And they’ll make other statements that indicate that there is just a disconnect between reality around time value of money and what their curriculum is suggesting to be taught. Because interest rates are difficult to understand unless they are converted into dollars. But our world doesn’t do that. We do things like, say, if I borrow at 4% and I invest at 5%, that’s a 1% improvement. No, it’s not. It’s a 25% improvement. But because we don’t take that 4% and apply dollars to it, for example, put in $100,000 for your loan amount at 4%, $4,000, and then you invest at 5%, that same $100,000, $5,000, the difference between $4,000 and $5,000 is not 1%, it’s 25%. Again, a financial calculator will make this very clear

[06:33] very quickly. But that is not a normal thing for people to turn to. And unfortunately, most financial calculators like the HP 12C, which is, I believe the statistics are something like it’s HP’s largest selling product. It’s been in production since the 1980s. There are just massive numbers of them sold. It uses reverse Polish notation, which is as horrible as it sounds. And it’s very difficult to learn. I learned it at one point and have forgotten how to use it. And so this is where the truth concepts calculators can come in so handy because they actually give us the five financial calculators. There’s a calculator for time. There’s a single calculator for payment, a single calculator for present value, a single

[07:21] calculator for future value, and a single calculator for interest rate that would enable us to put in something like four is our present value, five is our future value. There are no payments. We are looking at a one-year period of time. Interest rates should always be measured over one year. And that is where we would see that 25% rate showing us the difference between four and five. How are people supposed to teach that if they don’t have, for example, the truth concepts financial calculators? I honestly don’t know the answer to that question. Okay. So one, we’ll make sure we put in the show notes, truthconcepts.com for those calculators. Getting into the financial literacy, we have the definition of things,

[08:05] meaning the definition of information that we’re learning or understanding real numbers, we’re understanding future value. Now, and I’m stating this just from homeschooling my kids, which is here’s where a challenge comes. And I’m sincere because I want to figure out how to overcome this, which is we have education where we teach our kids, they grab onto a nugget. Let’s use the nugget of becoming our own. And I’m using this very easy to understand language, becoming our own bank as a family. From a kid that hasn’t done the work, they can then say to their friends, our family has become our own bank. And that’s very surface. So how can we give them a little bit more literacy without the overwhelm? What would Kim Butler say in this

[08:57] area? I think it comes down to helping them see what income and expenses are. And the best way to help them do that is to play games and to get involved with things like the cashflow game or the cashflow for kids game or the dinner table app or other elements of your own life where there are income and expenses. So start with activities that your family is doing. Are you going to the grocery store? Great. Show them mom and dad work. We earn income. We have guidelines to our spending. Some people call them budgets. I don’t prefer the word because I know that they don’t really work. But let’s say that your family’s normal grocery store expense per month is $400, $4,000. It doesn’t matter whatever your zeros are.

[09:54] Help them understand which with children, sometimes that’s literally taking a bunch of $20 bills and putting them out on the table so that they can understand what that is, depending on their age, of course. And then going to the grocery store with them. And as a parent, you’ll get better results if you’ll treat it like a boot camp. Understand that this grocery store trip is going to take a couple hours. Have them go through, look at the price of every item that goes into the cart, add it up so that they can see it, play games with them in a way that learning becomes fun. Have them sit down with you at the computer and pay your bills. Or if you’re using a physical checkbook, have them write out a check, income expense, income expense, income expense,

[10:35] help them see all sides of it. And same is true of things in the home. If something breaks, help them understand. The plumber comes over. He gets paid for the work that he does. Then he has to go buy his parts. Then he fixes our plumbing mishap or what have you and help them again. It’s going to take time, right? I heard a great quote the other day. I wish I could remember who said it. If you want to have awesome children, cut the money in half that you spend on them and double the time that you spend with them. Cut the money. Isn’t that good? Cut the money in half that you spend on them and double the time that you spend with them. And that’s the beauty of homeschooling is you get to do more time.

[11:23] That’s so good. That is so good. The financial literacy, you used the word cash flow mentioning the game, but cash flow is something that you often are teaching into the prosperity thinking on an audience. Can you give us a quick lesson on financial literacy with cash flow, how you see it different than the majority of people? Yes. To me, cash flow is both in and out. The income, of course, drives the in. Then the out should be savings first. This can be taught to a three-year-old. If they earn a dollar, give it to them in 10 dimes and help them understand that some of that money goes for savings. And if you choose to be a charitable family or a church or synagogue giving family, then you might have another dime go in those categories. And then you might as well start

[12:29] teaching about taxes right away. So another dime or two should go in those categories. And that will start that learning of cash flow. If your children are older, same kind of thing applies. It’s just larger dollar figures. And it’s so helpful for them to have physical things. You can do all of these things on apps. But the more that you can make it fun and help them see cash flow is a monthly thing or maybe every couple of weeks, depending on how you get paid. But more importantly, help them earn money so that they get paid. And then make sure that those dollars that they earn are going for their expenses. This is not money for them to just blow. This is money for them to understand that right off the top comes

[13:23] paying themselves first, their savings, just like an adult’s cash flow should. Off the top comes taxes. Off the top comes charity money, et cetera, however your family wants to do that. And then with the leftover money, this is not all for fun. If you have a sporting goods event you want to go to, you buy the ticket. If you have a car that you want to use, you pay for the gas and the insurance and the maintenance. If you have a gift that you want to give to your friend for their birthday party, you use that money to purchase it. And the fun thing about what the dinner table community inside our prosperity parents work calls gigs is it turns the idea of work into something fun. They can find things that are fun

[14:13] to go out and do in the community so that then the dollars that they’re earning are not coming from you, the parent, they’re coming from the community. This is the age old lemonade stand or fill in the blank. So this is an environment for them to be of service, for them to be out and about, not on their screens and learn the value of work, the value of a dollar, because they will spend their hard earned money very differently than the money that you provide for them either via gift or allowance, which I don’t recommend at all anymore. I love that. That’s so good. We don’t do an allowance and we look at our family like an incubator where we’re teaching the kids these skills and then they can take some of those

[15:04] skills, go out into the marketplace, the community. In fact, actually, they use marketplace to sell things. I love it. They’ve had to develop the skill of communicating with people, of dealing with people saying, oh, can you drop this off? And it’s no, or yes, we can. Here’s the additional fee, the ways to make money. And the other part that makes me think, and I want to get some insight, just a brief insight, which is leverage. I see leverage once you’ve got this financial literacy, once you’ve got some skills that have been developed, you get financial leverage and then human leverage. So how do you see that in the financial literacy world? It really goes back to cash flow, right? So cash flow in and cash

[15:54] flow out don’t always equal. And so it’s helpful to learn the good and the bad around leverage. For example, if somebody gets in an accident and they don’t have a savings account, then they have to use the leverage of a credit card to live. And credit cards are certainly viable options for a lot of things. We have to have them to do pretty much anything, get an Uber, fly on a plane, go anywhere, etc. A lot of stores these days, you can only pay via credit cards. It’s very important for our children to get to learn about credit cards quickly. They are a form of leverage. And we both know many businesses that were literally built on credit cards. Nevertheless, we know the detriments of them as well. And then that can parlay into car loans and mortgages, which mortgages in particular can

[16:47] absolutely be a good form of debt. And this is one of those things that I see in financial literacy courses sometimes, is talking about all debt like it’s the same stuff, credit card debt, car loan debt, student loan debt, and mortgage debt. And it’s very much not the same. Those have to be separated out and cash flow enables us to get leverage. But then what we use that cash flow for must be for things that are growing, the things that are providing benefits, which a home does do. Obviously, home values can shrink as well. But that’s also something to be taught in time, maybe a later subject for a kid that’s a little bit more experienced. Nevertheless, the whole arena of leverage, I love what you said, both monetary leverage and human leverage.

[17:35] My son in his late 20s, he pays his friends to do stuff all the time. He’s constantly evaluating if somebody will do this for $10 or $15 an hour, then I can go do something else for more per hour, or I can use my brain to create the next opportunity, or I can combine three or four $10 an hour kids and get the job done in half the time. That kind of thing. He’s always looking at that, which is a fabulous result of leverage and also a really classic win, which people can train their brains to look for where the person providing the service is winning, the person getting the service is winning. And there’s usually a third win in there if you look for it. That was good. That’s a great soundbite. That’s a good clip.

[18:28] Kim, thank you for teaching about financial literacy, helping our audience understand what are the real things to pay attention to, to cut the noise. And again, this is not something you get overnight. But like saving, it’s something that you’re intentional, something you create a habit that happens over time, and then prosperity is in front of you. Thank you for listening. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com. For me, it was important to think about where we would be in the future. All the tools to analyze sales, such as inventory management, are right there on our dashboard. Start your free evaluation at Shopify.com.