UNDERSTANDING FINANCIAL STATEMENTS

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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What is it and Why May it be Important?

A financial statement gives an accurate and current snapshot of your finances and investments. It let's you know where you are so that you can plan well for where you want to be. Financial statements allow a person to invest in both real estate and businesses knowing exactly what you are getting into by understanding the numbers. 

I'm including an example financial statement I created that is based on Robert Kiyosaki's teachings on these because I find it simple for teaching new investors how to begin looking at cash flow. 

I realize this may be difficult to see, especially if you are attempting to read this post on a phone, but I simply want to give you a general idea at this point.

When investors talk to me about risk I immediately refer to financial statements because they give such a clear picture of risk vs. strength of an individual investment or business as well as a person's overall financial picture.

How do I Learn How to Use it?

As you can see above, there are two major parts of the financial statement. The first is called an income statement and shows your income as well as your expenses (again, you can use this for investments/businesses as well as your personal financial picture). Below the income statement is a balance sheet which shows your assets as well as your liabilities. Both of these are extremely important to understand. 

Before going forward I want to quickly recommend that each and every person reading this post talks to you accountant about financial statements so that you have a professional opinion on this. I'm giving some very simple basics in order to start you off, but if you really want to move forward with this you will want to speak with an accountant. The problem with some accountants is that they may not understand the difference between a liability and an asset, so I'll go over these two concepts quickly right now

What is an Asset?

An asset, and my definition will be different than other people in your life at some points, is anything that puts money in your bank account. A liability is anything that takes money out of your account. I'll provide a few examples:
-Your home is not an asset, it is a liability because it costs money each and every month. Even when the mortgage is paid off it is still a liability because you are paying property taxes, maintenance, insurance, and utilities to keep the thing. Yes, your home can have equity in it, but that doesn't mean it is an asset. You bank will disagree with this definition. They will call it an asset. One reason, in my opinion they call your house an asset is because while you have a mortgage on the house it is an asset to the bank (it puts money into the bank's accounts each and every month)
-If you write a book and collect royalties for the rest of your life... the contract and book are assets.
-If you own a property that cash flows after ALL EXPENSES are accounted for it is an asset (please read my previous post on this for a definition of expenses. This will at least provide a brief explanation to get you started)
-If you own a property that you must manage yourself in order to make it cash flow... it is an incredibly sketchy asset. Why? Because as soon as you can't mange the place for a month it can instantly turn into a liability. If you get into an accident or die and your family doesn't know how to properly manage a property, it has become a liability for your family. Most "investors" in real estate do not own assets. They own liabilities.
-If you loan money to a family member with a contract that states they will pay you back the loan with interest on a monthly basis... this loan to them is an asset.

How do I Learn about Risk from a Financial Statement?

I will explain this very quickly using a few examples. You can judge who is taking bigger risks. Person A owns 5 rental properties (assets) that all cash flow and she has a full time job that pays $50,000 each year which is enough to get by on year to year. Person B has no assets, but has a job that pays her $200,000 each year and a pension that states it will pay her $60,000 each year until she dies in her retirement. Who has taken care of their risk of not having money in retirement better?

Person C invests in a single family home. It cash flows at $1,000 each month and the outstanding mortgage is $200,000. Person D invests in a multi-family property that has 10 units with each unit cash flowing at just $50 each month and an outstanding mortgage of $1,000,000. Both of these people have the same income each year from their job ($60,000). Who is in the best place to manage their risk with all other factors being equal?

Hint: Evaluate these scenarios by plugging information into a financial statement to see how things change. As a general rule, the more assets a person has and the more sources of income (income streams) a person has, the less risk that person is taking. Why? Because if one income stream disappears for any reason, there are others to rely on. If there is only one income stream it doesn't matter how big it is, if it disappears, there is no income left. Also, no matter how big debt looks, if it is consistently paid off the risk of this debt is mitigated. If a property has multiple income streams, it has less risk because if one income stream dries up, there are others that will still balance the books.

Summary

Financial statements are not extremely difficult to understand, but they will take some practice and potentially some help from someone who knows more about them than you do in order to make sure you are taking everything into account. Having said this, they are extremely valuable tools for evaluating your financial picture or an individual investment.  If you don't understand the basics of financial statements I would recommend you don't invest in anything because you are taking on a lot of risk no matter what you invest in without understanding the risk. Overall what I recommend is that you being to understand financial statements and then begin investing for your future!

Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

3 REASONS YOU SHOULD ATTEMPT TO OWN PROPERTY AS LONG AS POSSIBLE

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Long And Boring Wins The Race

If you listen to most radio shows, watch most TV broadcasts, or read most papers on investing you probably, like me, get it in your head that the entire world invests for the short term. There are a ton of shows out that promote quick and easy profits from flipping houses. It seems that the quicker, the return the more people desire that return. My post today is attempting to argue that the best money to be made in real estate is really very long term in focus. While many people live and die with the excitement of stocks or ups and downs of flipping strategies, look at the following paragraphs with an open mind for the boring.

3 Reasons Boring Does Win The Race

1. The first reason holding properties for a long time is that a property owner's highest interest rates are paid first. This is actually true no matter what strategy you use or even if you simply own your own home. The banks make a ton of money from you when you sell a property within the first 5-10 years of its mortgage. Why? Because mortgages are front end loaded. Take a look at your mortgage payments the next chance you get and you will see I speak the truth. If you have a $300,000 mortgage amortized for 25 years at an interest rate of 3%, you will pay almost $8,900 just in interest in the first year of that mortgage, or almost $42,000 in the first 5 years. In the last five years of the mortgage the interest payments will equal almost $7,000, and in the last year you will pay a grand total of almost $300 in interest.

Again, mortgage interest is front loaded in order to give the bank a major portion of their money up front and allow them to take advantage of people who move constantly. You pay off little principal in the first 5-10 years, but pay off a ton of principal later on in the mortgage

2. I have covered this second reason in a previous post. Click on this link if you want to read more about how it works. Did you know that the longer you own a mortgage, the less each dollar of the mortgage is worth? Inflation eats away at our money constantly. If you believe that inflation is at 3%, then you $1 today will be worth $.50 in 21 years. In other words $100,000 today will be worth $50,000! What this means is that the longer you hold that mortgage, the faster it becomes easy to pay off. A different way to explain this is that if you make $7,000 each month right now and continue to make the equivalent of what $7,000 can purchase today you will be making $14,000 in just over 21 years, but your mortgage payments will remain the same... If they are $2,000 each month right now, they will still be at $2,000 each month if interest rates stay the same.

Again, it becomes easier to pay down the mortgage because it is quickly worth less as time goes by. Owning a house long term is to your benefit. If you don't believe me, ask your parents or grandparents how difficult it was to make their payments in the first few years of their mortgage and how easy it is now (This only works if they have kept one property for a long time without refinancing it).

3. You save an extreme amount in taxes if you hold properties long term. I discuss this in detail in this post if you want to know more, but I will summarize that post quickly here. You pay taxes on the increase of a property's worth when you sell that property. If you never sell the property, you never have to pay taxes on it's gain in equity/value (your estate may not have to pay either if you set things up properly for your children when you die). You can even pull most of the equity out of the property without paying taxes on it. You do this by taking our a home equity line of credit. This actually decreases your taxes even more because you will be paying interest on that line of credit and the interest is a tax write off in itself!

Summary

I recently read the book "The Millionaire Next Door" and was reminded that North Americans who are wealth consistently build their wealth by holding onto their investments long term. The book was written by a couple of men who give detailed statistics for most of what they explain in the book and I highly recommend the read. Owning real estate for long periods of time is how many of the boomer generation became millionaires. Those who didn't, yet invested quite a bit of money in various investment classes typically bought and sold investments more frequently.



Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Can my mortgage be an asset?

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Words Give Us Clues

Did you know that 'mort' comes from Latin and means 'dead' and that 'gage' comes from a French word meaning 'pledge'? In other words the origin of a mortgage means something like 'dead pledge'. Basically, if a bank lends money for a house and payments aren't made on time, their pledge to continue to give money is dead (they can take back the property to pay the debt). And if the house is paid off completely, the pledge to pay for the loan with the house is dead (there is no longer any debt owed). Either way, somebody's pledge/commitment dies when the situation plays itself out.

Why is this important for understanding mortgages? Because originally mortgages were never meant to allow somebody to take advantage of banks or other lenders. Instead they were a way that banks/lenders could take back something of value if the borrower didn't pay. That has changed a lot in the last 70-80 years. Many years ago a family could only borrow a small amount of the cost of the house (under 50%) and would have to pay off that debt within 3-5 years. Now a family, in Canada at least, can borrow up to 95% of the money needed for the house being purchased and can take 25 years or more to pay off that debt! With the big five banks (TD, RBC, Scotia, CIBC, and Bank of Montreal) they will typically lend, at the most, for 25 years at the time of this post. Other lenders (credit unions and insurance companies) will at times lend longer than that.

How Can A Mortgage Be An Asset?

First, it is important to understand that if you are investing in real estate that doesn't cash flow the argument I am about to make isn't as valid. I always recommend purchasing real estate that cash flows in order to cover risk. Having said that... What a mortgage allows a person to do now is borrow money at a certain price and pay that money back at a different, lower, price. I will give you an example to help make my point:

If inflation increases at 3% per year for the next 21 years we will pay $2 for something that costs $1 today. Have your parents ever told you about the time when they could buy a bottle of coke and a chocolate bar for 15 cents? The reason it costs more now is due to inflation. The reason inflation takes place is that our government makes money out of thin air (the more they make, the less valuable each dollar is because of supply and demand). Over time inflation DEVALUES our currency. So, those people who are keeping their money in a sock drawer or in the bank for long periods of time are actually losing money because their money is worth a little less each and every year that inflation takes place.

The way this effects a mortgage is that if you borrow $200,000 in year one and you have $100,000 left to pay in 21 years, that $100,000 that you owe is worth about half of what it is now worth. Another way to say this is that the you will still owe $100,000, but you will now be paying it back with money worth about $50,000.

I wish there were a really easy way to explain this, but I haven't thought of one that works really well. There are two key aspects to what I am attempting to explain. The first is that if you borrow money for a very long period of time, you will be paying it back when it is worth less than it is now which means it will be easier to pay back (it will be easier to earn $100,000 in 20 years because your wage will probably have about doubled). The second key is that all along the process of paying back loans you won't be paying it yourself, it will be the tenant who pays back this money. Because you will be making higher rent by that time, you will be putting more money into your pocket (if rent is costing your tenant $1,000 each month now, it's fair to assume it will have about doubled in 21 years and they will be paying you $2,000). So, if my mortgage payment is $600 each month now it will still be around $600 in 21 years, but I will be making an extra $1,000 from rent which goes straight into my pocket (the increase in maintenance costs won't be extreme enough to change this equation significantly).

Summary

This basic explanation of how mortgages work to our favor is that we can borrow at today's dollars and pay that debt back with future, devalued, dollars. When purchasing an income property it is sometimes wise to stretch the payment out as long as possible... that way you will be delaying the payment until you have more money to pay it back with. The only caution in all of this is that interest rates are at the lowest they have every been at in all of recorded history as far as I know. It is likely that at some point in time interest rates will rise significantly (it was only 35 years ago that interest rates for mortgages were over 20%). Always research what you want to do and how you want to invest and always connect with professionals in the industry in order to get an educated opinion before you invest, but then invest wisely and grow your wealth in so many ways because real estate is the most advantaged asset class on the planet!

Note: The main point of my argument above also applies to our family home, but only if we live in it for a long period of time. The average family is purchasing a new home every 5 years or so.... I'll cover why that's a terrible idea in a future post.

 

Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Should you invest in Calgary right now? Yes and No

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Current Market

Calgary's house prices have been rising and people have been excited! Even will low oil prices it seems Calgary may see a decent up trending market in 2015 (though it may be too early to tell and it will be interesting to see how the spring market plays out). Since our market low in 2010 we have steadily seen an uptrend and as the market has trended, so too have average people jumped on the band wagon of purchasing real estate in Calgary. I want to make two basic points in my post today: 1) Anytime is a good time to invest in real estate if you know what you are doing and how to analyze a good vs. a bad deal and 2) Generally speaking the best time to purchase is not once the market has been trending up for 5 years!

When is The Best Time?

I have heard many wealthy people, including Warren Buffet, make statements along the lines of: 'When people are greedy, it's time to be scared and when people are scared, it's time to be greedy'. I'm pretty sure this idea has been one that many wealthy people in the past few hundred years have had in their minds when they invest. So... when is the best time to invest in real estate in Calgary (or anywhere else)? The answer is when the market has tanked and everyone in a city or country is talking about real estate in negative terms (2008-2009 in many US cities is a perfect example). The best time to invest in Calgary; the time when it was easier to maximize many aspects of real estate investing, was 2009-2010. During that time a person could negotiate a great deal on a property because there were more sellers of real estate than buyers of real estate (supply and demand is always at work).

Having made that statement, I also want to encourage anyone interested in real estate investing by my next statement: The best time to invest in real estate is NOW! As long as a deal qualifies as a legitimate investment (Cash flows after ALL expenses both short and long term are accounted for) a person will have a sound investment no matter at what point in the market that investment is purchased.

When is The Worst Time?

The absolute worst time to purchase real estate as an investment is when the deal doesn't make sense. Period! That's all there is to it. When does a deal not make sense? When it puts you at risk of losing the property. That usually means the investment doesn't cash flow, but there are other factors. Even a cash flow negative property will often create a lot of wealth for a person long term if they can cover the costs of the property for the first 5-7 years, but I would never in a million years encourage someone to get into a situation like that.

My Advice

On one hand I would advise most people getting into Calgary real estate not to invest right now unless it cash flows $200 after ALL expenses. I would advise you to learn and educate yourself and set yourself up for the next hit on the market. This may be in 3 years and may be in 10 years, but if you are wise and save up a lot to invest and improve your credit, you will be well situated to maximize that money in low risk investing. If you don't know a lot about real estate investing start asking people who have been in the business for some time. Most investors I know who do well in the business will gladly give some of their time to a new investor to guide them along over a coffee meeting. People who are the most successful tend to also be the most willing to help others out. When in doubt, fill out a contact form for me to contact you and I would be happy to discuss these and other investing ideas with you.




Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

4th Dimension Revisited: How Real Estate Saves You Tax Money

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Our Biggest Expense in Life!

I often ask people what the biggest expense in life is. I hear different answers, but the most frequent I hear is 'my mortgage'. While mortgages are significant, they pale in comparison to what the average person pays in taxes. I'd like to prove this to you really quickly and easily:

Say, for an example, that you earn the Canadian average of $74,540 (2012 numbers) each year and somehow you are able to find a way to save up enough on that income to purchase a house worth $409,708 (April 2014 numbers). Say you live in Alberta which is right around the middle of the pack for provincial taxes of all provinces (See below for the numbers I used). Each year from the age of 25 to retirement at 65 you would be paying $20,723.73 in taxes. In those 40 working years you would pay about $828,949.2 in taxes. In that same time, with a 25 year mortgage at 3% interest you would have paid a total of $553,721.28 to the bank. Even if interest rates rose and you paid an average of 5% over those 25 years, the total would still be only $682,606.97! I haven't even taken into account that the average person lives until they are 80-85 years old, which means there are another 15-20 years of taxes to think about (even more if you earned money before the age of 25). When including these extra years of paying taxes, the average person could easily pay more than $1 million dollars in taxes to the government, which is almost double what they may pay in mortgage payments.

Is It Even Possible To Become Wealthy?

It is, but not if you pay every dollar of tax to the government that you are able to. One major factor that allows people to become wealthy is by lowering the amount they pay in taxes. I have said many times to many people that real estate is the most tax advantaged investment class in North America offered to the average individual and I would like to prove that point. You can save money in taxes with real estate investments in at least 5 ways!

1. Depreciation: I've discussed this before and you can refer to that earlier post in order to learn more about this. This isn't the biggest way you save money, but you have the choice about when to use this advantage. You can use it early in your investment and use the savings to reinvest, or you can wait until retirement and save the taxes on the back end when you want more income in your pocket.

2. Increase in net worth: As the property you own increases in value over time (let's use an example of 30 years) you are not taxed on that increase in value! While this is an incredible way to build net worth... many other investments are similar (the stock market, mutual funds, precious metals)... You don't pay tax until you liquidate the invested money. The beauty, as I hope you will soon see, is that you never have to sell your real estate to use most of the money in it.

3. Throughout the time you are paying down the mortgage you can save money in taxes on the amount of interest you pay each year to the bank! Make sure you keep this in mind because it makes a big difference. On a $300,000 mortgage paid off over 25 years, you will pay at the very least around $127,000 in interest to the bank. If interest rates rise this number would be much higher. Can you imagine the difference that makes to your income? I will let you do the math on how much money you are saving by writing off that expense.

4. When you take money out of the property you can save taxes again... And this is where real estate can be so much better than other investments! If the income you receive from rent isn't enough to live on and you want more, you can take out a home equity line of credit (HELOC). When you do this the money you receive is absolutely tax free! In other words, if my real estate portfolio is worth $1 million, I would potentially take $650,000 out of it to live on or spend or reinvest or give to my favorite pet and I would not pay $1 of taxes on that $650,000 that year. Do you realize what this means for people? If this doesn't blow your mind you either already know this or I haven't explained just how incredible it is.

5. If you do take equity out of your property in the form of a HELOC you will be paying interest on that loan. This means that you can write off the interest you are paying on the $650,000 and save on taxes once again! I'm getting so excited writing this out that I'm bouncing! Every time I explain this I get this excited because of what it means to the average person who pays a ton of money to the government in taxes each and every year of life where you make money in almost any way.

6. Here is the bonus way to save on taxes... When you die and you pass the property you own to your children, they don't have to pay taxes on it either! I will most likely discuss this in a future blog post, but if the real estate is placed in a trust, that trust doesn't die with you... if lives on and therefore your children would not have to pay taxes on the real estate either (this is the time when some wealthy individuals lose the most... when they pass their inheritance to their children). I would advise you to talk to a lawyer specializing in retirements and finances if you want to look into this idea further. 

Summary

Alright, so I've gone over the potential ways that any person who owns cash flowing property can save on taxes, but what difference does it make? I would like to provide one simple thought here. I live in Calgary where real estate has increased in value substantially over the last 12 years. What if the only difference all of the information I provide you with in this post gives you the ability to purchase just one more property for your portfolio? In Calgary, if someone has already paid off their mortgage, they should be making at least $2,000 in income each and every month with a normal suited house in an area where it makes sense to own real estate. What difference would $2,000 each month make to your retirement? What if you were able to purchase 2-3 rental properties with the information you just read? Dream big! Just 3 rental properties owned without any mortgage in retirement can easily outpace some of the best pension plans out there (and you could still use any equity in the property for anything else you want/need in retirement).

Last Comments

If you decide real estate is something you would like to invest in, please contact me through my website: www.akerahomes.com. I love teaching people how to become excited about their retirements and currently do not charge even $1 for the help I give people when I sit down with them and discuss their retirement goals. This may change if too many people start calling me, but as of now it is simply my passion to help more people retire the way they desire to after working for decades.

If you ever decide to invest in real estate I highly recommend you speak with a real estate investment lawyer and a real estate investment accountant. Both of these professionals should own a substantial amount of real estate themselves to be able to advise you with any wisdom. Most lawyers and accountants understand very little about real estate investing (even though many will understand some of the basics), which isn't a problem. You need to be aware that people who specialize in real estate investing will be able to help you in many more ways than someone who also helps people with divorces or suing their neighbor for whatever reason. Always work with a specialist!

* Residents of Alberta a flat 10% tax rate no matter how much they earn. Everyone in Canada also pays 15% on the first $44,701 and 22% on the next $44,700.


Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html

Why we give our kids an allowance

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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How My Wife and I Manage our Children's Allowance

We have two children. My daughter is almost 6 and my son is almost 4. My wife and I have been thinking about how to teach our children about money for quite a few years (basically as soon as my daughter was born) and have read a ton about other parents' ideas on the subject. I'm presenting the basics of how we do this with the hope that it may help other parents think about money. One reason for doing this is that someone close to me recently asked how we do things so they can think about it and develop their own system that fits their goals. We receive next to no financial education on this planet in school. I have met many accountants, doctors, business owners, and those with advanced degrees in finances who know next to nothing about the basics of managing money. Most of us learn about finances from our parents. Think about your parents for a moment and ask yourself: "What did my parents teach me about money, budgeting, saving, investing, and spending?"

Our Purpose

It is fundamental the you think about what you are attempting to teach your children in how you dole out an allowance. Our primary purpose in giving allowance is teaching money management up to the age of 18 so that our children are able to manage money for the rest of their lives. We want to teach our children how to budget, delayed gratification, a generous spirit, bookkeeping, and a foundation for investing right from the beginning.

Our primary purpose in having an allowance IS NOT to teach our children about household chores, obedience, or rewarding or punishing them for anything. This is an important point! We give out the allowance each week regardless of their obedience because we teach the importance of obedience in other ways. We have three stages to how we are going to give out allowances. The first stage is simply money management, the second is beginning to understand how to generate their own money, the third is focused on facilitating independence with money management.

Age 5-9

During this stage we simply want our kids to learn what to do with money when they have it and explore what that means as well as teach delayed gratification and documentation for money. The way we do this is by giving them a dollar per for how old they are; we give our 5 year old 5 dollars per week and will soon be giving her 6 per week (when she reaches her sixth birthday). We have decided that money should be separated into 4 categories (in order of importance):

1. Giving to others in need (generosity) = 20%
     -This is for gifts. That's it. For people who need something, our daughter always has money handy.
2. Investing (paying yourself first) = 25%
     -She recently purchased a portion of her uncle's new property purchase ($20 worth). She will be able to track, and therefore learn about, various investments in mutual funds, stocks, bonds, real estate, businesses, GICs, and even precious metals or money market accounts if she desires to in the future. As she tracks these investments over 10-13 years she will begin to understand how they work and what she desires to invest in for the future.
3. Saving (delayed gratification) = 45%
     -Simply delayed gratification. As long as it'll take more than 3-6 months to earn enough for something we are ok with whatever she chooses. Right now she is saving up for a horse! We've told her it may take until she is a late teenager and she is fine with that. She talks about it all the time. Can you imagine the impact this will have on her when she finally purchases that horse! She learns that she can afford almost anything if she is willing to sacrifice for it. She can realize these desires even faster if she finds other ways to generate cash.
4. Pocket money (for enjoyment) = 10%
     -She can spend this, literally, on anything she wants. So far it is Lego (she has to save up for a couple of months just for the basic sets). If she purchases candy my wife and I reserve the right to facilitate her consumption of that candy by regulating how long it takes:)

These percentages will likely change as time goes by and that's fine. We have criteria for each category and each time our daughter is given her allowance or spends anything she writes it in a ledger with our help. She delights in the ledger book that is only for herself and we opened a bank account in her name that she was super excited about as well (when she turned 5).

For us, if our daughter is punished by not receiving an allowance it is robbing her of the opportunity to learn about money. We aren't giving her money in order to teach her obedience. We are giving her money to teach her about money. We've decided it is counterproductive to not give her money because it steals from her education at this point in time.

Age 10-14

At this time we will give $10/week but not give more as our children age. When they hit 11 years old, they will still be receiving $10/week and we will begin to teach our children how to generate money in other ways. We haven't completely decided the exact ways, but this will most likely not be tied to common household chores. Our kids are expected to do common household chores along with us because that's what is needed to have a family function properly. There is a chance, however, that if they want to help with things outside of normal chores that add value to our lives in some way that we could pay them. For example, if they are creative enough to wash our cars for us, build something useful for our family or house, or take on someone else's chore in return for some money... I'm comfortable with that. In my opinion my kids will be learning to think of new ways to generate income.

Our daughter has already begun thinking in these ways. She goes around the neighborhood and asks people if they want her to pick the apples off their trees in late summer. This helps the neighbors because the apples don't rot on the ground. My daughter then sells these apples to others in our community by offering them hand picked, tree ripened apples for less than people can purchase in a store. The beauty of this is that our daughter is helping various groups of people and bringing value and receiving compensation for that value (which is the most basic concept of good business). Hopefully we will be able to teach her how to scale this business as time goes by so that she learns even more! This past year my wife and son helped her pick and sell the apples. After she put all the money she made into the 4 categories we have, she used the giving and pocket portion of what she made to buy gifts for my wife and daughter. She learned that when people help you in business it is fun to say thank you out of the profits (again, a key good business concept of paying your employees). It is our hope that our daughter continues to learn these lessons when she is in the 10-14 year old range.

Age 15-18

At this age we have a choice to continue to giving some kind of allowance for specific reasons: see the note below or simply allow and expect them to make their own money in their own ways. At the moment I lean toward giving them an allowance for specific items they need to learn to manage, help them learn to work within a budget in order to reach their short and long term goals, and help them learn to start their own businesses and make money on their own. If they choose to be an employee somewhere on a part time basis, I'm alright with that as well. One of the great lessons they can learn about money management is that if they are an employee they most likely will need to settle for smaller dreams or simply not reach their dreams and goals. The hope at this stage is to both allow our kids to learn on their own and be prepared for leaving the home (from a financial standpoint) as well as to discover their passions and do what they enjoy doing (or, alternatively, to discover what they really don't like doing so that they make choices not to continue on those paths of making money).


Note: Regardless of our childrens' age, we still expect them to divide their money into appropriate categories that we come up with together. We are open to discussing these allocations with them if they bring up valid arguments. At later ages we may introduce other categories (education, clothing, basic necessities) and set the basic allowance we give them to be used for these categories in the way our kids choose. If they want to buy one pair of expensive jeans and have only one pair, that's fine. If they choose to shop at a second hand store and have more clothing, that's also fine. We could also simply give them a greater amount of allowance in certain categories for this purpose; ie.$10/month on clothing to be used as they see fit.Another idea we have for the future is to eventually begin handing over some of the grocery shopping to our kids with a budget and the expectation that they shop for the groceries and cook a meal each week and see how far their money goes. I'm positive we will have hiccups along the way. I actually welcome these hiccups and difficulties because each one of them offers an opportunity for learning and growth.

Summary

It has been a delight to watch our daughter learn about money thus far. She has quite a bit of control for a 5 year old, and yet consistently makes fantastic choices with her money (she loves helping other people out and dreaming about the horse she wants to own one day). I believe one mistake parents can make is to give your kids money without teaching them. Another is to base the gift on attitude or behavior in any way where they now have the option (through their attitude) of not learning about money. My belief is that as long as my wife and I spend time on the purposes for the allowance and we adequately plan to accomplish those purposes, our kids will learn what we desire to teach them. The biggest mistake a person can make in finances or life in general is not to think about their purpose for the actions they choose to take. I'll end with a great quote I'm sure you have heard from an individual who understood life on many levels:

"By failing to prepare, you are preparing to fail" - Benjamin Franklin



Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html