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Water Works – Managing Personal Cash Flow

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Analogy is one of the most effective teaching tools.  By showing similar relationships in the familiar and concrete to the new and abstract, it becomes much easier to illustrate the relationships to the inexperienced.  One of the most concrete analogies I have seen to explain abstract concepts is in plumbing.  I have seen plumbing used to explain such diverse fields as electricity to organizational systemic behavior.  Plumbing also is a great way to illustrate the flow of money.

In every household, there is income which consists of the water source and a set of expenses that serve as a drain.  Most people have a drain that is large enough to drain the bathtub nearly as fast as the water flows into it.  Not only is one required to keep filling the tub by working hard, but also should something disrupt the flow of water, such as a bout of unemployment, the tub quickly drains and fundamental needs of food and shelter become difficult to have.

I started working when I was 13 years old.  I have always worked and worked hard.  One of the best things that can be instilled in a young person is a work ethic, but a work ethic without an ability to manage personal cash flow only serves to help make everyone else more well off.  When I started working, I earned some money and I was able to buy a few nice things, but one of the lessons I learned far too late is that when you buy something that doesn’t pay you back, that purchase only serves to make the seller richer and you poorer.  Diligent efforts must be made to make some portion of your earnings work for you over time and that only happens with a combination of saving and investing.

I will be discussing more about how to manage cash flow in the weeks to come.  But it is fact that one will never get ahead financially unless one learns to reduce expenses sufficiently to divert some income into savings and investments.

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Book Review: The Richest Man in Babylon

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5198kPizgPL. SL160  Book Review: The Richest Man in BabylonThis site is all about education.  One of the best ways I have found to learn is through reading.  Therefore, I will provide book reviews from time to time of books which have taught me much about personal finance.

I have chosen to discuss the first book I ever read about personal finance.  It is also one of the best. The Richest Man in Babylon by George S. Clason is a collection of very readable and interesting stories which teach fundamental financial lessons.  Written from the perspective of people living in ancient Babylon, it teaches through story, which I think is one of the most effective ways of learning.

The book provides a simple plan for financial success:

1) Save at least 10 percent of your income.

2) Wisely invest your savings so that it can multiply.

3) Find people who have industry specific knowledge who you trust to help you invest wisely.

4) Don’t invest in things you don’t have knowledge of or things of which your trusted industry experts do not approve.

5) Don’t invest in things that appear to good to be true or with people without integrity.

These five laws, collectively referred to as “The Five Laws of Gold,” are a great foundation into effectively handling money.  What I learned too late is that building wealth is very uncomplicated.

Sometimes when it comes to investing, we try to be sophisticated.  There is a time for sophistication.  But most investing, particularly when you are just starting to build wealth should be kept as simple as possible.

There are many other lessons in this book, such as making the most of opportunity and the value of hard work.  The wisdom gained from reading this simple book is a great primer into the fascinating world of personal finance and investing.

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Should young people see a financial planner?

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I found an interesting article in US News. The value of a financial planner to a young person depends upon how someone defines a young person and what kinds of services that financial planner is commissioned to provide.

If young person means someone under age 18, it is uncommon that a financial planner is needed to coordinate a large investment portfolio. However, a financial planner would still be very useful to provide financial education. Unfortunately, too many financial professionals are salespeople rather than trusted educators. Regardless of age, I would recommend finding someone who sees his or her primary role is that of educator. In that vein, seeking a fee-only financial planner is a good idea for people of all ages, provided you find yourself learning during your visits.

One good rule of thumb for any financial transaction pertains to who is paying this person. If one operates on commission, the company one sells for is paying the person and, therefore, the seller owes his or her allegiance to the company and not to you. However, if you are paying the person, there is a better chance that the advisor is keeping your best interests in mind.

I love financial planners. I provide financial counseling to many folks and I find it very rewarding to help some people discover better ways to manage their affairs. The most important thing to keep in mind is make sure they are working for you.

Here are a few warning signs to look out for:

1) The advisor wants to sell you something the first time you meet.
2) The advisor hasn’t asked you a bunch of questions to understand your situation.
3) The advisor seems to push you in the direction of one financial product.
4) The advisor starts marketing you investments before you’ve discussed your cash flow situation.

Remember that 80% of the game of personal finance has to do with cash flow management. Any advisor that isn’t addressing this is thinking more about selling you something rather than helping you solve your financial problems.

http://money.usnews.com/money/personal-finance/articles/2010/08/05/should-young-people-see-a-financial-planner.html

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Student Loans: The Albatross around the Necks of Young People

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The purpose of this site is to help young people avoid costly mistakes early in their financial lives.  One of the biggest mistakes a young person can make is to burden themselves with huge student loans.  As this article attests, in a bad economy a huge debt burden can leave you unable to stay afloat financially.

“The number of college students who defaulted on their federal student loans climbed in the fiscal year that ended in September 2008, according to new government data released Monday.”

Defaulting on Federally backed student loans leaves you in terrible shape.  You are subject to large fees and interest.  And in those times when things get really bad financially, most student loans are not dischargeable in bankruptcy.

My family has been greatly burdened by huge student loans to the tune of over $110,000.  With careful planning, we intend to retire our student loan debt within a few years, but it has been an extremely difficult challenge with which to contend.  We’ve had to sacrifice much of the good things we want to pay for those decisions.  Had I made smarter financial decisions when I was younger I would be living a more comfortable life.

http://www.usatoday.com/money/perfi/college/2010-09-13-loan-default-rates-rise_N.htm

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Making Monopoly Better!

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monopoly Making Monopoly Better!From an early age, we are taught the wrong things about money and business. Consider the very popular board game Monopoly(R). The game was developed by an engineer at the beginning of the 20th century. In a world of Robber Barons and at the genesis of Scientific Management as a management science, it is possible that a strictly win-lose game is an accurate teaching tool about business. To me, this is a grossly inaccurate way to teach young people about business in a Knowledge Economy, where success is much more about fostering cooperation, sharing ideas and mutual success. Today's business environment is all about win-win. It's a great time to be running a business. I love Monopoly(R) but I have found a few minor rule changes can make it much more accurate depiction about business today. It also makes the game move more quickly and allows for teaching lessons of negotiation and the art of creating win-win solutions in business.

Rule 1) All rents are paid by the bank Rents are not paid by other players. When a player lands on another players property, this just simulates the market buying from the owning player.

Rule 2) Making Payroll Every time a player passes "Go", the player must pay 10% of the purchase price of all owned properties (both mortgaged and unmortgaged). This simulates making monthly payroll and teaches the player the importance of cash-flow management.

Rule 3) Partnered Ownership. Players can partner to form monopolies and divide the proceeds as agreed. Property ownership is no longer an attrition game. Deal making is encouraged much earlier in the game. In the traditional game, many players wait until nearly all the properties are acquired to begin making deals, which draws the game out. In business, jumping on opportunities quickly is vital to success.

Rule 4) Private Lending Players may lend money to other players under whatever terms mutually agreed upon. Successful business people know that a lack of money is rarely an obstacle when the opportunity is great. Part of the art of deal making is assembling the team that has all the necessary resources. Often, one party brings funding.

Rule 5) Ending the Game The game ends when the last hotel is sold and therefore, the market has achieved "saturation". This teaches the importance of taking action quickly and encourage deal making as soon as possible.

A few simple rule changes like these can reinvent Monopoly(R) and make it a much better learning tool. Youth Financial Education is dedicated to finding fun and creative ways to teach young people tools that will place them on the road to financial success. We do so using a combination of lessons and games. In the weeks to come, we'll show you new ways to help young people get ahead.

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Why I am here

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Why should I undertake something like this? It’s a challenging answer. It is important that you folks know that I have never attempted to do web hosting/web development before. And, honestly, just to get this far required vast amounts of learning. This learning will only be multiplied going forward.

I’m excited by this though. I am one of the most educated individuals out there. My knowledge and applied skill set spans a wide variety of topics. There is rarely a problem which I haven’t been able to work through with good colleagues and a little time.

However, bad financial decisions I had made early in my life set me on a course that made my road a lot more difficult than it needed to be. I am convinced that our current educational system, despite the laudable efforts of educators, is ill-equipped to arm our young people with knowledge and experience so they can lead financially successful lives upon receiving their first paychecks.

This site is dedicated to them. We will be providing education, knowledge and a forum of ideas to help ambitious youth and the ones who care for them achieve wealth and wholeness. It is my hope that through the wealth they create, each of them will be prepared to make the positive difference on the world that both they and world deserve and need.

Nick

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Welcome to YouthFinancialEducation.com!

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We are the only site that is exclusively dedicated to helping young people plant their feet safely on the road of financial success.  It is my hope that you will visit here often.  If you are a parent, we will work with you to help you empower your children so they make financially smart choices.  If you are a young person, you will find this forum a great place to learn from others, interact and develop skills that take most of us years to develop–if we ever do.

I learned through a lot of pain and heartache that the dumb financial decisions I made at the dawn of my career dramatically impacted my enjoyment and quality of life for years after that.  I established this community in the hopes that I can spare others the pains and troubles that I unwittingly allowed myself to experience.

I look forward to helping you find and follow the road of financial success, no matter if you are 9 to 90 years young.

Best,

Nick

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