Tuesday, March 20, 2012
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The Younger, The Better
I'm a baby boomer. My generation was born at a time when certain economic principles were deemed as sound practice. Follow these simple rules and one day you could retire in comfort.
Boy, has that landscape changed. First we saw pensions give way to 401(k)s, changing the rules as the game went into the fourth quarter.
So we began investing in IRAs, only to see the Great Recession wipe out their balance as we approached the two-minute warning. Along with the jobs we thought would provide continued health benefits throughout our golden years.
Our children are more fortunate. They never expected a pension, so learned at a young age the importance of investing on their own. And they have time for the market to rebound to recoup any losses they may have suffered.
Their children will fare even better, with parents handing down these valuable skills. Those adults best-prepared to handle the financial ups and downs of life are taught money management skills at a very young age.
How young should you start? The younger the better. Once a child can count, they have the skills to think about money.
Save the buy a home, medical bills, retirement aspect for later on. They won't relate and the rest of your lessons will fall on deaf ears.
A quick web search will turn up more resources on teaching kids about money than we can offer here. But we will pass along some of the best advice we've found.
Visit us first. GCFBank.com devotes an entire section to children's resources. The link appears in Today's Spotlight section, but for your convenience we've included it here as well.
There are several facets to financial education. Don't expect to teach your kids everything in one day. You're trying to establish a lifetime of good financial habits here. The learning process will never end.
Children must first understand the concept of saving and spending. Saving enables money to grow. Watching change accumulate in a piggy bank helps them to see this visually. Once they're old enough to understand compound interest, open a savings account for them.
This is also a good time for them to learn how expensive it can be to borrow money and pay interest.
Children can learn a lot about spending simply by going to the grocery store with you. Explain the importance of establishing a budget. Arm them with a counter or calculator to add up the cost of everything going into the shopping cart.
They'll understand the value of clipping coupons when that total is deducted at the checkout counter.
Teach your children the difference between needs, wants and wishes. They'll be better prepared to make good spending decisions later in life.
Record keeping is a valuable skill to teach your children. Give them a pocket notebook where they can stash monthly receipts or jot down everything they spend money on. Have them note any money earned that month as well. They'll be able to easily track their income and expenses for themselves.
Children need to learn about advertising. Some adults still have trouble with this. An advertiser's job is to sell products. They lead you to believe you need something that you would otherwise not have even wanted. Their purpose in life is to separate you from your hard earned money.
Dissect commercials while watching with your children. That cute, furry bunny may make an excellent spokes-rabbit but knows nothing about healthy cereal options. Unveil the hidden aspects about products that you often have to read between the lines. Make them understand the power of advertising.
Goal setting is an important lesson. Those goals will change over life, so start with something within their reach. Teach them what it takes to achieve that goal.
A parent's goal is simpler. Every parent shares the same one. It's the vision that their child will develop all the skills they need to become a successful adult. It's never too soon to start them on the right path.
Learning From Our Young
We can take lessons from 10-year-old Richard Chapple, whose simple advice applies to us all. "If I spend all my money on one thing, I wouldn't have enough money for anything else I wanted to buy" he told a nationwide audience. He understands the necessity of maintaining ample savings for whatever future needs may arise.
Chapple first demonstrated his spending savvy last summer. He wanted a new basketball hoop so he could play with his younger brothers. Dad reminded him of the balance in his savings account, asking if he wanted to use some of that money to buy the hoop.
He never hesitated before replying: "No, that money is to save. How can I earn it instead?" A chore was decided upon. After cutting the grass himself for the entire summer, he earned enough to buy the basketball hoop.
The story won him a spot on American Public Media's Marketplace Money broadcast on NPR. A regular listener of the financial advice show, he liked hearing people's stories about their money habits. So dad nominated him for the show's Piggy Award, given each week to a listener willing to share their wise financial decisions. The 10-year-old was last week's award winner. Listen to the show here.
This young man understands the importance of saving, and how to earn money for those things in life you might want to buy. And offers advice to other youngsters.
"A good way to earn money is to ask your parents for jobs you can do to earn some money," said Chapple. Other ways he has found to earn money was by doing household chores and helping to clean up his younger brother's bedroom.
This is not natural instinct in today's instant society. We text, instant message, search the web, make instant oatmeal, or need a quick response to a credit application. We use whatever form of device available to get whatever we desire now.
But it takes groundwork to lay a strong foundation. Anything we gain instantly can be gone just as quickly. It's never too young to start building that foundation.
In fact, he's not even the youngest in his family to learn smart saving skills. That honor belongs to his youngest brother, Chris. The kindergartener is fortunate to have a money-savvy teacher to reinforce the habits he was already learning at home.
At the beginning of the school year, parents were asked to send in loose change to be held for their child. Children are awarded coins for specified classroom achievements, such as completing an assignment.
Once a month, the children can "shop" at a classroom storefront operated by the students. Parents donate baked goods, pencils, erasers and various novelty items the children can purchase with their earnings.
Brother Matt was taught supply and demand last year attending the second grade at this same school.
Children are naturally creative, and can find innovative ways to earn money. They're also innocent, not yet jaded by worldly demands. Their motivation isn't always based on their own needs.
A close family friend fighting cancer inspired seven-year-old Greer Gates of Seattle to sell jewelry she made from a bead kit she received for Christmas. That was in 2005. As of December 31, 2011, Greer has raised more than $37,000 selling jewelry and Christmas tree ornaments. She donates 100 percent of the proceeds to the University of Washington Medical Center to fund cancer research. Read her story here.
Children are never too young to learn good financial habits. But there is a point where it can be too late for them to accept what you're trying to teach. Don't wait for a specific point or event to occur. Make it a part of daily life from the beginning, and they will too.
Strong Private Property Rights (Cont'd)
Last week we dispensed with the theory and definitions regarding private property rights. So why are strong private property rights so vital to economic prosperity?
It is indisputable that the most prosperous societies have universally had strong private property rights. This is based on the "self interest" aspect of human nature. Virtually all things in life contain an element of risk, and the risk of loss to private property regulates the amount of capital flowing into such property.
Perhaps the most obvious example is related to housing. Home ownership has often been described as "The American Dream," primarily because of the strong private property rights enjoyed in the U.S. Unlike many societies, when you bought a home in the U.S. it was yours until you decided to sell it or transfer the deed for some other consideration.
There are caveats, of course. For example, you must pay your taxes, or else the tax authority will file a lien against your property. And in extreme cases, your property could be sold at sheriff sale for the payment of taxes. Thus, taxes, and high taxes in particular, are an infringement on private property. Yes, the government must collect some revenue to provide public goods. However, most of the goods that government provides in the U.S. are not actually public goods (remember the non-rivalrous and non-excludable tests from last week).
Let's go further. If you used a mortgage to purchase your dream home, the lender will place a lien on the property until the borrowed funds are repaid (with interest). Failure to pay as agreed might lead to foreclosure, whereupon ownership is transferred to the lender so they can liquidate the property to satisfy the debt. A lender's right to perfect and enforce a lien is just as important as the owner rights, in that it was the lender's funds that acquired the property in the first place. Lender's only risk capital making mortgages because they can rely on the strength of their lien to be repaid in the event of default. It is easy to see how mortgage credit would dry up in the absence of such property rights.
Of course, it is sad when a homeowner loses their home, but is just as sad (economically speaking, at least) when a lender is prevented from perfecting and enforcing their lien in the event of default. The government's ill-advised "foreclosure moratorium" has harmed far more homeowners by distorting the market (by trampling private property rights), than the very few homeowners it has helped.
Let's consider one last example regarding private real estate property. Virtually everyone has heard of the term "eminent domain." The term, Latin for "supreme lordship" was coined by Hugo Grotius in 1625. Essentially the concept recognized that in some "extreme cases" or for "public utility," private property rights should give way to the public need. Grotius was clear however, in that in the event private property was seized, the owners should be compensated at a fair market value. And the purpose must meet the public goods test (remember last week).
If you think back to last weeks "Islander's" example, the public dock might require a small piece of one of the private owner's lot in order to facilitate construction and access to the dock. And this makes sense, as long as the owner who gave up the sliver of land was justly compensated and the true purpose meets the public goods test.
Unfortunately, there have been many infringements on private property as a result of eminent domain. For example, is it a "public good" that older, modest homes are seized by the government and torn down to make way for newer, more lavish homes? Some municipalities have done just that because the newer lavish homes generate greater tax revenue. This is a flagrant violation of private property rights as it satisfies neither the "non-rivalrous" nor "non-excludable" tests for public goods.
A final example: Most people derive income from employment. Wages are compensation for the fruit of one's labor. Unfortunately, governments tax wages to generate revenue to pay for what is always deemed "public goods." However, wages are private property, so income taxes are an infringement on private property. Do you believe you have non-rivalrous and non-excludable access to all the stuff that the government spends your tax dollars on? Me neither!
Modern times have seen many troubling infringements on private property rights. Taxes, zoning, foreclosure moratoriums, bailouts - all are infringements on private property. In many cases, such actions are well intentioned. However, there are always opposing forces at work. Such government intervention into the private economy has spooked private capital - to the point that economic recovery is, in the best case, delayed. And in the worse case, unattainable.
The most important point is this: It is not until we return to the sound principle of strong private property rights that skittish private capital will return to the scene and prosperity will once again take hold. Unfortunately, that is far from a certainty.
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