Financial literacy in this country is appalling. I blame banks, big financial institutions and, of course, the government.
Do I believe there is a conspiracy to keep the poor poorer and the rich richer?
From a government perspective, I don’t think so. I think they want to help, but they just go about it the wrong way. And, yes, they listen too much to people they should not listen to.
But when it comes to schooling, our governments are pathetic. They tend to undertake ‘education reviews’ because every decent research shows that our education system is a bit of a mess. This then results in a lot of brouhaha, and of course government then makes all kinds of threats and noises. These threats and noises result in documents full of graphs and abbreviations that are specifically designed to be unreadable to everyone except those in Government.
From bank and other financial institutions’ perspective? Maybe they want the poor to remain poor, but don’t forget most of the wealth built in Australia came about because these institutions provided loans and opportunities from which that wealth was built.
I will tell you this, though.
There is no benefit for the banks, our government or institutions to ensure the masses are financially literate. And when it comes to our children, then, we definitely do not want them to be financially literate.
Why?
Well, that’s because if we really found out what was going on in Governments with our tax money, we would be willing to happily line them up to be stoned.
Banks want to lend money to those who invest (which is a good thing), but they make more money by lending to someone whose idea of investment is a new pair of shoes. Or maybe several shoes.
Hence, if you want your children to understand wealth, and financial freedom get them financially literate. Do not assume that just because they are young, they do not get it. If you have ever given pocket money or money for chores to your child, then they ready to become financial literate in small doses.
But if you have teenage children, then one of the best education talks you can give them is about debt. There is an almost 100% chance that sometime in their life they will take on debt. Yet many have no idea what debt means.
Most in their teens will take on HECS debt. Then personal loans, then house mortgages, car loans, and the one that I hate with a vengeance – Buy Now Pay Later (BNPL) loans.
But if you are cleaver with a strategy, you can manipulate the banks and use them to make money. Do it from a young age, and they are on to a winner. I wish I knew that when I was young. I would hate to think what I have missed out on.
The key thing your kids need to understand is:
1. All income is not for spending.
2. High income is not wealth.
3. An investment strategy creates wealth… and 100% in crypto is not wealth.
4. And there is something called Good and Bad debt.
1. All income is not for spending.
Teach them not to spend it all. OK, I get it. When at university with low pay and bills to pay, you can forgive them if they spend it all.
But once they have a job, this is the time to make the move.
My advice – try to put 20% away. It will be hard. It will be a pain. It may mean the everyday coffee becomes one every 2 days. But starting to pay 20% away when young will become a habit of a lifetime and almost guarantee you wealth and financial freedom if the 20% is invested corrected.
2. High Income is not Wealth
I have a lot of doctors as clients. Most would fall into the top 10% of income earners in Australia. Most though do not hold 10% of all wealth in Australia.
High income is not wealth. What you do with high income has the potential to create massive wealth.
But it does not have to be high income. I have on my books a lot of clients who have average income but significant wealth. High income gives you an advantage. But do not assume high income equals wealth because it does not.
3. An investment Strategy Creates Wealth
An ASIC survey recently stated about 44% percent of people hold crypto. And of those, half held crypto only. That is not an investment strategy.
An investment strategy is one where the risk is spread out so that when things go bad, you are not exposed.
If you hold everything in Crypto and it goes belly up, you could be stuffed. If you hold everything on commercial property, you could be stuffed. Remember Covid? Most commercial property investors only survived because banks and the government gave support.
But if you held commercial property and shares during Covid, you could at least rely on the shares because they were a roaring success.
4. Good Debt and Bad Debt
Most people have never heard the term. Understand it, and the world becomes your Oyster.
Good debt is debt that has been invested in an asset that brings money to you. Bad debt is debt that takes money away from you.
Here are some examples.
i.) You borrow money to buy an investment property.
When you do this, you buy an asset that generates rental income (brings money to you). In the short term it may take money from you but in the longer term the growth in rental income, property values etc. will mean more money comes to you.
This is good debt.
ii.) You borrow money to buy a Ute in your Business
As the Ute is used to in the business to transport stock and machinery, it brings money into the business.
This is good debt.
iii.) You borrow money to buy a car
You buy the car not because you need it but because you want to. The car does not bring money to you. In fact, it takes money away because you pay admin fees, interest and loan fees. Even if such costs are tax deductible you lose money.
And if you think classic cars are a good investment because they go up in value think again. I have a classic Aston Martin that is going up in value. But every day that I hold it, it generates NIL income in my pocket. It gets worse because it costs me money to keep it in terms of insurance registration and fuel.
If I were to borrow money on this, it would be bad debt.
Now you know why I hate BNPL schemes – they are usually for assets that generate no income for you. It takes money away.
This article is our 3rd article of 3 to help you educate your children to become financially literate.
Financial literacy is the key to working less, having financial freedom and building wealth. If you would like more information on this email Hitesh at hitesh@wowadvisors.com.au or Ros at ros@wowadvisor.com.au. Or call us on 07 3161 9548.
