The Four Financial Gorillas Your Child Will Face image

The Four Financial Gorillas Your Child Will Face

Why understanding the CASHFLOW® Quadrant can save your child's financial future.

You've probably heard of the phrase, "the 800-pound gorilla in the room." If not, it simply means there is something—a topic or an idea that carries some weight or needs to be reckoned with—that everyone knows about, but no one wants to talk about.

When it comes to our kids, I believe that there are four gorillas they will face that will significantly impact their financial future. Few people talk about these gorillas, but they're out there. It's vital that we prepare our children before they encounter them later in life.

800-pound gorilla #1: The new problem of growing old

It used to be that 65 was considered old. Today, "65 is the new 45"—or at least that's what us baby boomers would like to believe.

With advances in medical technology, the new old for your child may be 90 or even over 100. This makes for new opportunities...and new problems.

Getting old is expensive. Most people rely on programs like Social Security and Medicare to assist them financially as they age. But there's a problem, both programs are unfunded liabilities that won't be liquid by the time our kids grow old.

Even worse, our kids will have to support the generation before them who will be on these programs, requiring hundreds of trillions of dollars. Where will the money come from?

800-pound gorilla #2: Accelerating national debt

Most of us have probably heard of the power of compounding interest. Albert Einstein is often credited with referring to it as the "most powerful force in the universe."

A parallel concept is the miracle of compounding debt. Your child will face the tyranny of compounding debt as well as the compounding interest on that debt.

In the year 2000, the US national debt was over $5 trillion. By 2012, it had risen to over $16 trillion.

In 2011, riots erupted in Greece when the government of Greece declared bankruptcy. The US, England, and Japan may not be far behind.

Your children's future will be one of increased financial turmoil as nations face compounding debt and financial pressure.

800-pound gorilla #3: The New Depression

History records two types of financial depressions:

  1. The Great Depression of 1929 in the US
  2. The German hyperinflation of the 1920's

Summarized in simple terms, the American depression was caused by not printing enough money. The German hyperinflation type of depression was caused by printing too much money.

In 2002, Federal Reserve Chairman Ben Bernanke said, "The U.S. government has a technology called a printing press [or its electronic equivalent today] that allows it to produce as many U.S. dollars as it wishes at no cost." Since 2007, it has been clear that Chairman Bernanke favors printing too much money to fight the financial crisis, having pushed trillions into the global economy. But is there really no cost?

Hyperinflation is a period of rapid inflation that leaves a country's currency virtually worthless. For people who work for money and savers who believe in saving money, hyperinflation could wipe them out.

If the US keeps printing money like it is, our kids may very well face hyperinflation. In that scenario, the old rules of money to get a job and save cash won't help them. They'll need to be equipped to survive and thrive in this new reality.

800-pound gorilla #4: Higher taxes

Every time central banks print money, two things happen:

  1. Higher taxes
  2. Higher inflation (which is another type of tax)

As the previous three 800-pound gorillas unfold in our children's lives, one thing is for certain: taxes will go up—significantly.

Because of this, parents should talk with their children as early as possible about who pays the most in taxes—and why.

The importance of understanding the CASHFLOW Quadrant

Below is the CASHFLOW Quadrant:

CASHFLOW Quadrant image

The letters in the four quadrants represent:

  • E for employee
  • S for small business or self-employed
  • B for big business (500 employees or more)
  • I for investor

Everyone resides in at least one of the four quadrants, and each quadrant determines where our cash comes from.

Our school system prepares our kids for the left side of the CASHFLOW Quadrant, the E and S quadrants. That is why the common advice is "Go to school to get a job" (E quadrant) or "Become a doctor or a lawyer" (S quadrant).

It is generally the "A" students, those who do well in school, which go on to do these types of jobs.

The problem is that those on the left side of the CASHFLOW Quadrant pay the most in taxes. This is because where your income comes from determines how that income is taxed.

Generally, this is how it breaks down:

  • E = 40% taxes
  • S = 60% taxes
  • B = 20% taxes
  • I = 0% taxes

Looking at that, it should be clear why it's vital that our kids have a solid financial education in order to learn how to operate on the right side of the CASHFLOW Quadrant as business owners and investors. By doing so, they'll thrive financially in a future where most will struggle just to survive.

It's generally the "C" students, those who are smart but don't do well in traditional school, that go on to work in the right side. In truth, everyone can work on the right side of the quadrant, but they need the right financial education—and education that our schools do not provide.

In preparing our children for the gorilla-wresting that lies ahead, it's important that they know there are different options open to them than just "go to school, get a job, work hard, and pay higher and higher taxes." This starts with you providing a great financial education at home.

So the question is, what are you doing to prepare your kids for the future?

If you're looking for more resources, join our free financial educaion community here.

This post was adapted from Robert's upcoming book, Why "A" Students Work for "C" Students.

Original publish date: March 26, 2013

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