I’m often asked to talk to client’s children about the importance of investing and the power of compound interest, usually hearing “If you can convince them to just open a Roth IRA….” I quickly realized, however, only a small percentage of them are actually open to the idea. Ever try telling a young person they need to forgo their daily latte in favor of putting money in their Roth IRA? Good luck.
After looking back at these conversations, I noticed a pattern – those who listened and took action probably would have done so even if they never spoke with me. Some people are wired to embrace this sort of thing, others are not, and that’s not something I can control.
Still, I wasn’t ready to give up. I am a parent now and that changes things. My children are five and seven years old, with shorter attention spans than the teenage children or grandchildren I was being asked to speak to. I realized any vital message has to be brief and extremely accessible.
With that in mind, I came up with the following piece of financial education that, more than anything else, I believe is vital to their ability to build above-average financial resources over the course of their lives: TURN CASH INTO EQUITY. Cash is easy to understand. It’s the green paper and metal coins they use to buy ice cream or get on their birthdays. Equity, on the other hand, is a bit trickier.
What is equity? Equity is ownership, specifically, ownership in a business. A business is something that provides value in exchange for cash. That value might be a video game, a ticket to their favorite sporting event, or an ice cream cone on a hot day. Businesses can be as simple as a lemonade stand, or a complex multi-national conglomerate selling intellectual property rights. In both cases, cash is being exchanged for part or all of one of these value providers.
Something very important happens when you exchange cash for equity. The potential value of the cash you had increases exponentially. The potential decrease also increases exponentially as well but hey, there’s no free lunch.
How or why does this happen though? It happens because as the business becomes more valuable, your piece of the business grows proportionately. We’ve all said at one point or another, “If I had just started buying shares of (insert company here) 20 years ago….”
The equity you now have in place of cash has the capability to grow. If you consider a list of the wealthiest people in the world, the majority (if not all of them) had an above average propensity to make this simple trade – cash exchanged for equity.
Warren Buffet started this at a young age; the story is he used cash as a kid to buy pinball machines. Along with a friend, he put them in barbershops and shared the profits with the barber. It was a very simple business, but it taught him the power of trading cash for equity, and as we know, he kept doing this his entire life. From oil execs, to internet billionaires – even the guy that makes WeatherTech floor mats – they all at one point or another exchanged cash for equity in a business.
But you don’t have to start the next multi-billionaire company to do the same. For most of us, the easiest and most accessible way to trade cash for equity is by buying stock in public companies on an established stock exchange, or owning a piece of the overall market through an index fund.
For most kids, the core lesson is simple – trade cash for equity. As adults, life gets more complicated, with cash needed for mortgages, daycare or food. That’s why we try to put an emphasis on financial planning.
Financial planning is just a fancy way of saying, what you need to do to make sure you can pay for the things you need today while still investing for the future. Of course, investing involves risk and as I mentioned in the beginning of this article, not everyone is wired the same way. That’s why at Biondo Investment Advisors, we focus on building investment strategies with clearly defined risk levels, and work with you to choose what aligns with your comfort level, current objectives and future goals.
Whether you’re five or ninety-five years old, the lesson is the same for building wealth: TO THE BEST OF YOUR ABILITY, TURN CASH INTO EQUITY. We can show you how to implement this simple idea, making sure you’re able to cover your short-term needs first. As Wealth Advisors, we want to provide this very accessible lesson now, so that it becomes the foundation to build over the course of your financial life.
Neither the information nor opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance does not guarantee future results.
