BY JON MARZANO, AIF®, Founding Partner, Managing Principal
In order for a community to grow and for its residents to gain a standard of living that would promote bigger families and more worker bees (young adults paying into Social Security) in the future, there is a basic set of financial awareness and understanding that I believe everyone should learn at an early age. So early, in fact, that if they want to cut something from high school budgets, you could cut out basic finance classes and leave free and reduced lunches alone. This basic understanding revolves around three fairly simple topics, all of which are important. You need to understand them all by the time you graduate middle school or the chance of your grasping it by the end of high school is little to none. There is too much peer pressure and too many hormones going on mid-to-late teen years; you just need to know it before then. Period.
1) Own versus Loan: As an example, I have money in the bank – I own that money until I spend it. It can sit there and earn interest for me if I let it, but that would mean leaving it alone. When I run out of money and use my credit card, now I am using someone else’s money and it’s being loaned to me, with interest that I am paying. Own money in the bank, loan money on the credit card. Simple things, yet hard for young brains to absorb. Stay in touch with Marzano Capital Group on our website for more own/loan examples.
2) Compound Interest: Albert Einstein said it best – “Man’s Greatest Invention” he called it. He was not lying, it really works. Those that understand compound interest earn it. Those who do not, pay it. You cannot short change time in the compounding process, it takes years. As a matter of fact, 20 or more years is needed to really see it work. Compound interest is a simple concept. Your money earns a return being invested, that return is added to the original investment. Next year, you get a return on the “whole enchilada” and not just your initial investment. After years of that, it makes life a lot simpler from a financial perspective.
3) Needs versus Wants: This is going to require the majority of parents to rewire their family’s financial thoughts to more of a state of what things were like in the United States 25 and 30 years ago. These past two decades, it has been proven that parents spend more of their salaries and income on the “wants of the family” than ever before. It could be that it was due, in part, to lower inflationary times and more discretionary money available to the average family. That, my friends, does not last forever and we have just seen the start of a new era in inflation. It’s a tough lesson when all we want for our kids is to live a better and easier life than what we had. However, helping our young ones truly understand needs versus wants will set them up for making better decisions – decisions that will have to be made when you are not there to guide them.
Start with these three topics early with your family and loved ones, and it will help create a stronger community for our descendants, and the generations to come.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Marzano Capital Group are separate entities from LPL Financial.