Teaching Kids to Be Entrepreneurs is Key to Building Wealth

Scott Trench wrote a great article about the wealth gap and identified the main problem as lack of financial education. I’m going to take that a step further. The real problem leading to such a huge wealth gap is that there are two types of people in this world: people who know how to create wealth and people who don’t.

Wealth creation is, by my own definition, the act of developing assets that provide a unique value to consumers who are willing to pay more for the asset’s outputs than it costs to deliver the unique value. Wealth creation allows you to subsequently build wealth through the accumulation of income producing assets over a long period of time. Wealth creation is the first step.

How Do You Create Wealth?

The good news here is that you can create wealth even if you work a 9-5. You are essentially your own small business, a one man shop providing services to a consumer, your employer. So now the question becomes – are the results of your operations providing more value than the cost of those operations?

If you make $4,000 per month and spend $4,000 per month, you are not creating wealth. You are a struggling business bound to declare bankruptcy. In accounting, we call you a “going concern.”

On the other hand, if you spend less than you make, you are creating wealth. You then have the ability of rolling that created wealth into income-producing assets, such as real estate, allowing you to create and accumulate even more wealth. This is known as the snowball effect.

Notice that there are three components of the wealth creation formula: income, savings and investing. All three components are important; however, the first two, income and savings, are most important. Without income and savings, you can’t invest.

People often want to generate more income for themselves. What they fail to realize is that generating more income requires a new value proposition, meaning that if you continue to do today what you did the day before, there’s no reason for you to earn more money. And the biggest problem with the 9-5 is that even if you create more value for your employer, you may not see a pay bump for months.

Yet generating more income remains the most important factor to creating more wealth. Without increasing your income, your rate of wealth creation will be low relative to the people who have figured out unique ways to increase their paychecks. This is the ultimate paradox of the 9-5: everyone has the same goal, to create wealth, so they get a job and discover that their employer inhibits their ability to realize that wealth creation goal by giving annual raises inaccurately reflecting the value the employee adds to the organization.

So people resort to talking about savings and living a life of frugality, as this is an area they can control. You can now see why those frugality articles are so popular—everyone has a 9-5 job, and they can’t figure out how to make more money, but they can certainly figure out how to save more! Don’t get me wrong, savings is an important component of the wealth creation formula. Understanding how to budget and how to save will allow you to roll your net earnings into income-producing assets and build wealth over a long period of time.

So yes, even with a 9-5 you can create wealth. But how do people create substantial wealth?

They Become Entrepreneurs

You will never realize your full wealth creation potential if you are working for someone else’s business. I always laugh at the people who say their employer pays them “fair” or “market” rates. Newsflash: if you are working for someone else, you are underpaid, as that’s the nature of business. If your employer pays you what you are actually worth, they won’t make any money. If an employee generates $60,000 for my business, I’m going to pay him/her less than that amount in order to make a profit. The problem is that employee is actually worth $60,000.

The only way to determine what you’re actually worth is to become an entrepreneur. The people who have created significant wealth know this. They figured out how to add value to the lives of their customers, and as a result, they are paid what they are worth and their efforts are directly and timely rewarded with an increase in earnings.

You see, entrepreneurs are on the right side of the wealth creation game. They start a business with a unique value proposition that allows them to create wealth. The entrepreneur hires employees who help him/her create additional wealth. They roll their earnings into income-producing assets to further build their wealth. The wealth gap between those who know how to create it and those that don’t further expands, causing uproars, protests and higher taxes on the rich.

It’s not unfair that these entrepreneurs have generated substantial wealth and their employees haven’t. They just figured out how to solve a problem allowing them to create wealth and build upon it. After studying several entrepreneurs and business owners, I’ve decided two things: I will be an entrepreneur, and I will teach my future children how to become entrepreneurs.

Let’s Teach Kids to Be Entrepreneurs

This brings me to the main point of my article: to teach kids to be entrepreneurs, solve problems and create wealth.

The secret to decreasing the wealth gap is to teach your children—and your children’s children—to be entrepreneurs and business owners. Give them the financial education and the wealth creation education they need. Teach them to create businesses, discover problems, develop solutions and then sell those solutions. Teach them how to define a value proposition and negotiate prices.

When I was a teenager, my parents told me that if I wanted money, I’d have to figure out how to earn it. I knew that lawns always needed to be mowed, and the task would often take homeowners an hour or more to complete, so maybe people would pay me to avoid doing it themselves. Once my parents agreed to allowing me to use their mower, I was in business. I mailed out fliers around the neighborhood and received a few calls. I started mowing and did a good job, which led to referrals and continuous business. To my surprise, I found that people also needed their mulch spread, driveways pressure washed, gutters cleaned, you name it.

The funny thing is, I didn’t even know I was running a business. I just wanted some gas money to go hang out with my friends. My earnings were laughable, but the education I received was priceless. I learned finance, marketing, operations, logistics and negotiations. This education has had a lasting positive effect on my life, sparking my interest in business and providing me with the confidence to start a side CPA practice and purchase rental real estate.

While I was working at Pricewaterhouse Coopers (PwC), I had the awesome volunteer opportunity of teaching financial education to middle schoolers. Teaching these classes made me realize the wide gap of financial education between children, even at such young ages. At the end of the class, the mother of one of the students, who was pretty well financially educated compared to his peers, approached me, and I asked how she teaches financial education to her children at home.

She told me that they don’t give their children an allowance; rather, if their children would like to earn money, they need to walk around the house and find a problem to fix. Once a problem has been identified, the parent and child will negotiate a fair price and a deadline to solve the problem. I thought this strategy was brilliant. Not only can it be fun for the kid, but it teaches them so many entrepreneurial and financial skills at such a young age.

Compare that to the parents that give their children a list of chores and pay a weekly/monthly allowance. These parents are literally teaching their kids to work a 9-5 job. They aren’t teaching their children to solve problems and capitalize on those problems. Even if these parents teach their children how to invest and budget, they aren’t providing their children with the knowledge they need to know how to create wealth.

Now, you have to take my parental advice with a grain of salt. After all, I’m in my mid-20s and many years away from having a child of my own. I don’t know the age at which a child realizes they need money, but when that day comes, I’m not going to task them and pay them an allowance. I’m going to ask them to find a problem around the house, tell me how they will fix it and then negotiate a price.

Conclusion: Will Your Kid Be the Next Big Entrepreneur?

At the beginning of the article, I mentioned that there are two types of people in this world: people who know how to create wealth and people who don’t. You are capable of teaching your children how to create wealth regardless of your financial situation, and doing so will put them so far ahead of everyone else.

Teaching kids to be entrepreneurs will have a lasting effect on the world. Not only will the wealth gap decrease, but imagine how many world problems your children can potentially solve. That sounds a lot better than sitting in a cubicle from dawn till dusk.

We’re republishing this article to help out our newer readers.

What do you think of this idea? What creative strategies do you use to teach kids about finance?

Let’s talk in the comments section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.