Hey everyone, it’s Finance Fridays again. Today we’re going to just do some free-thinking (rambling) about “The Head Start”.

The Head Start?

Yea.

So, I think it’s no surprise that when it comes to wealth, people don’t start at the same level or even the same time. There are a lot of sarcastic quotes about this like:

“The best way to become a millionaire is to start off as a billionaire. “

Then of course, we have Donald Trump who started off with “a small loan of $1 million” in order to build his empire.

The point of the matter is that in the things are never equal, especially at the very beginning:

In America, inequality begins in the womb

This isn’t new information but any means, but I wanted to bring it up to illustrate a point. For my grandparents, my parents, and now for me, I think the common thread between us was to give our children a “better life”.

This isn’t to say that our lives were bad persay. It’s just that you want your children to have every advantage possible.

One of the most interesting things I read recently was this:

Poverty charges interest.

I talk a lot about compound interest on my Finance Fridays, but this is kind of the reverse. Reverse Compound Interest if you will.

It’s kind of like when your bank account gets over-drafted and then the bank charges a fee because you don’t have money in your account. So then your bank account was $0.93 before the charge, but then is now -$9.07 after the charge. And then the charge itself doesn’t go through, so whoever charged you probably is going to charge you a late fee.

Doesn’t seem fair does it? Can’t squeeze water from a stone.

Anyways, the point of this post is that these little advantages are more important the earlier they happen in life. Everything compounds.

Everything compounds?

Yea.

The easiest way to provide financial stability for your children is to already be financially stable. It’s kind of the same as the above where the easiest way to make $1 million is to start with a $1 billion.

My parents provided a stable home environment for me and I went to a good public school. I received a good education and the question was never if I was going to go to college or not — it was merely a question of which college. Of course, this is different for people on both ends of the spectrum, those who couldn’t go to college and those for which an Ivy League college was already a foregone conclusion. Additionally, since my parents had committed to paying for college for me, that was another distinct advantage I received over others.

When it comes to establishing a foundation of wealth, I had a pretty good head start. However, times change, and achieving the same “head start” for my children may be a little different because of how expensive college has become. Committing to paying for all of their college may be difficult, especially since I live in Hawaii and the only “in-state” public school option is University of Hawaii. Now then, I have committed to putting away money 529s for my daughter and son every month. However, I am leaving whatever that amount ends up being to chance. I hope the market was good for those 15 years or so and we’ll see how much that covers.

If and when the 529s run dry, then we’ll look at our finances and see if we can still help out. If everything goes according to plan, and the the likelihood is we will be able to — but at our discretion.

What other “Head Start” do you have planned?

I want them to understand finance. My parents did their best to shield my sister and I from the worries of money, since it worried them a lot. In fact, they didn’t like to talk about money at all with my sister and I, even when we were adults in college. While I understand why they did it, I’d prefer for my children to understand how things work – at a very profound level.

The terminology of 401k, 403b, 529s, etc. should be common knowledge to them before they leave for college. They should understand Compound Interest, The Rule of 72 and Index Funds amongst other things.

More so than that, I want them to understand the separation of risk and calculated risk. It’s a lot easier to take risks when you have (relatively) less at stake.

For example, if you have $100k in your bank account and $1 million in your 401k, taking a high risk high reward kind of bet on $10000 probably isn’t difficult to do. In the same situation, if you only have $10k in your account, and $100k in your 401k, you probably can’t take the same risk.

The other thing to understand is that the less you need, the more you can risk. If you can live off $20k/year, but you make $200k/year, then you can take more risk than if you live off $100k/year and make $200k/year.

Now then, I’m not saying to just throw money at gambling everywhere on whatever you don’t need to live on. I’m just saying, more opportunities are available to you when you can live off less.

What do you mean?

For example, let’s say you make $400k/year but can live off of $30k/year. I’m using this example because I know this is possible for some exceptionally frugal individuals, even here on Hawaii. Even after taxes and maxing retirement accounts, you likely still have a huge excess of money every year.

At any one point in time you probably have $200k+ in cash. There is a lot you can do with that much money. For example, maybe you could buy a 2nd house to rent out. Or maybe just buy some land. Or if you want to start taking bigger risks, you could invest in individual stocks or pre-IPO deals. You can take enormous risks and command a ton of leverage.

What I’m saying is you can take more risks when you don’t need the money. Any of those options above could fail. In fact, they could all fail.

You have to accept that some of them will fail, but that the one that succeeds will make up for the failures. This is pretty darn near impossible to do unless you are essentially playing with money you don’t need.

Money I don’t need?

It’s probably a hard concept to grasp, but at some point money just becomes zeros. Once you can provide for yourself and your family and have all the things you want, what else do you do with it? I think people who are billionaires probably don’t worry about things less than a $10,000, because to them, it’s like us “regular people” worrying about things that cost less than $10.

So what I’m saying is that I want my children to understand that frugality can provide freedom. You need to have a good understanding of what makes you happy in life and place your time and value in that. Anything outside of that does not need to be expensive or take up too much of your time. Once again, it comes back down to Value Cost Ratio – just on a larger scale.

Pay for the things that have value to you and don’t pay for the things that don’t.

It sounds simple, but it isn’t.

What’s the bottom line?

In a round about way, I’ve kind of talked about everything around the point of this article, except the actual point of the article.

My point is that everyone tries to give their kids a head start when it comes to their future. My grandparents for my parents, my parents for me, and now my wife and I for our children.

However, the “head start” changes with time, and you must adapt with it. For my children the “head start” I will give them is a stable home environment, good education, enrichment, and 529s for college. This is similar to what my parents did for me.

However, in addition to that I will provide them knowledge and a good foundation in how finance works. I will instill in them the importance of frugality and how it buys freedom.

Then from that freedom, they can set out on how they want to make their mark on the world — and hopefully change it for the better.

At least that’s the plan.

TL;DR

The starting line isn’t the same for everyone.

It even begins with your zipcode.

Poverty charges interest.

These are my thoughts on “The Head Start” that I was given, what I’m trying to give my children, and why.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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