What A Medieval Leader Can Teach Us About Finance
A guest post from Ben Taylor
The chorus of financial advice is getting louder. More pundits, experts, and analysts are offering their brand of insight. Finding the signal amid the noise is becoming difficult. Moreover, this cacophony is even more vexing to parents seeking to instill a simple message of financial responsibility within their children. Perhaps instead of looking to the forecasts of the “professionals,” we can learn something by looking to the past. That is, over 800 years into the past when Spain was a battleground.
Rodrigo Diaz de Vivar was a medieval military leader in Spain. Many called him “El Cid.” In 1081 the beleaguered general was in desperate need of supplies. He had no money. He filled a large, wooden chest with sand and secured it with three locks. He offered the ruse to creditors telling them the contents had enough value to secure a loan. Trust won the day. The lenders agreed to provide El Cid with the requested money.
In time, El Cid made good on his promise. He repaid the loan and the chest, unopened, was returned. The lesson: managing money is rooted in trust. Today the chest sits undisturbed in Spain’s Burgos Cathedral. Outside the church is a statue of El Cid, remembered today as The Lord Champion.
Perhaps his creditors were foolish, but the story underscores the power of trust in developing a relationship with money. How can parents empower their children with such a level of trust?
Operation Windfall
The story of El Cid offers some clues to teaching your children financial responsibility. Show them you understand their capability by entrusting them with money. By putting them in the driver’s seat, you’ll send a message of respect. Your children will mirror this sentiment by exercising self-discipline. How can parents most effectively communicate their trust? Consider a large outlay of allowance money, perhaps three, six, or even twelve months worth, at one time. Welcome to Operation Windfall.
When parents deliver an allowance piecemeal, they prevent children from learning the most critical aspect of fiscal responsibility: self-discipline. The most crucial component of wealth, compounding, is built upon the simple strategy of postponing consumption. That is, you will be rewarded later for limiting spending today. Children lose this critical aspect of wealth building when parents manage the steady flow of cash.
Are children in need of this lesson? Absolutely. Consider the findings of a 2008 Survey of Financial Literacy, which reports that only five percent of high school students could define compound interest. This finding means that nearly all young adults fail to grasp what Einstein called the “eight wonder of the world.” He also astutely warned that “he who understands it, earns it … he who doesn’t … pays it.” If compounding is a foreign word to kids, then a parent’s vocabulary must change. We’ll start by eliminating one world…
Remove the Word Allowance From Your Home
Replace “allowance” with “budget.” An allowance conjures images of a steady stream of cash passing through the hands of a child and into toys and games. A budget is something different.
With a budget, kids begin to think of money differently. They think of the future. This capacity for forward-thinking is the very reason for human’s survival; it is a concept as old as humanity. Early hunter and gatherer cultures learned to stockpile food and other resources in anticipation of colder seasonal weather. With a budget, your child will learn to do the same.
Problems will arise; after all, that’s part of the drill. Kids will lose their wallet or purse. They’ll overspend and find themselves short when going out with friends. You can predict whom they’ll turn to in these times of need: mom and dad. Are you ready to say no? Be sure that you are before you put Operation Windfall in place. Without a commitment on both sides, the plan is sure to fail. Learning consequences is part of the routine. The best way to limit this problem is to encourage budget building.
It Starts With A Pencil and Paper
A budget should begin with a sentence, not a number. Have your children write, in their words, what they want. Perhaps they will decide they want to reach a savings goal. Maybe they have their eye on an expensive toy. The end goal doesn’t matter much. Instead, the purpose is to commit to a plan.
Guide the process with questions rather than dictation. Ask them what they think is best. Determine what they believe they can afford and what things will cost. Let them put the pencil to paper. They will be the navigator of their future.
Lastly, parents seeking to tie finances to chores and school performance can still do so under the Operation Windfall plan. How? Remind your kids that they next lump sum payment will only come to them under the condition that they maintain a certain academic standard. Additionally, the agreement, also in written form, can include guidelines for behavior and help around the house. Set specific goals, so there are no misunderstandings later. “Earn good grades” is not a goal, “earn a B+ or better in Math for the second marking period” is.
If El Cid can rally a Spanish army with a chest of sand surely, you can rally your kids with a plan.
Start today.
Ben Taylor is a financial writer. His writing has appeared on Nasdaq, Business Insider, Seeking Alpha and more. You can see more of his work at http://www.financialcontentmanagement.com/
