Most adults spend a large proportion of their money on their home. Whilst we all love our homes, it's important to help our kids realize that buying a home is not an investment.
In a previous blog, I wrote about how to teach kids about Mortgages. In that blog, I used an analogy of a house as a big Purple Tree. Most Purple Trees have a Red Bush growing up them (a mortgage). The plan is for people to cut down the Red Bush over time so they see more of their Purple Tree. Check out our full blog How to Teach Your Kids about: Mortgages.
In this blog, I want to talk about a very important topic to teach kids as they grow up with respect to buying their home when they are older. I want to help kids appreciate a common misconception most adults have when it comes to their views of their home being an investment.
Like in a lot of my recent blogs, I want to start with a story that I told my kids. I’ll go through the details afterwards. For now, please enjoy the story.
The Owl and the Best Tree Competition
There was once an owl who wanted to win the local ‘Best Tree Competition’.
You see, the owl had recently found a lovely Purple Tree to live in. It wasn’t big but he absolutely loved it.
When he got to the competition, he saw all the different types of trees. There were the Rooks with their collection of Blue Trees. There were the Crows who had Yellow Trees. There were also the Robins with their own Purple Trees.
The judges came around, looked at all the trees and made their decision. Sadly, Owl didn’t win the competition. In fact, he came last place.
Whilst the owl was sad, he felt that he didn’t win as he was new to the competition and his tree wasn’t as big as the other birds in the competition. He said to himself that he’d make some changes to his tree so he’d do better next year.
Over the year his Purple Tree had grown a bit bigger. He’d even tidied up some of the broken branches. He loved how his Purple Tree was looking now. He felt his tree could do really well in the competition this year. For him, he didn’t want to live anywhere else other than his Purple Tree.
He turned up and saw all the other competitors from last year. Like his tree, their trees had also grown.
The judges went around all the trees. They asked the Owl "Do you live in your tree?". "Yes I do!" replied Owl proudly.
He waited for the results and was getting excited about potentially winning a prize.
The judges had made their decision.
Sadly, Owl’s Purple Tree came last again!
“How can this be?!” thought Owl “I’m not going to give up - I’m going to enter the competition again next year!”
Over the next year, Owl’s Purple Tree continued to grow. He had read lots of magazines which showed him how to make trees even more beautiful. He gave away some of the seeds he had been storing for the winter to make a beautiful entrance box for his tree.
Again, he turned up at the competition. Like last year, the other trees had also grown. However, they didn’t have a beautiful entrance box like Owl. He felt this was going to do really well.
The judges came around and again asked “Are you still living in your tree?”.
“Yes - I love it and wouldn’t want to live anywhere else!” replied the Owl.
The results came in and to his surprise, he was …. Last again!!
Owl was so sad. He just didn’t know why he kept coming last. He really wanted to win the competition. He went to find one of the judges to find out why he was last again despite giving away all his seeds to build his beautiful entrance box.
The judge explained. “Whilst your Purple Tree is very big and beautiful, in fact, one of the most beautiful trees in the competition, we aren’t judging the trees on how big or beautiful they are. We are judging the trees on the seeds they produce. You see, whilst your tree is beautiful, as you are living in your tree it’s not producing any seeds. In fact, as you gave away seeds to build your beautiful entrance, you scored fewer points than last year. All the other trees in the competition have grown and produced seeds.” the judge explained.
“What about the Robins with their Purple Trees?” Asked Owl
“They don’t live in their Purple Tree. This means they let other birds live in the tree and they have to give the Robins seeds to allow that. So, their Purple Trees are producing seeds.” Said the judge.
Owl was very disappointed; he didn’t realize that the competition was not about how big or beautiful his Purple Tree was. He then realised how many seeds it had taken him to make his tree so beautiful.
Owl initially thought about no longer living in his Purple Tree so his tree would start producing seeds. However, he loved his home and didn’t want to leave.
In the end, Owl decided that he was going to stay in his beautiful Purple Tree, it was his home after all. Instead, he said to himself, "From now on I’m not going to use any more seeds to make his Purple Tree any bigger. It’s fine just the way it is!”. He then started planting some of his seeds to grow different types of trees. He grew a few Blue Trees. They grew and grew over the next couple of years later. He then entered the ‘best tree competition’ with his Blue Trees and won the prize of the 'Most seeds produced from a new tree'.
Now Owl has a nice Purple Tree to live in and many other trees which are producing seeds. He is helping other owls realize the rules of the competition before they decide to use all their seeds to find a really big Purple Tree to live in.
Owl lived happily ever after. The end.
A mortified version of this story is included as part of my new book, Grandpa's Fortune Fables. To find out more about the book, click here.
Why share this story with your kids?
A lot of people believe that their home is a sign of how wealthy they are. They keep buying bigger homes and/or adding extensions. They compare their homes to others to see how they are getting on relative to the competition. This is exactly what Owl was doing when he first entered the competition.
However, just like Owl, most people don’t realize the rules of wealth.
Your home actually costs you money (seeds) to maintain and isn’t putting any money (seeds) into your pocket. As it’s not putting money in your pocket, having the biggest or most beautiful home is not going to make you wealthy. In fact, it’s making you poorer.
Don’t get me wrong, we all want a nice home to live in. A home has value in lots of non-financial ways (so worth spending money on). I want my girls to grow up and own their own homes one day. The key lesson I tell them is to make sure they get the right balance in terms of using their money to buy a home they love and using their money to invest in things which will put money in their pocket.
Assets versus Liabilities
This topic is illustrated very nicely in the book 'Rich Dad, Poor Dad'. In the book the author, Robert Kiyosaki, states that an ‘Asset’ is something you buy that puts money into your pocket over time (i.e. a tree that produces seeds). This includes stocks and shares, high-interest savings accounts, royalties, and property that you rent out. A ‘Liability’ is something you buy that takes money out of your pocket over time. This includes buying a car and your home (insurance, utilities, local tax, maintenance costs). To become wealthy, you need more Assets than you have Liabilities.
This is a really important topic to raise with your kids early as they will grow up hearing stories of people who bought their home many years ago and now have a home which is worth a lot more. This sounds like a good investment and hence why so many people spend a significant part of their money on a home (and move to bigger homes over time).
To actually make money from your home, you have to sell your home (to release your capital and benefit from any capital appreciation) or, rent it out. If you sell your home, you do however need to find somewhere else to live. A lot of people, don’t want to give up their home and therefore won’t be able to use their home to buy Assets, i.e. they won’t benefit financially from having bought a big house unless they sell or rent it.
Summary
I hope you use this story to help your kids get the right balance when thinking about their future home. Hopefully, they’ll aspire to have a nice Purple Tree to live in plus some other types of trees which produce seeds (rather than just one 'big' Purple Tree).
If you and your kids enjoyed this story then I feel you will enjoy my upcoming book, Grandpa's Fortune Fables, which is coming out in October. To find out more about the book please click here.
Thanks for reading!
Will
For more fun stories to teach your kids about money, check out our book ...
