One of the most interesting aspects of life is the disparity between knowing what you need to do in order to have the life you want and actually doing those things. This conversation always leads back to the concept referred to as “Be – Do – Have”.

For those of you who are aware of this conundrum of sorts, you understand that the BE part has to come first. The question has always been, “How to you GET to the BE part?”

It’s much like the question of the chicken and the egg. Which did come first? It’s one of those answers our brains often freak out about. Like thinking about the immenseness of the Universe. Does it have an end or doesn’t it? And if it does, where is it and what comes next? Our brains just want to climb under the safety of a warm, down comforter and not think about it any more!

Let’s explore this ‘Be, Do, Have’ thing. Let’s put on our pristine white scientist cloak and tuck our loose hair in one of those fashionable hair-nets and look at it under the magnifying glass as if we’ve never heard of it before. And perhaps you haven’t.

Let’s apply this to your life’s financial situation. For the purposes of this discussion, let’s say you are $10,000 in debt, have a decent job making $4000 a month and have expenses of $3850 a month. You have no savings, $5,000 in a retirement account from a previous employer and are in a state of frustration at this situation. You feel lost, hopeless and overwhelmed with your seeming inability to ‘get ahead’ and all you want is to be financially free someday.

This is actually a common situation in the United States even though a person in this position would be considered very rich in many parts of the world. Regardless, this is you and you want to change the situation. But how?

Be, Do, Have. But you’re thinking, “Wait, first I have to HAVE the money before I can BE anything or DO anything with the money!” Ah, this is where the thinking goes awry. But in a way, it does make sense. How can you possibly BE rich without the money? If this concept is new to you, hang on. It will become crystal clear under that microscope in just a bit.

What if, instead, you learned what BEING a millionaire looked like? What if you studied the habits of millionaires and started incorporating those habits into your daily life? What if you learned how millionaires thought and started thinking those thoughts instead of the thoughts you’ve been thinking all these years? Would it make a difference?

It makes all the difference in the world. We’ve all heard the stories of lottery winners who lose all of their winnings, and more. Why does this happen if they have millions of dollars coming in? Ask yourself this simple question: Why didn’t they have money BEFORE they were millionaires?

The simple answer is that they didn’t know HOW to be millionaires; they didn’t understand the thoughts, beliefs, attitudes and habits of wealthy people. They knew how to think like a poor or middle class person. So, when they got all that money, they continued to think like, and have habits of a poor or middle class person and there you go. They are out of money quicker than they are out of life to live it with.

You see, before anything shifts OUTSIDE of you, you have to choose to shift what’s INSIDE of you. And in order for that to happen you need several things and those things are sometimes described using the acronym ADKAR.

The first things that must happen for anything in your life to change is AWARENESS; an awareness that something in your life isn’t working and must be altered to get a more desirable result. Once you have that awareness, the next step is to have a DESIRE to change the situation.

There’s a saying that goes like this…People don’t change until the pain of change is greater than the pain of staying the same.

After you’ve discovered an awareness that something needs changing and you develop the desire to change it, you must then seek the KNOWLEDGE you need in order to make the change you wish to make. The best part is that once you are in this place mentally and emotionally, the knowledge you need seems to seek you! It is everywhere. It’s as if you willed it to you. Surprise! You did. Just by starting to think it, it started to come. Seem too good to be true? Have you heard of the movies, The Secret or What The Bleep Do We know? These movies are based on the idea that our thinking makes it so. Napoleon Hill, the author of one of the best read success books, Think and Grow Rich, said it this way…Thoughts are Things. Try it. What do you have to lose?

Now you have the knowledge. What next? You must take ACTION and this is where people get hung up and where the BE, DO, HAVE concept enters back into the picture. You see, a wealthy person who is BEING a wealthy person, naturally does the things he or she must do in order to get and stay wealthy. You must learn to BE the wealthy person before you will BE the wealthy person. And now it gets a little muddy under our microscope for just a little while. Sometimes, before you have the beingness of that wealthy person ingrained in your cells, you just have to DO what they do until it comes naturally.

I suspect you are really confused now. Stay with it…confusion is a great state to be in. It tells you that you’re on to something new and exiting.

You see, the more you DO what a wealthy person does, the easier it becomes to continue to DO those things and, before you even notice, you are BEING the wealthy person naturally and you don’t have to stop and consider what the next, right, supportive action that will lead you right to what you wanted, and where you wanted to be, in the first place. This is when it all becomes second nature and you don’t have a clue why you thought it was so hard to begin with when you were still BEING that poor or middle class person.

To finish the process, you find yourself, sometimes quicker than you ever imagined possible, at the RESULT you were after. Congratulations. Now you can HAVE all those things in life that you’ve dreamed possible. The fact is that you just made them possible by BEING the type of person that lives that kind of life.

Let’s review the ADKAR process: Awareness, Desire, Knowledge, Action and Results. It takes the really complicated idea of changing your life and lays it right out there in simple steps you can follow, if you want to change something badly enough.

Which takes us back to the very initial question: How do you go from knowing you want to get somewhere in your life to actually being there? Now you know. Use the ADKAR formula, sprinkle in a lot of Be, Do, Have along the way, season with laughter, stop along the way to celebrate your progress and viola’, you have the life you want. Good luck with it. Oh, and the Results at the end? That would be Your Life. Enjoy.

Elisabeth Donati is the owner of Creative Wealth Intl., LLC and creator of Camp Millionaire, a unique and effective financial intelligence program for kids and teens and Creative Wealth for Women, a workshop designed with the special financial needs of women in mind. She is an expert in teaching the basic financial principles people need in a way that is engaging, empowering and fun. For more information, visit http://www.innerwealthpublishing.com.

She is the author of the only financial parenting book parents need, The Ultimate Allowance, available at http://www.ultimateallowancebook.com.

Please feel free to email her at: elisabethdonati@gmail.com or give her a call at 805-957-1024.

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.

It’s that time of year again. Time to ‘help’ your kids buy gifts (if you do gifts) for others. And by help, I mean help them literally and financially.

There’s so many options for this ‘help’, I could write a book on the subject but let me illustrate a few of the most common approaches to helping kids buy gifts with a few pointers to help reduce the stress around kids and holiday gift buying and giving.

Scenario #1. Your kids don’t get an allowance and they aren’t earning money of their own.

Since this situation can be the most expensive situation, let’s deal with this one first.

First, have you child make a list of the people he/she wants to buy gifts for with a column of potential gifts and a column of the projected cost of that gift that he would like to give that person. This activity is great for kids so they get an idea of how expensive gift-giving can actually be!

Once your child’s list of people and gifts is finished, sit down with him and work out a budget for the purchases. Make an agreement with your child about the ‘help’ you will be providing.

• Will you simply be buying the gifts for the child to give?
• Will you be loaning the money to the child to buy the gifts and they have to pay you back somehow (extra chores, outside job, etc.)?
• Will you split the costs: you pay for half, you ‘loan’ him the rest of the money required to purchase the agreed upon gifts?Encourage the child to consider making gifts by hand in order to save money as well as the fact that it will lend a nice personal touch to the gift. Helping the child create these gifts is often a wonderful bonding experience for you and the child and creates positive memories around family and holidays. (To this day, I remember my Mom helping me make home-made ornaments for the tree and it makes me smile!)

Once you make the gift-buying agreement, stick with it. Help your child learn to stay within their ‘budget’. Experience is the main way children learn to handle their money wisely. Do everything you can to ensure their success and praise this success.

Celebrate their success by doing something the child likes to do rather than rewarding him with a gift something as celebration. This sends the wrong message, i.e., I do a good job, I spend money on ‘stuff.’ Not a message we want them to learn and not a belief or habit that will be supportive as he grows up to handle all his financial needs.

Scenario #2: You give your child an allowance and/or they make their own money. (If you are using The Ultimate Allowance system, gift-giving will be figured into their Living Jar.)

In this situation, it’s important to establish an understanding about where gifts fit into the allowance system or both of your expectations of how and what the child’s own hard-earned money is used for.

Hard feelings usually result from misunderstandings and unspoken expectations that one person had of another person or situation. Have this conversation early in the game.

Again, there’s a couple of options, but first have your child make the person/gift list mentioned above. Before we move on, because the money being spent is primarily the child’s money, it’s important to understand the different types of money personalities a child may have and how this may affect his spending. The four classic money personalities are as follows:

Spender: this personality is happy to spend money any time. They love buying things for themselves and others, often with no thought about the future or additional spending or expenditures that are coming up.

Saver: this personality isn’t so happy spending money. They prefer to save it and watch it grow. They are actually quite reticent about money and ‘wasting’ it on others and unnecessary things. Their purchases often have to be well thought out, calculated over and over again and have enough relevance to warrant the spending.

Avoider: this personality doesn’t want to have to even think about all the gifts and the spending and the wrapping and such. They are the last minute buyers that put it off until the very last moment because they just didn’t want to deal with it, whether they have the money or not.

Monk: this personality usually is a little put off that they are expected to buy gifts for people just because it’s a holiday. They are very ho-hum about the whole thing. They would rather donate their time to a food bank or shelter than buy a bunch of piddlyjunk someone probably doesn’t need anyway and they don’t necessarily have the money to purchase.

With a child that is spending his OWN money, the personalities come into play a little more than when they are spending YOUR money for some reason. It’s just a little more painful when they are spending THEIRS. All the more reason to really stay involved, help them budget, come up with gift ideas and options and help stay present (no pun intended) during the gift giving process so they are successful, stay within their budget, are happy with their purchases and have hopefully learned a bit about money.

Again, in Scenario #2, you can make an agreement to help your child with the gift purchases, paying ½ while they pay ½ .

Each child will learn different lessons during the holiday season as they get older because they are accumulating beliefs about money, gift buying, the meaning of the holidays (does Santa exist or not?), the commercialism and more.

Bottom line, as always, the best thing to do is simply pay attention to your child to see how he is doing during the holidays in the realm of handling money and purchasing gifts for others. Ask yourself, “What powerful money habits and lessons can I help instill in my child by the things he experiences this year?” You’ll be surprised by the answers that come up.

It’s never too early or too late to learn how money works and how to make it work for you. Your children are learning all the time by what you are doing with your own money, what you are saying about money and by their own experiences with the green stuff.

Here’s some basic financial philosophies you might work on this season: only borrow money if it makes you money, pay yourself first (are they taking care of their own needs first?), helping others is helping yourself and one of the most important…money is a tool to reach your dreams and the dreams of others.

What will your children learn this holiday season? Set it up in advance and watch your children gradually grow into financially-savvy adults. Now that’s the best gift of all!

Elisabeth Donati is the owner of Creative Wealth Intl., LLC and creator of Camp Millionaire, a unique and effective financial intelligence program for kids and teens and Creative Wealth for Women, a workshop designed with the special financial needs of women in mind. She is an expert in teaching the basic financial principles people need in a way that is engaging, empowering and fun. For more information, visit http://www.innerwealthpublishing.com.

She is the author of the only financial parenting book parents need, The Ultimate Allowance, available at http://www.ultimateallowancebook.com.

Please feel free to email her at: elisabethdonati@gmail.com or give her a call at 805-957-1024.

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.

They say it isn’t a bailout … but it is.
They say it is necessary to keep Main Street alive … and they are right.

THE PAULSON BAILOUT GOES THROUGH CONGRESS

Last week, I sent an email blast telling everyone to contact their congressional leaders asking them to slow down on the bailout.  Every survey I saw showed the American public against Hank Paulson’s plan by a huge margin (9 or 10 to one in most cases).  In fact the plan had an approval rating that was lower than Congress!  I didn’t think that was possible.

We are not done yet.  While this is being voted on, it isn’t set in stone.

Wall Street is down this morning – that can either be because they don’t like the plan or because they don’t like uncertainty … or both.  I vote for the combination.  There are significant problems with the bailout and the repercussions.  There is also significant uncertainty over what will eventually get passed.

SOME KIND OF ACTION IS NEEDED

In case you hadn’t picked up on this – I am a free market enthusiast.  I believe that government intervention almost always creates waste and makes a situation worse in the long run than letting the market work through the problem.  I also believe that the problems we are facing today were created by government agencies and meddling in the first place.

That said – something needs to get done because if we muddle along too long we risk the significant chance of a completely destructive crash of the system – something that could create irreparable damage to the world economy, not just our own.

QUICK SUMMARY

There are lots of bad loans on the books of most banks and many other corporate entities.  They are often in the form of complicated derivatives – financial instruments where it is not easy to discriminate between the good ones and the bad ones.  In addition, these derivatives are often piggy-backed on top of other different-but-equally-complicated financial instruments.

While these instruments will wreak havoc on many corporate financials, the primary concerns are those derivatives held by banks and lending institutions.  As we identify this “toxic waste,” each bank’s balance sheet looks worse and worse by the day depending on their exposure to it.

Today, we not only have many banks which are technically insolvent (as they write this toxic waste off their balance sheet), the cash they spend to remain solvent from a bookkeeping standpoint is cash they can no longer lend to businesses and consumers.  They also can’t borrow money to lend because of ratings downgrades and their weaker balance sheets.

A number of times in the past few weeks, banks have found themselves unwilling to lend to each other, much less anybody else – because everybody knows that everybody else holds some of this toxic waste in their portfolio.  So everybody is a bad risk.

This is an extremely dangerous position for the economy to be in.

THE PURPOSE OF THE GOVERNMENT INTERVENTION

I am refraining from calling the ultimate solution a bailout, because if it were done right it SHOULDN’T BE a bailout.  It is only an intervention.  Whoever owns toxic waste must deal with their problems and resolve them rather than just selling them to the taxpayer.

The purpose of the intervention is to free up liquidity so that businesses can continue to operate and the economy can continue to function.  This will add faith to our banking system which will keep foreign investment dollars here in the US rather than have those trillions of dollars be moved into other countries and financial systems – an act that would be devastating.

AVOID THE MORAL HAZARD

This is probably the key point underlying all of my blog posts the past three weeks.  We got to this point because of a moral hazard that was promoted by our government in the form of excess liquidity by the Fed, aggressive lending programs by Fannie Mae and Freddie Mac and massive leverage within the already-highly-regulated banking industry.

It is this moral hazard that has promoted over-leverage by American consumers and companies and unrealistically high market prices for real estate and financial institution stocks.

These excess values have led to more leverage which have, in turn, led to even greater share prices and home values creating a seemingly-never-ending upward spiral.  This is what a bubble is.  This is what we are dealing with.  Now the cycle is broken and there is a lot of pain to be felt as values retreat to sustainable, intrinsic levels.

The new program/intervention which I believe has to come from the federal government MUST make every effort to avoid creating new moral hazards – moral hazards which would mean more asset bubbles and greater catastrophe in the future.

Unfortunately, the Hanky-Panky bailout (the Paulson proposal going through Congress) creates whole new layers of moral hazard and incentives for more poor choices in the future.

WHERE IS THE MORAL HAZARD?

If you are a bank or corporation and you got yourself in trouble by buying an investment asset that ended up losing money, under normal circumstances you would report the loss and take the hit as your stock price goes down.  You would lose some of your investors and stockholders.  As a company you might survive … or you might go out of business.  If you used leverage (borrowing) to make this investment, you increased the potential to make gains on your investment, but you also increased the downside which could make a small loss turn into a huge loss.

If, however, after making a horrible decision made worse by a lot of leverage – the government came in and said, “Hey that’s OK, we want to help you so we’ll take your crappy investment off your books and give you more than it is worth in cash.”  Now your crappy investment turns out to be not so crappy – in fact you may have ended up profiting from it (and profiting a lot if it was heavily leveraged).
What’s to stop you from continuing your behavior in the future?

You’ll keep looking for risky investments figuring that if you make money, you get to keep it.  If you lose money, someone will come in and save your butt.  That was the essential flaw in the Fannie Mae and Freddie Mac situation – profits were privatized, losses were nationalized.

NOW AMPLIFY THAT HAZARD BY 1000

In essence that is what a $700 billion bailout does.  It takes the moral hazard of condoning activity which has brought us to the brink of disaster and then puts the downside cost on the backs of future generations while giving upside to the thousands of companies that made terrible choices over the past 10-15 years.

Nobody learns anything.  “No pain, no gain!” as Richard Simmons used to say.
We sow the seeds for the next mother-of-all asset-bubbles AND we bury future generations’ prosperity with more debt, uncontrollable inflation and a banking system in which foreign investors have no faith.
No good comes out of a massive bailout – except to the relative few who get bailed out and the politicians who get elected into office by burdening our grand-children and saving us the pain of an important learning experience.

WHAT WE NEED TO GET FROM ALL OF THIS

1) As a society, we should be more self-reliant.  History is riddled with countries that tried to spend their way out of a jam whether they were socialist, communist or free market.  It never works.  I don’t believe that counting on government (especially one that also spends more than it makes) to bail us out solves any of our problems.

2) Transparency – The more we know about what is going on with a company and their balance sheet, the better.  Some people propose that regulation provides this transparency.  That has not been my experience.  Regulation usually creates ways for insiders to obfuscate the truth and protect themselves from competition.  That is a topic for a different post.

3) Responsibility – We all need to take responsibility for our money.  If a company has toxic waste on their books – they need to figure out how deal with it.  They should write it off and take the loss.  They should not be able to show a profit that isn’t there and/or pawn it off on the US taxpayer.  If a person bought a house they cannot afford, they shouldn’t be in that house.

4) Liquidity – for reasonable loans (the kind that used to be underwritten before all this started).  Cash needs to be available at a reasonable cost so that businesses can continue to operate and people can continue to live their lives.

AN ALTERNATIVE

The GOP offered an insurance alternative to the Paulson plan.  Nice.  Cute.  I don’t see how it will work.  It still creates all kinds of moral hazard especially as far as the responsibility quotient is concerned.
I am fascinated with the solution used in Chile in the early 80’s.  In this situation, the government loaned money to the banks.  This provided cash and liquidity to the system.  All loans were collateralized by the bad debt.  Any company borrowing this money would be required to keep the toxic waste on their books and to write it off over time as it matured.  This keeps the company honest about their responsibility for the debt and improves transparency within the market.  Any company with one of these loans on their books cannot distribute profits to their shareholders (or pay incentives to executives) until this loan is paid off.  This gives an incentive to the borrower to resolve the issue as fast as possible using their own resources.

The biggest advantage to the Chilean solution is that the US taxpayers can actually benefit from it.  It minimizes our exposure to losing the money (some companies will not survive and the collateral on the loan may not be worth a whole lot, but that is only a percentage of those who participate).  It takes government out of the role of hedge fund (which is what it becomes if we start buying this toxic waste – especially at “above market” prices) and puts it into the roll of market maker and liquidity resource.
The US House of Representatives just shot down the $700 billion bailout … There is still time for a more reasonable alternative.  Fax your letters to your representative today.  Tell them they will not get back into office if they vote for the bailout – you do not want to burden your kids with this bill.

SOME BOLD PREDICTIONS FOR THE FUTURE

Housing prices are not done going down.  They will continue to drop until values have retreated at least to the point of historical intrinsic value.  Historically real estate values grow at a rate equal to inflation plus productivity improvements.  That translates to about 4.5% over the past 50 years.   In order to get back to that trend-line, real estate values nationally need to drop another 15-25% (depending on your location and how you calculate the trend-line).  In these cases, prices ofter retreat PAST the historical norm like a pendulum goes past its resting point.

If we get prices to stop falling now (maybe down only another 3-5%), then expect home values to stay flat with no increases for years if not decades.  The key is to get back to the trend-line.  With great certainly I can predict that this will happen.  I cannot predict the path by which it will happen.

Financial Firms aren’t done losing value.  There is a lot of toxic waste.  Thanks to the obfuscation which comes with regulation, we don’t even know how bad the problem really is.  Banks are also pretty highly leveraged institutions – the equivalent of 90% loan to value so the balance sheets of these firms will get whacked even more as we uncover all of the exposures.  Expect huge losses and market values to end up at 10-30% of their peaks a year ago.

We will see a recession before this is done.  This is the one that kills me.  I hate recessions as people go through knee-jerk reactions to the situation and stop spending money even when the expense is for something that can truly add to their quality of life today.  I just don’t see how falling home prices, falling financial stock investments and the unravelling of all this leverage can happen without consumers spending less – and maybe for a long time (2-3 years).  There is a sea-change that has to happen regarding spending and saving.  That requires a time out from growth.

If tax rates go up in 2009, it will kill the economy.  The middle class – and especially the entrepreneurial middle class – are the keys to getting this country out of this mess.  If you punish them with higher taxes it is likely that the US economy will never recover in this global financial world.

Now More Than Ever – Financial Literacy is Critical.  The events of the past few weeks and the challenges we face in just getting Americans to understand the basics of what is going on – all lead me to conclusion that financial literacy is critical.  Everybody must understand how their money works.  We all need to know how leverage can help you and how it can hurt you.  Pandering and demagoguery are rampant in Washington DC.  It gets votes which then are translated into programs that spell disaster for us economically as a nation.

Take classes.  Read books.  Participate in an ongoing dialog about money.  Don’t take what Hank Paulson, Ben Bernanke, President Bush or even John Buerger says without asking questions and getting your arms around the concepts.

For more information on John Buerger and to read more of his wise writing, visit his Rich and Fullfilling website and as John reminds us all…

Get Control Over Your Money… Before it Takes Control of Your Life!

John D. Buerger, CFP®
Wealth Coach
jdbuerger@altuswealth.com
www.RichAndFulfilling.com
ALTUS Wealth Solutions
3211 Broad Street, Suite 201
San Luis Obispo, CA 93401
805-476-0333 (office)

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.

As with everything in life, things go up and things go down. And then they go up again and down again. You can liken it to a wave which goes up and down, or to a glass of water you set down on a flat surface. If you knock the glass, the water is disturbed but, in time, it will once again level out.

The past two weeks I have been asked about the financial future of this country more than at any time since I started teaching financial literacy. I am NOT a financial advisor in any capacity (nor do I wish to be) but I can say this: some things stay the same and some things change and the more we understand that this ‘situation’ is just a situation and we don’t all go off the deep end, the better off it will be in the long run.

What I mean is, the basic financial principles that govern whether a person ends up financially free have not changed:

Pay Yourself First
Put Your Money To Work For You
Only Borrow Money When It’s Going To Make You Money
If You Can’t Afford It In Cash, You Can’t Afford It At All
Helping Others is Helping Ourselves

and my all-time favorite…

Your Thoughts, Beliefs and Attitudes Determine Your Wealth Potential

Then what changes?

Well, WHERE and HOW to put your money to work. HOW to borrow and FROM WHOM when it IS going to make money for you and HOW not to let what is currently going on influence your long term financial strategies and the systems that you have in place.

Again, I am no financial expert, but it seems to me that it’s just a hiccup; maybe a big hiccup for some but a hiccup just the same. Just like all of the other financial hiccups that have happened since the beginning of time, and the beginning of the stock market. It’s interesting to note the stock market time line of events since it started back in 1792 when 24 men signed an agreement that launched the New York Stock Exchange (NYSE). There have been some pretty major events in its history and yet, over time, it has always gone up. For a little stock market history lesson, click here!

Will some people suffer? Yes.
Will some businesses fail because they made poor business choices? Yes.
Will some people make a lot of money at the expense of others losing a lot? Yes.
Do you have a choice in how you are going to respond to the situation? Yes.
Do you have the opportunity, just like the rest of the people in this country, to take advantage of the situation at hand and make some money? Of course you do.

The question is, WILL you?

So in answer to my simple yet important question “Where do we go from here?”, my advice is as follows:

1) Don’t get too upset about it.
2) Seek professional advice from someone you trust before you make any rash decisions about moving your money.
3) Keep teaching your kids about money and give them every opportunity to practice with it. Don’t know how? Get The Ultimate Allowance.
4) Keep spending less than you make.
5) Keep your eyes open for opportunities.
6) Take care of your health.
7) Watch an inspiring movie or read a great book.
8) Keep a handle on your thoughts because they really do create things.
9) Remember to stay focused on your future. There is a very good reason the front window in your car is bigger than the rear view mirror.

This is the perfect time to make sure your children are getting a clear picture (or as clear a picture as possible) about what is happening. Regardless of how you feel about the situation, the bailout, what will happen to the value of our dollars, etc., this is a great time to talk to your kids about business decisions and how financial decisions can affect an entire country.

Talk to them about how some business decisions may bring you a lot of money in the short term but can turn around and bite you in the tush later on. Talk to them about systems and strategies. Ask them questions instead of giving them your opinions so they will share their own opinions with you. You never know what may come out of their mouths when they are given an opportunity to simply converse instead of defending their positions.

And finally, listen to my mother who always said…

“There, there. This too shall pass.”

Thanks Mom.

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.

I hear people say all the time that the most important thing to teach kids about money is the power of compound interest. But really, that’s not the true picture of why investing works and why our money grows over time. It’s not actually always compound interest that creates wealth…at least not for many investors. It’s actually ‘compound growth’ that causes money to grow in many instances. Let me explain.

Let’s divide this conversation into the three main areas of investments which in our programs we call the Three Pillars of Wealth: business, real estate and the stock market.

Let’s start with BUSINESS. Think about how people profit from owning businesses. The reason they do is many fold:

• The business appreciates in value and is sold for a profit.

• The business is able to be put on autopilot and create passive income.

In these two cases, compound interest has absolutely nothing to do with the wealth a business can create, UNLESS the business is in the business of lending money and charges compound interest on that money. Examples would be banks, credit card companies, private lending companies, mortgage companies. You get the idea.

Next, let’s look at REAL ESTATE. The profit from owning or investing in real estate comes from:

• The property or building appreciates in value and is sold at a profit.

• The property is rented out for more than the expenses on it producing a positive cash flow the owner can live on.

These two methods of making money on real estate have nothing to do with compound interest, UNLESS you’re lending money to someone who is buying the house and you’re changing compound interest on that loan or you’re carrying the paper (playing the bank) on a piece of property you’re selling.

Lastly, let’s look at the STOCK MARKET. Once again, very little profit and wealth that is created in the stock market has anything to do with compound interest. The wealth that is created is because:

• The stock or mutual fund you’re invested in grows in value because the cost of the stock or mutual fund (NAV in case of the mutual fund) goes up and you sell it at a profit (or vice verson because you are selling short…more on that later)

• The dividends you may be receiving from the stock or mutual fund are ‘reinvested’ in more of the same stock or mutual fund providing a compounding effect, but it’s not interest per se.

Bonds are another type of investment where the money you make can be interest, but it’s not always interest that makes you money when investing in bonds. Confused? That’s OK, so was I when I first learned about bonds. Much of the actual profit made on bonds is due to people buying and selling the actual bonds as the cost of those bonds goes up or down, just like the price of a stock goes up and down. Still, if you’re the holder of a bond, you do make interest on the bond itself.

So, is it important that kids of all ages learn about compound interest? Absolutely AND it must also be combined with the idea that the power of money to grow over time is called Compound Growth. The definition of compound growth is “a measure of how much something grows per year, over a multiple-year period, after considering the effects of compoundING.

An extension of this topic, if your child is old enough and ready for it, is the conversation about ‘return on investment’ and ‘rate of return.’ I have asked many experts if these two phrases mean the same thing and I always get a mix of answers; some say yes and some say no. Most say that ROI is the actual bag of cash returned from an investment and ROR is the measured rate, expressed in a %, at which the investment returned a profit.

The general question is simply, “How much money has my money made over time and how do you turn that into a percentage rate per year?” According to Wikipedia, the ROI or ROR is the RATIO of money gained or lost on an investment where the money invested is referred to as the asset, capital, principal or cost basis of the investment. To figure your ROI or ROR you simply…

Divide the amount of money you made by the total investment made. Example: Let’s say you invest $50,000 and a year later you get back $60,000. Your profit is $10,000 (not factoring in any taxes or other fees).

Your RETURN = $10,000/$50,000 or 20%. Pretty straight forward, yes? And remember, rates of return are usually quoted per year, but not always. What if you have an investment that pays you 30% every six months? Well, is that a total of 60% per year? Maybe, maybe not. In order to get a total return for a year, you have to do the math based on the figures for the year. It makes sense that it would be 60% but sometimes it just doesn’t turn out that way.

Now for some cold hard facts about actual compound interest that we share with our attendees to Camp Millionaire and Creative Wealth for Women.

CREDIT CARDS: Let’s say you buy a new stereo for $1000. You put it on a credit card that charges 19% interest per year. You only pay the minimum payment on this card. Ready for the shock?

It took you 19.3 years to pay it off and you ended up paying $2930.00 for it!!!

YOUR MORTGAGE: Let’s say you buy a house for $300,000. You borrow $250,000 from the bank at 6% interest and it’s a 30 year loan. Do you have any idea how much that house cost you? Are you sitting down? $539,596.80!!! You paid more interest on the loan that you originally borrowed.

Should you never buy a house then? No, but you should consult your accountant to find out if it’s the right thing to do financially. We teach our campers to buy rental properties first and then buy the house they live in with the passive income from their rentals. Put your money to work for you first!

OK, that’s all for today in terms of this compound interest concept. Just remember that isn’t not always compound ‘interest’ that is making your money grow…sometimes it’s compound growth based on appreciation, cash flow, profits, rents, dividend reinvestment, and more.

If someone sent you this article and you’d like to read more interesting tips, trick and philosophy on money and life, sign up today for Elisabeth’s FREE Weekly E-Zine, Financial Wisdom with a Twist and FREE monthly teleseminars at UltimateAllowanceBook.com.