Hello Folks,
Please review this trifold which summarizes our financial education program.
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I had the pleasure of listening to a recent lecture by a researcher in child psychology. One of the most interesting findings involved an experiment of 7th grade students. All students were asked to perform a set of some moderate difficulty math problems. After completion of the problems, one-half of the students were complimented on how smart they were for being able to solve the problems. The other half were complimented on how hard they worked to get to the solutions. Though the problems that each group worked on were unchanged, those kids who were complimented by the effort they exerted as opposed to some innate intelligence were substantially more likely to choose to do a more complex set of math problems when given a choice of a new assignment.
This finding is fascinating to me. It demonstrates that work ethic and the willingness to work hard and take on new challenges can be cultivated in children.
Wealth creation is the result of a collection of habits founded on fundamental premises. Habits such as spending less than you earn, performing due diligence and managing risk can be brought about by education and practice. But if the fundamental premises behind wealth creation are not observed or not believed, no amount of education and training can help your child down the road to success. This means that one of the most important tasks for any caring parent must be to instill a strong work ethic and cultivate a belief that usually hard work dedicated to a good purpose over time is a great recipe for success.
We have the benefit of living in a time in history where our society can afford a great deal. Not long ago, young boys and girls of age 10 were busy planting and harvesting crops or performing the household laundry. Families needing to eat had to hunt or fish or grow their own food. Our lives of convenience are truly blessed, but with our increased time for ourselves, what do we do with this time. Our children in many cases live lives of comfortable privilege free from the cares of daily life. As a parent, I wish that my children never know pain or hardship, but we forget that pain is an important part of the learning process. When my son hits his head on the edge of a table and he cries, he will know next time to be more careful and mind where the table’s edge is. Similarly, nearly all families and individual at one time or another will suffer some financial hardship. But hardship is not permanent condition. I, myself, learned the hardest financial lessons in a time of hardship. These lessons have only tempered my resolve to pursue success and the hardship itself has forced me to make decisions that have propelled me further down the road.
Parents, to cultivate a strong work ethic in your children it is important to keep in mind several items
- Money must be tied to effort – Reject the concept of an allowance. Demand that your children perform some of the household tasks in exchange for any money you provide them.
- Encouragement – Periodically, be sure to encourage your children to continue to work hard by recognizing the effort they put in. Reinforce that success is a pattern of reward that follows achievement.
- Share how the family works through hardship – Whether you realize it or not, your kids are watching and they know when things are tough for mom and dad. So let them know, to the extent that they can understand, what is happening and how you are working to resolve the problem. You may be working longer hours or doing extra jobs or giving up on luxuries that you used to enjoy. Explain these things with a smile. Let your children know that work is one of the best companions you have on the road to success, because work can help you solve nearly all financial problems.
- Work is life – Most importantly, it is important that your children learn early on that it is only through our contributions that we make the world a better place. Anything of value ever created throughout human history has been brought about by the efforts of individuals working in solitude or in concert with others.
Children want to change the world; but the world has never changed by itself. It changed because of the desire and effort of the former 7th grader who once chose the harder set of math problems.
In the mid 2000’s, our society saw the largest asset bubble in modern history. Low interest rates spurred loosening of credit which propelled home sale prices upward. Operating by simple laws of supply and demand, the abundance of cheap and loose credit meant that there was an abundance of money. Without a strong constraint on the availability of funds with which to buy homes, there price of homes increases to match the supply. The crash that began in 2008 was driven in large part of the well of credit drying up. This caused the supply of money to shrink rapidly. Again, operating under the simple laws of supply and demand, home prices plummeted.
For decades, we have been seeing the same process at work in education. Driven by easy access to low interest credit in the form of Federally backed student loans, the prices of post-secondary education has risen unchecked. According to inflationdata.com, in 1986, average costs of a 4-year degree was $10,000. By 2015, costs of a 4-year degree is anticipated to be $120,000. Between 1985 and 2010, the total cost of education increased more than 485 percent, while the average of all consumer prices increased about 107 percent.
Based on this information, it is apparent to me that higher education costs are a major bubble. The only reason that bubble hadn’t burst years ago is because the Federal Government has been willing to continue to lend with reckless abandon. In 2010, in the wake of ever increasing student loan defaults, combined with a widespread cry for fiscal accountability in government, there finally started some discussions about limited the pool of government funds to be used for new loans. If and when that pool dries up, finally, there will be a reversal in the cost of a college education.
Unfortunately, this will come too late for those students who will be laboring for decades under the load of loans that in many cases will not result in a large enough income stream to pay them off in a reasonable period of time.
I have always been interested in entrepreneurship. In college, I took several courses that dealt with starting and running a business. Though none of the material was exceptionally difficult, I was intimidated by assembling financial statements. One would normally think that being an engineer and otherwise being very proficient in mathematics, this wouldn’t be difficult. However, there is a world of difference between using math to solve an interesting problem and using math to keep a business solvent, feeding your family and keeping people employed.
Like many people I was intimidated by assembling income statements and balance sheets and left the creation of these documents by other folks who were in traditional finance fields. Looking back this is amazing since both income statements and balance sheets consist of nothing more than simple addition and subtraction. The most difficult parts of preparing financial statements usually comes in the initial setup when you do not have a history that will guide you in making predictions moving forward. Even in these instances, there are numerous ways one can estimate costs and incomes if one thinks things through. I would have given myself a tremendous advantage earlier on had I chosen to apply myself more in facing my lack of confidence and learn it.
Speaking plainly, you will never move forward financially until you learn to track your financials and make reasonable financial projections. You need to learn to track your income and outflow so you can effectively manage the challenges of spending today and projections are needed to manage the challenges of spending in the future.
Most children are taught the story of Sir Issac Newton sitting under the apple tree and being struck in the head by a falling apple and how the falling apple prompted him to discover gravity. However, what kids are not told is that same event prompted another Newton invention. Gravity is the force that describes how things are pulled down toward the center of the earth. In order to explain the concept of gravity and to make the new concept more useful, Newton invented a whole new branch of mathematics called calculus. I have an engineer’s training and have taken more mathematics classes than the vast majority of the population. Although teaching calculus to kids at an early age may be difficult, the basic concepts behind calculus are very simple, easy to illustrate and are vitally important in the teaching of financial education concepts.
Prior to the invention of calculus, it was very hard to make sense of many things in nature, because math was limited to snapshots. Algebra, geometry and trigonometry only make sense for the given data at a certain time. If you wanted to see how things behaved with time you needed to figure out the equation at a bunch of different points and draw the graph to see it. Calculus allowed us to see how things are changing at a given instant. It allowed us to see that if we are in our car and slam on the brakes, we can predict how far and how long it will take us to stop. It allowed us to see if we are spending money at a given rate and earning money at a smaller rate, how long will it be until we run out of money. These types of measurements weren’t easily performed prior to the invention of calculus.
When it comes to personal finance, each of us does calculus all the time, though we may not realize it. Calculus is used to measure the rate at which something is changing at that instant. Week-to-week, month-to-month, we adults always work the Net Income equation to make choices. Net income is simply total income minus expenses. The bulk of financial education is geared toward increasing the rate of change of the net income equation. When we work to be more frugal, we are making expenses smaller. When we invest, take on additional jobs or get wage raises, we are making the gross income side bigger. Both of these increase the rate at which the net income equation is changing.
- Image via Wikipedia
By using the net income equation, we can make predictions about where we are going to be financially in the future. When will I be able to afford that new item? Will I have enough money to go buy groceries or go to the movies? Will I be able to pay my tuition bill? Will there be enough left over to continue to pay for other things? These are the questions that one can reasonably answer through the help of calculus.
I find it unfortunate that teachers in schools often tell about the first discovery the Newton made that day, but so often neglect to mention the latter. Kids need to know the concept behind calculus and rate of change at an early age. It will help them throughout life. If you think about it, you will find many ways to illustrate these concepts for your children in the car, on the playground and in the home.
This type of learning is important, because gravity tells us that, on earth, unless we do something about it, things fall. This applies to equally to checking account balances as it does to apples.
