The 11 Things Your Kids (And Mine) Must Know About Money

In 1979 I became the protégé of Louis R. Mobley, the man who founded the IBM Executive School in 1956. It was during his tenure that the IBM Executive School churned out the leaders that made IBM the most admired corporation in the world during the 1960s and 1970s.

Mobley was the epitome of optimism, but he frequently lamented what he called, “the woeful state of financial ignorance among our young people.” Mobley’s Jeremiad was not academic: It was rooted in a profound love for our free enterprise system and his contention that it was far more fragile than most realize. When Benjamin Franklin emerged from the Constitutional Convention a group of citizens asked what form of government the founding fathers had created, “A republic,” Franklin replied “…if you can keep it.” Mobley had similar sentiments about our miraculous economic system. 

Here are 11 things about economics that are worth passing on to your kids.

1. Capitalism is Not a Zero-Sum Game. It is amazing how many Americans think that capitalism means that for me to win you must lose. Capitalism is actually a win/win model. Imagine that I have a tie you like. You offer $10 for my tie and I accept. In this case, I value your $10 more than I value my tie, and you value my tie more than your $10. A free exchange takes place, and we both walk away happier than when we met. The world has just experienced a small but important increase in value through our exchange. Win/Win.
2. Profit is Not a Synonym for Exploitation. We all have a limited amount of time and energy. Ergo, we try to maximize the return on investment of these precious resources. We want more in return than we invest. This excess return is called “profit.” As an avid gardener, for example, I hope to reap more value in vegetables than I invest in time, seed and fertilizer. This excess value is my profit. Of course, viewed solely from a monetary perspective, I consistently run my garden at a loss, but when I add in the value, I get from garden fresh veggies and seeing things grow I always turn a huge profit!
3. Money is Not Evil. Money is merely a tool. It is a highly creative way to store human energy over time and make it fungible and portable.
4. The Miracle of Compound Interest. My grandfather immigrated at only 19 from Slovakia: He had a sixth-grade education, no English, no money, and as he put it, “the clothes on my back.” He made his way to Pittsburgh and took a job in a steel mill for 10-cent-an-hour working 12-hour days. However, he and my immigrant grandmother managed to raise three kids and send two to college; they owned their home and three apartments free and clear while amassing a tidy stock portfolio. One day I asked how he had managed to prosper on such a small income. Struggling for words in a language he never really mastered, my grandfather finally just rotated one hand on top of the other several times and said, “percent on top of percent.” His secret was the magical power of compound interest. If you want to dramatically demonstrate the power of compound interest, ask your kids whether they’d rather have a million dollars, or a single penny doubled every day for a month. Then offer a paper and pencil and let the fun begin! 
5. The Law of 72. If you want to know how long it will take to double your money, just take the interest rate and divide it into 72. For example, 72 divided by a 6% rate of return doubles your money in 12 years. A 12% interest rate doubles in six years and so on.
6. Nonprofit Organizations Can “Make a Profit!” For a nonprofit to remain viable and grow it must bring in more money each year than it spends. However, rather than referring to this excess or shortfall as profit or loss, nonprofits call it a surplus or deficit. There is also no reason why a nonprofit organization cannot buy t-shirts for $10 and sell them for $20 and book a $10 “profit.” What distinguishes a profit from a nonprofit is not whether the organization takes in more than it invests, but where that “profit” goes. Nonprofits cannot have shareholders and therefore cannot pay dividends. However, nonprofits are free to pay huge salaries, and that is why college presidents and football coaches often make millions of dollars a year working for organizations that don’t “make a profit!”
7. Be an Investor Not a Spender. Mobley and my father agreed on one critical point: the most important thing that money can buy is freedom from worrying about money. As Mobley would say, “You are only as rich as the money you have in the bank.”
8. If You Can’t Pay Cash, You Can’t Afford It. Be extremely leery of borrowing money. The miracle of compound interest works equally well for your creditors. Borrowing money can make you poor every bit as easily as saving can make you rich.  
9. Getting Rich is Not as Hard as You Think. As Warren Buffet likes to say, all you need is a tiny “snowball” and a “really long hill.” Through compound interest even small amounts of money can become big bucks if we start saving early and do so consistently.
10. Pay Yourself First. My Dad raised eight kids on a very modest salary and still managed to amass a seven-figure stock portfolio. When I asked for his secret he said, “Always pay yourself first!” Most people pay their bills and save what’s left. Unsurprisingly, there is always nothing left. If you want to save money, the first check you write each month must go to savings. “If you run out of money at the end of the month,” my Dad advised, “cut your expenses but never cut your savings.”
11. Always Pick Up More Than Your Share of the Checks. In the end, our lives will be measured not by how much money we have, but by how many people we have helped. Investing in other people is the only “sure thing” investment there is and the returns compound at an almost infinite rate. 

Despite the failed legacy of Communism and horror stories like Venezuela, the siren song of socialism is once again entrancing many of America’s young people. Economic literacy is more critically important today than it was even for Mobley. And like charity itself, economic literacy begins at home.