How to get teens interested in building wealth?
Imagine, when your eldest kid was born in 2004 and you invested a sum of 3 lakhs for them in your average over the counter Sensex index fund as a safekeeping for their future. That sum of 3 lakhs would have been 22.75 lakhs today, comfortably paying for their education and marriage.
That's not some voodoo magic, it's the power of compounding and it is the base principle behind creating wealth.
Is it too late to start teaching your kids about wealth?
Now Warren Buffet calls compounding the 8th wonder of the world, but to put disposable income into investments, it's important for kids to understand the value of passive income streams and free cash flows as early in their life as possible. This article serves as a lamp post that you can forward to your kids to help them appreciate and understand how simple wealth building can be.
However, simple does not mean easy.
1. Open a DEMAT account for them and set them up with some cash
Let them lose money, in order to help them understand how to make more. DEMAT accounts help you buy and sell securities (stocks of publicly traded companies) at the click of a button. When the market goes down, you buy. When the market goes up, you sell. The difference is your profit to keep or so-called capital gains. Prudent investors study the market and look for opportunities where they can predict a trend in the price of a security and exploit it for their benefit. Almost all wealth is exponentiated with the power of capital markets.
2. Wealth is not money
Money is just how we quantify wealth. You can borrow funds from a bank and you will have money, but you will actually have decreased your wealth by taking on a liability (a loan, in this case). Things that take money out of your pocket are called liabilities, things that put money in your pocket are called assets. The key to building wealth is creating assets, which create money even when you are not actively working on them. Your job is not an asset, because if you stop showing up, you will stop receiving your monthly salary. Investing in mutual funds is an asset because the market will grow irrespective of what you do.
3. Multiple streams of income
So what is the definition of being wealthy? Simply told, it's when your monthly passive incomes supersede your monthly expenses. Now you don't need to do literally anything to make money, because your passive streams are already doing the heavy lifting for you! It is super important to set up multiple streams of income by creating multiple assets. If you buy a house and live in it, your house is not an asset. But if you rent it out, it generates rental income for you. That's a stream of income. There are multiple ways to generate income streams for young folks:
a). Invest in capital markets
b). Rent out things that you don't use such as your car, or flip things on peer-to-peer marketplaces like OLX and Quickr.
c). Create a course on Udemy and earn from course purchases
d). Write a book on Kindle Direct Publish and gain royalties
e). Build a blog that has high-quality content and earn from ad royalties
f). Become a streamer on Twitch and cross-publish streams on Youtube, making ad royalties.
4. Owning liquid assets
Wealth is not just creating money for yourself, it's also about creating time and optionality. The assets that you create should be liquid assets, meaning they generate cash for you and not just notional value. A house that you buy will increase in value over time, but you will not be able to enjoy your gains until you sell the house. Even then, your gains will be diminished by taxation and other fees involved. Not to mention all the interest you paid to the bank for paying the EMIs. Liquid assets can be sold immediately in return for the cash or generate cash for you all the time.
5. Take asymmetric risks
Wealth is created by efficiently calculating risk and reward. Imagine, if 90% of your investments are in rock-solid investment vehicles that will never lose their value like index funds and large-cap dividend-yielding stocks, you can put 10% of your investments in high-risk investments like small-cap companies or non-traditional investments like Bitcoin. Here, the gain has no limitations on the upside -- you could potentially make 100-1000x on your investment, and the only downside risk is the capital you put in. These investments enable people to jump the queue and make money more efficiently than other conservative investors.
Hope this article inspires you and your teenagers to learn a bit more about wealth creation and how to create asset-building opportunities for themselves. To supercharge their financial journey early, sign up for Yodaa.