Facts and Fallacies About Creating Wealth

Many commonly accepted “facts” about wealth building are, in fact, fallacies.

Take these six as examples:

1. “Risk and reward are inversely correlated. If you want to acquire great wealth, you have to be willing to take great risk.”
2. “Wealthy people are stingy for a reason. Pinching pennies is a necessary part of building wealth.”
3. “The most important factor in building wealth is ROI — the rate of return you get on your investments. When investing in stocks and bonds, therefore, look for high ROIs.”
4. “A well-balanced investment portfolio is comprised primarily (80% to 90%) of stocks and bonds, with the rest (10% to 20%) in cash or cash equivalents.”
5. “The surest way to acquire enough money to retire is to buy the most expensive house you can afford and gradually pay off the mortgage.”
6. “Asset allocation is the single most important factor in building wealth.”

Those are the fallacies. Here are the facts:

Fact No. 1:

The intelligent wealth builder takes advantage of safe bets and avoids risky ones. He does this as an employee, a business owner, and an investor. He understands that smart financial decisions are cautious decisions. When he must take a risk, he does so with some sort of loss limit in place. He never loses more than he is comfortable losing.

Fact No. 2:

Spending money prudently is an economic virtue, but being stingy — i.e., paying less than market value for goods or services simply because you can — is a flaw. The rich man who undertips does so not because he has learned the value of money, but because he is simply a cheapskate. It’s as simple as that.

Fact No. 3:

The most important factor in wealth building is not ROI but the accumulation of net investible assets, the amount of money you’re able to devote to investing after you’ve paid for all your regular expenses — your car, home, debts, and loans. Plus, individual investors, chasing yield, typically get ROIs that are less than half those of market averages. This is why the intelligent wealth builder devotes the lion’s share of his wealth-building time to increasing his income and setting realistic goals for his stock and bond portfolios. By “reasonable,” I mean market averages plus or minus 10%.

Fact No. 4:

The typical portfolio of stocks, bonds, and cash — however allocated — is an inadequate approach to building and safeguarding wealth. The intelligent wealth builder will also include other assets, such as income-producing real estate, tangible assets, alternative fixed-income investments, and direct investments in cash-generating private businesses.

Fact No. 5:

Buying a more expensive home every time you get a big raise is a great way to ensure that you will never get rich. What you want to do is find the least expensive house you can “love long time” and keep it. The longer you keep it, the more net investible income you will have to invest in income-producing assets that will eventually make you rich.

Fact No. 6:

Asset allocation is indeed very important, but it is only one-third of a larger strategy that truly is most important. I’m talking about risk management. Risk management has three parts: asset allocation, position sizing, and loss limitation. The intelligent investor pays equal attention to all three.

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Four More Facts

Okay, those are six facts that dispel the common fallacies. Got a few minutes more? Here are four more facts, some of which are very basic but often ignored.

Bonus Fact No. 1:

The biggest mistake retirees make is giving up their active income.

Yes, I know that’s exactly what you hope to do. But to keep your wealth for a lifetime, you need multiple streams of passive income. Your goal should be to build each stream of income to a level where you can live on that and that alone.

Bonus Fact No. 2:

The “miracle of compound interest” applies not just to money but also to skill and to knowledge. If you want to get rich and stay rich, you need to invest as much of your spare time as possible in acquiring financially valuable skills and learning about your business.

As a general rule, buying makes you poorer, whereas selling makes you richer. If you want to develop a wealth builder’s mindset, develop the habit of asking yourself every time you buy or sell anything: Is this making me richer or poorer?

Bonus Fact No. 3:

Every type of financial asset has its own unique characteristics in terms of growth potential, income potential, and risk. Expecting more growth or less risk than “normal” from any investment is a bad idea. And that is why 90% of ordinary investors have results that are far poorer than market averages.

Bonus Fact No. 4:

There are two ways investments can build wealth. One is by generating income. The other is through appreciation — an increase in the value of the underlying asset. Asset classes are inherently structured to increase value, preserve value, or do both. Investments that provide both income and appreciation are generally superior to investments that provide only income or only appreciation. But in developing an overall strategy of wealth building, the prudent investor will incorporate all three types of investments.

You may find some of these facts instantly sensible. Others you may disagree with, be confused by, or see as unimportant. But don’t just read them and dismiss them, please. Give yourself a bit of time to think about them. For me, they are useful and important because they worked for me and for people I mentored — and they worked over and over again. Which means, of course, that they might work for you.$

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A Lesson From Martha Stewart

““Productive work is the process by which man’s mind sustains his life, the process that sets man free of the necessity to adjust himself to his background, as all animals do, and gives him the power to adjust his background to himself. Productive work is the road of man’'s unlimited achievement and calls upon the highest attributes of his character: his creative ability, his ambitiousness, his self-assertiveness.”” -Ayn Rand, The Virtue of Selfishness

Martha Stewart has had an amazing career, one that might inspire you.

A one-time stockbroker and caterer, she got her start in the early 1980s by publishing how-to guides on home-making and entertaining. At that time, she was an editorial contributor, making maybe $50,000 a year. Today, she heads up a huge business enterprise and is worth more than a three-hundred million.

Martha is not brilliant (if I can judge from her TV appearances), but she was ambitious and willing to do what it took to succeed. She has been described as “zealous” or “pushy,” depending on the source. She works nonstop and claims to love what she does. And when it comes to promoting herself, she takes a back seat to no one.

In short, Martha Stewart does a lot of what I've been saying you should do.

Success Can Happen So Fast And So Dramatically If You Keep Pushing

Back to Martha’s career . . .

She began as an editorial lackey, but she worked so hard at developing a commercially appealing style and selling it that by 1991, a unit of Time-Warner Inc. was promoting a Martha Stewart Living magazine.

Not content with what to most would be great success, Stewart contracted to do a daily television program, a newspaper column, and a mail-order catalog — all within a 24-month period!

In 1997, the industrious style guru bought her business from Time-Warner for $53 million. That same year, she started a syndicated radio show called Ask Martha. Today, she has her own line of home and garden goods at Kmart that produces over a billion dollars a year in merchandise sales. Recently, she brought her company (Martha Stewart Living) public, increasing her already considerable fortune.

It’s amazing to think that it all began over 30 years ago as an ordinary publishing job. The difference between Martha Stewart and the hundreds of others who were working at her level in publishing in 1980 is her ambition and determination. Sure, Martha Stewart has style. But so did (and do) thousands of others.

Just think of it . . . 30 years ago, she was making a salary – about 50 grand a year. Today, she is worth more than a 300 hundred million dollars.

What are you doing now? What would you like to be doing in 30 years?

What are you going to do about it?

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the Internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…

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Choose Investments That Keep Risks Low And Profits High

“Be not penny-wise: riches have wings, and sometimes they fly away of themselves; sometimes they must be set flying to bring in more.” – Francis Bacon (Essays, 1625)

If you get up early and make good use of your time, you will have a higher-than-average income. If you commit to saving a significant portion of that extra income and check your net worth every month, your net worth will grow quickly. How quickly depends on three things:

1. how much you invest

2. how long you keep it invested

3. what rate of return you can get

The traditional idea about investment returns is that the more you want to earn the more risk you have to take. Today, I’d like to talk about how to get a higher-than-average return with much-less-than-typical risk.

Let’s start by assuming that you begin a 20-year wealth accumulation program with monthly savings of $1,000. Saving $12,000 a year should not be a problem for you even if you are starting out. I've shared many ideas in previous blog posts about how to increase your income.

Let’s make another assumption. Let’s figure that by working hard and smart you are able to increase that $12,000 by $3,000 a year. That is well within the reach of anyone committed to wealth building.

And finally, let’s assume you are 45 years old and have 20 years of income-producing years in your future. (If you are younger than that, the numbers I’ll show you will turn out to be much, much more favorable.)

Over a 20-year time period, putting away the savings mentioned above, the total “extra” income you’ll have socked away will be about $800,000. That’s not bad. It shows you the power of consistent savings.

Now let me show you the power of boosting your savable income. Let’s assume, again, that you started by saving $12,000 a year. But instead of increasing that amount by $3,000 a year, let’s say you add $6,000 — a modest $500 a month. In that situation, your accumulated savings will amount to about $1.4 million.

But let’s say you do better than that. Let’s imagine that your financially valuable skill allows you to increase the amount of money you can save each year by $12,000 ($12,000 the first year, $24,000 the second year, etc.). In that case, your 20-year saving spree will total $2,520,000.

Two-and-a-half million dollars is a lot of money. It would put you among the solidly wealthy. Not revoltingly rich, but financially independent.

You can definitely do that well by sticking to a straight money-building program. But the numbers I’ve cited so far do not include the effect of compound interest. They show what you’d get if you hid all that extra money in your mattress.

If you put all that extra money in long-term treasuries and earn an average of 3% interest over time, you’d have about twice the amounts cited above. If you could do better than that — say, 5% — you’d end up with four times that much. 7% would give you about five times that much. And 10% would give you about six times that much, or between $5 million and $15 million.

This demonstrates something you already know: If you can get your return on investment (ROI) up into the double digits and keep it there, you can get rich — even very rich. It’s not easy to get 10% over time, but I believe it can be done if you invest in businesses you know.

Start by dividing your assets into four categories:

1. your home

2. secured loans

3. passive investments

4. active investments

You know what “your home” means. “Secured loans” include Treasury bonds, municipal bonds, mortgages (that you give, not take), and highly collateralized private loans. “Passive investments” cover the kind of things that most people think of when they think of investing. This includes individual stocks, mutual funds, options, futures, etc. The final category, “active investments,” identifies any investment you make in a business in which you play an active, often controlling, role.

Because I’m a strong believer in “diversified” investing (balancing your investments so that you don’t have too much money in any one area), I make it a personal habit to try to have a substantial amount of money in each of these four categories. In fact, if you want my recommendation, I’d say you should have no less than 10% and no more than 40% of your money in each category. For planning purposes, you might want to start off with the idea that you’ll have equal value in each category.

For each of these categories, you need to reduce your risk and increase your potential return. The way to do this is the same for all four categories: Invest in what you know and keep learning about what you are investing in.

Let’s see how this applies to your home. To be sure that your home appreciates in value, don’t buy a house until you really know the local real estate market. Spend the time you need to scout around, to speak to people, to watch what’s going on. When you are confident you know the good neighborhoods, the up-and-comers, and the overvalued properties, do what the real estate pros recommend: Buy a modestly priced house in an good or up-and-coming neighborhood. 

The next category — secured loans — is an important but usually overlooked part of any wealth builder’s investment portfolio. Secured loans are wonderful because they pay a decent rate of return — higher than bank savings accounts — with virtually no more risk. To make things simple, I recommend tax-free municipal bonds. If you go for the safe ones — triple A — you’ll get about 4.75% return today. That equates to about 7% to 8% before taxes.

Next, you’ll want money in the stock market. For reasons I’ll tell you about later, I recommend that you select a balanced mutual fund that is meant to “track” the Dow Jones Industrials. Don’t mess around picking individual stocks or timing your investments (pulling them in and out of the market depending on economic conditions and other factors). Just put your money in and let it enjoy the historic 9% return stocks have given investors for 70 years.

You can expect your home to appreciate at least 5% a year — twice that much if you’ve done your homework and have gotten to know your local real estate market. You’ll get about 7% on your muni bonds (before taxes) and 9% from your mutual funds. That means that three-quarters of your wealth probably will be appreciating at an average of 7.5%

Figuring that rate of return into each of the savings levels we talked about before, here’s how your 20-year nest egg would grow:

* If you start with $12,000 a year, increase it each year by $3,000, and get a 7.5% return on 75% of your investments: You’d have  about $1.5 million.

* If you start with $12,000, increase it by $6,000 a year, and get a 7.5% return on 75% of your investments: You’d have about $2.5 million.

* If you start with $12,000 and increase it by $12,000 a year with a 7.5% return on 75% of your investments: You’d have between $8 million and $10 million.

What that means is that 75% of your savings will give you a 20-year net worth that will be higher than what you would have had if you had simply hidden your money away — and yet your risk would have been just as low. (Remember, hidden money can be stolen.)

What you do with the other 25% of your savings (the subject of another message) can make the difference between being financially comfortable, enviably wealthy, and disgustingly rich.$

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the Internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…

Click here to watch the video and start your own premium traffic business today!]

10 Silly and Dangerous Things People Say About Stocks

“Nature never deceives us; it is we who deceive ourselves.” – Rousseau (Émile, 1762)

Peter Lynch was the most successful fund manager in the world from 1977 to 1990, when he ran the Fidelity Magellan Fund. The fund grew from $20 million to $14 billion in assets under his leadership, and he walked out on top. Just before he retired, he wrote a best-selling book titled “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market.”

And he has probably bought and sold more stocks than anyone else on the planet. I can’t think of anyone more qualified to make a list of the 10 silliest (and most dangerous) things people say to justify their bad stock-market decisions.

So, without further ado, here’s a quick look at Peter’s list — along with my comments on each one:

1. “If it’s gone down this much already, it can’t go much lower.”

I know that you’ve said this to yourself during the last two major downturns. You said it on Lucent. On Cisco. Sun. AOL. Enron. WorldCom, etc. How many times does an investor have to say this before he learns that it makes no sense? Outside of zero, there is no rule for how low a stock can go. The best advice I can give here: If you catch yourself saying this, it’s time to get out.

2. “You can always tell when a stock’s hit bottom.”

Nobody knows when a stock will bottom — so don’t try to guess it. Instead of trying to catch a falling knife, it’s much safer to let the knife hit the ground … and let it wiggle around a bit to be sure … and then pick it up.

3. “If it’s gone this high already, how can it possibly go higher?”

If you want to make 10 times your money, you can’t sell before the stock goes up 10 times. But nearly all investors do sell the big winners early because of this faulty logic. The only way to make real money in stocks is by letting them go higher — by not taking a profit early. It’s hard to do. But you’ve got to let your profits ride.

4. “It’s only $3 a share; what can I lose?”

What can you lose? You can lose 100%. Whether a stock is $3 or $50, if it falls to zero, it’s a 100% loss. If it falls to 50 cents, it’s not much better. Three bucks is no guarantee of a bargain. Resist the urge; it’s dangerous. You can still lose it all.

5. “Eventually, they always come back.”

I’m heard that a lot during the dotcom bust. It’s as if WorldCom, Enron, Global Crossing, and all the dot-coms were some kind of fluke. Fact is, they don’t always come back. If you catch yourself saying this about one of your stocks, it may well be time to get rid of it. Make sure you’re using your trailing-stop-loss strategy here. 

6. “It’s always darkest before the dawn.”

For the past several years, gold has done nothing but fall in price. But every year, somebody is saying “It’s always darkest before the dawn.” As Peter Lynch says, “Sometimes it’s darkest before the dawn, but then again, other times it’s always darkest before it’s pitch-black.” If you’re saying this — and you really believe it — please be absolutely certain that you’re not just rationalizing a bad decision.

7. “When it rebounds, I’ll sell.”

I’ve heard this phrase hundreds of times. Yet, I’ve never seen anyone follow his own advice here. When the stock rebounds, they decide there’s nothing wrong with it and they keep it. If it never rebounds, they keep it. The reason people do this is that they don’t like to admit they’re wrong. So, somehow, by holding a losing stock instead of selling it, there’s still a chance that they’ll be right on this loser. Usually, they’re not. If you find yourself in this boat, your best bet is most likely to sell immediately.

8. “What, me worry? Conservative stocks don’t fluctuate much.”

There isn’t a stock on the planet that you can afford to ignore. And as we’ve learned during the stock-market shellacking of 2008-09, even blue chips can get clobbered. This phrase justifies the decision to not pay attention to your investments. That’s a bad idea. It’s your money. It’s worth a little attention.

9. “It’s taking too long for anything to ever happen.”

I hear this phrase all the time. Investors want action. But think about this: A 12% annual return is about 1% a month. That’s a great return, but there’s no action. You don’t need action. Be patient. Lynch says it takes remarkable patience to hold on to a stock that everyone else seems to ignore. Most of the money he makes on a stock, he says, is in the third or fourth year of owning it.

10. “Look at all the money I lost because I didn’t buy it!”

Lynch says this thinking “leads people to try to play catch-up by buying stocks they shouldn’t buy, if only to protect themselves from ‘losing’ more than they’ve already ‘lost.’ This usually results in real losses.” Have you made any of these statements — or statements like these — in the past year?

Always remember: In the long run, it is much easier — and ultimately less painful — to correct a bad decision quickly than it is to continue searching for emotional justification as your portfolio continues to shrink.

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the Internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…

Click here to watch the video and start your own premium traffic business today!]

Wealth Building Secret #2: Earn More Than You Spend

“I didn’t want to be rich, I just wanted enough to get the couch reupholstered.” – Kate (Mrs. Zero) Mostel

If you continue to get up early and read Ray's Wealth Wisdom, your income will climb. How do I know that? Because the world is starved for ambitious, hardworking, and focused people. Waking (and getting to work) early gives you a head start day after day, month after month, year after year. That adds up. By charging your batteries with Ray's Wealth Wisdom (Seven Years to Seven Figures), your energy will always be high and your efforts razor-sharp — focused toward achieving your goals.

Even a modicum of extra effort will give you enough extra income to become wealthy eventually. The best-selling book “The Millionaire Next Door” (by Thomas Stanley and William Danko) documented that. If you are satisfied being among the “lumpen capitalists” (see “How Rich Do You Want to Be?” below), the secret is to spend less than you earn, invest those extra savings over a long period of time, and let the miracle of compound interest do the rest.

But you probably don’t want to wait 30 or 40 years. And you may not be satisfied with a mere $500,000 to $1,000,000 in net worth. If so, you are going to have to do the following:

* Learn (and eventually master) a financially valuable skill.

* Use it to position yourself as a profit maker.

* Secure for yourself a fair cut of the success you create.

This will give you — almost from the start — an above-average income. And that income will increase as you get better at what you do. But no matter how high you boost your income, you won’t acquire wealth unless you learn to spend less than you make. For it is the money we save, not the money we make, that determines our wealth.

That’s what I’d like to talk about today: how to avoid the very natural and deceptively powerful impulse to spend more as you make more.

If you have enjoyed a growing income, you already understand (all too well) what I’m talking about. Make more money and things get better: your car, your clothes, even (and most expensively) your home address. That’s fine so long as there is a limit. But for many (if not most) income builders, the desire to spend is always two steps ahead of the ability to earn. If you fall into that trap, you will have the accoutrements of wealth but never its most valuable benefits: financial peace of mind and the freedom to stop working.

Fat people consume more calories than they burn. Poor people spend more money than they earn. Getting thin and getting wealthy are the two easiest things you can do — at least in theory. The hard part is the mental discipline.

We’ll talk about dieting some other time. Today, I want to give you one powerful trick that will give you a wealth builder’s mind-set.

It’s a technique I stumbled upon many years ago that has been a great help in my financial success. It has allowed me to get richer in good times and bad, when my ideas were working and when they were not, when the economy boomed and when it stalled. It’s something you can do for yourself. Something that will change you in a subtle but powerful way so that you will never have to worry about being poor again. It’s the financial equivalent of a diet pill that would make it impossible to ever gain back a pound of lost weight Wouldn’t that be nice!

This came to me about 20 years ago, when I first was introduced to the teachings of Jim Rohn. Jim was big on "the numbers tell the story". He explained that Las Vegas casinos complete a profit and loss statement hourly! Why? Because of all the activity, even a little neglect could spell disaster. So I decided to really focus on my numbers.  Every day after my business opened, I’d count the money that came in. Then, I started doing something that I’ve continued to do to this day.

I took out a sheet of paper and tallied up the value of everything I owned and everything I owed. There was an 8-year-old car that was worth about $1,500, some cheap jewelry I had bought for my wife that I could hock for maybe $200, and a couple of inexpensive (but actually good-quality) oil paintings I’d bought that might get me $50 each in a garage sale. That was about it. Except, of course, for the sweet green cash that was piling up in my mind each day as my fledgling business paid back its start-up capital and went on to earn thousands and then tens of thousands of dollars.

When I started this little scribbled list, my financial assets were overshadowed by my debts and liabilities (credit-card debt, some old student debt, a car loan on that piece of junk vehicle, etc.). The bottom line was bright red. But since I had a cash-positive business, things were getting better every day. The hole I had dug for myself was getting less and less deep. In a matter of months, I could poke my head above ground level and see a future for myself. A year later, I was among the lumpen lot!

It wasn’t a straight march up. A year later, I was a partner in about a dozen operating businesses and suddenly found myself — for several scary months — more than a million dollars in the hole. If things hadn’t turned around, it would have been very bad for my family.

Those two experiences — making that good, fast money and then almost losing it — inspired me to adjust my habit of adding up my wealth. The twist was this: I promised myself that I would do whatever it took to make sure that each new total — each new bottom-line number — was larger than the one before. Since I’d gotten into the habit of running my numbers on a monthly basis, my vow meant that I was committing to becoming wealthier every month.

That may seem like a simple promise, but it had a profound impact on the way I thought about myself, my job, my business relationships, and wealth building itself. It made me see — almost instantly — that many of my habits (including some of my spending habits) were financially unhealthy. It also gave me, at times, the panicked energy I needed to do something drastic — to start something new or end something that had gone wrong . Plus, it gave me an underlying determination to get a little bit richer every day — and this, as Robert Frost said, has made all the difference.

You might want to do the same thing:

* Make it a habit to recalculate your net worth on a monthly basis.

* Then promise yourself you’ll do what it takes to make that bottom line always bigger than it was before.

You’ll have to be scrupulously honest. The temptation to meet your goal by overvaluing a particular asset may be strong, so be aware of it and resist it.

Counting your money is an unseemly activity. You probably don’t want to do it in front of anyone else. And you certainly don’t want to talk about it. But it will remind you of the progress you’re making — and that will give you the mental strength to continue. Ultimately, it will make spending less than you earn automatic. And that means your future wealth will be guaranteed.

Don’t dismiss this little technique because it’s simple. All the best and most powerful things in life are simple. This WILL make a difference. Do it.$

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…
 

Click here to watch the video and start your own premium traffic business today!]

The Greatest Financial Gift You Can Give to Your Children

I wrote this essay for your children and grandchildren.

You’ve probably heard about America’s huge debt load. The U.S. government’s financial obligations now exceed $663,000 per American family. This burden will fall on the youngest Americans.

It’s unethical. It’s unfortunate. But it’s the reality.

With this giant financial obligation bearing down on them, it’s critical that now – right now – your children and grandchildren learn about money and finance. They need to know the basic principles… like how to be independent, why debt is dangerous, and how to grow money.

They don’t teach finance in schools. If you don’t teach them this knowledge, no one will. They call this financial illiteracy.

If our children are financially illiterate, they have as much chance of survival as a swordsman in a gunfight. There will be no mercy for the financially illiterate in the future. It’s likely these people will live as indentured servants to the government and its creditors.

But if our kids have a grasp of finance and its basics – and they obey its laws – they will grow up rich. They will be in a position to help other Americans, too.

Below, you’ll find the three vital financial concepts all children need to understand. Please pass them on to your children and grandchildren as soon as you can. I have three children… And these three concepts are my starting point for their financial education.

First of all, our kids must know that they are not entitled to money or wealth… or anything for that matter, even Christmas presents. They must earn money. I want my children to learn that they shouldn’t expect anything to be handed to them. I don’t want them to rely on the government for their livelihood, like many people do right now.

So many people treat money and prosperity as an entitlement. The government even calls its welfare programs “entitlements.” This word – and what it represents – gets stamped into young people’s brains. Kids act as if they are somehow entitled to toys, video games, and cars. But why should they be? Just because they have parents, it doesn’t mean they should get everything they want.

It's good to regularly remind your children of this when they are old enough to understand it. Not paying kids an allowance is a great start. An allowance would reinforce the sense of entitlement. They can make money by earning it: doing the dishes, making their beds, mowing the lawn… there are a million things. It's better to pay them for doing those things. But I’m not going to just give them money.

The second concept our children need to understand is debt. Debt is expensive. If you abuse it, it will destroy you. Like the entitlement mentality, debt is an enslaver. It robs you of your independence. I avoid debt in my personal life… and when I’m choosing investments.

The best way to illustrate the cost of debt is to calculate the total amount of interest the debt generates in dollars over the lifetime of the loan, instead of looking at the interest rate (like most people do). Once you look at it like that, you can see how expensive borrowing money really is.

For example, say you borrow $100,000 with a 30-year mortgage at 7%. Over 30 years, you’ll end up paying $140,000 in interest to the bank. In the end, you’re out $240,000 for a house that cost less than half that. Not a good deal.

The third thing our kids need to learn is the power of compound interest and the best way to harness it.

Compound interest is the most powerful force in finance. It is the force behind almost every fortune. The brilliant Richard Russell calls compound interest “The Royal Road to Riches.” And it’s mathematically guaranteed.

Let’s say, for example, you have $100 earning 10% annual interest. At the end of a year, you’ll have $110. During the second year, you’ll earn interest on $110 instead of $100. In the third year, you’ll earn interest on $121… and so on. This is the power of compound interest. The numbers get enormous over time, simply because you’re earning interest on your interest.

Because time is the most important element in compounding, it’s an incredibly powerful idea for children to understand. They have the ultimate edge in the market: the time to compound over decades.

The stock market is the best place to earn compound interest. You buy companies that have 50 years or more of rising dividend payments ahead of them. Then you let the mathematics work.

As soon as your kids are old enough to understand some arithmetic, you can sit down with the classic compounding tables and show them which stocks they have to buy. I’ll use Coca-Cola, Johnson & Johnson, and Philip Morris as examples.

Another very safe place to save and compound your money is our “Income for Life” strategy. 

After that, assuming they have the discipline to follow through, they will get rich. There’s no doubt about it.

In sum, you have the responsibility to educate your family about finance. If you don’t, no one else will, and they will suffer for it.

Encourage them to work hard and avoid the entitlement mentality. Teach them the power of compound interest and explain the dangers of debt.

If you do this, you will equip your kids and grandkids to survive financially in the difficult circumstances ahead. You’ll provide them with something that nobody can place a price on: the power of independence.$

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