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Preparing the Next Generation for Wealth: Instilling Financial Literacy

Feb 15, 2020

Preparing the Next Generation for Wealth - Instilling Financial Literacy - Part 2 of 3

As “Wealth Creators” look at the estate planning process, the focus is typically driven by the tax-efficient transfer to the next generation. But this is just one half of a successful wealth transition plan. It is critical to not just prepare “the money” for the transition of wealth to the next generation, but also to prepare “the heirs” to be responsible owners and stewards of the family’s wealth. 

Most of us have a few simple goals for the younger generations. We want them to be independent so they can stand on their own two feet. We want them to be good critical thinkers so they can find their way through tough times that seem to come to all of us. We want them to be prudent financially, live within their means, make solid investments and position themselves to help others. 

Families that incorporate three components into their planning will increase the odds of meeting their goals and ensuring a successful transfer. 
  1. passing on shared family values 
  2. instilling financial literacy 
  3. having intentional family communication 
Instill Financial Literacy

Financial Literacy

It is important to prepare the next generation to be able to gain the skills, confidence, and independence they need to manage whatever wealth they ultimately may earn or are entrusted to steward. With wealth comes financial security, but without financial literacy, finances can slip away. 

The education should include 1) financial topics that everyone needs to know regardless of the level of wealth and 2) financial topics that arise because of the presence of wealth. For example, everyone should know how to create a budget. However, not everyone will need to know about the workings of a Trust, but in a life with wealth, this is essential. 

There are age-appropriate ways to educate children about the responsibilities of wealth and to build the necessary level of financial acumen. Financial literacy can be obtained through parent mirroring, formal program, dinner conversation and real-life experiences. 

Tips for Parents 
  • Provide guidance and boundaries as children are allowed to make financial decisions 
  • Provide opportunities with consequences. Making a mistake with a small amount of money is less costly than the damage that can be done by an inexperienced college student with a credit card. 
  • Patience is critical because growth/learning occurs at a different pace for everyone. 
  • Be creative and ensure the program is engaging. Use formats that facilitate open communication rather than just lectures. 
  • Start early, be intentional and consistently communicate over the years. Learning to become comfortable with wealth often comes with education, maturity and experience. 

Pre-Schoolers
  1. Earning Money through an Allowance is a great hands-on learning tool 
    1. Earning money through physical or mental effort helps your child associate value with labor, money comes          as the result of work. Money can be earned by a combination of task completion (whatever routine task is            appropriate for his or her age) and positive reinforcement. 
    2. Pay allowance in small denominations so that it is easier to divide between the different categories. Make            allowance day a routine, like payday - give the same amount on the same day each week. 
  2. Goal Setting 
    1. Explain that they have choices of what they can do with the allowance – they can save it or spend it. When        they get older, expand out the options to include invest it or give it away. 
    2. Have them write down savings goals and the amount that must be saved each week. 
  3. Saving versus Spending 
    1. Have two piggy banks for your children, one for something like a treat at the candy store (spending) and one        for something like a new nerf gun (saving). When they receive their allowance, have them divide it up between the two piggy banks.
    2. Consider some incentive such as matching the savings. The simple lesson that unspent money can lead to          future money is a powerful one. 
    3. Follow up on their spending decisions. A few days after a purchase ask them how much enjoyment that are        receiving from the item. Would they buy it again if they had the chance? 
    4. Questions like “Can I have that new toy?” can be a great opportunity to discuss spending decisions and          reinforce the concept that they are not entitled to an open bank line of credit with their parents. 


Grade-schoolers
  1. Need versus Want
    1. Because we live in a want-driven society, this is a crucial discussion to have with your child. We “need” food, shelter, clothing and security to survive (need it now) – whereas our “want” is something we desire but do not depend on to live (it can wait). 
    2. Compare the difference between desire and need: Walk around your house and categorize the items inside – need? Or want? Identifying the difference helps a youngster understand we don’t NEED everything we have. 
  2. Interest 
    1. Opening a savings account in a "real" bank introduces them to the concept of interest. Explain that Interest is what a bank pays you to keep your money there. The longer the money stays in the bank, the more money you earn. 
    2. Consider matching any contributions to the savings account. 
  3. Inflation 
    1. Let them know that over time you get less for your money than you used to be able to get. 
    2. They are sure to laugh at your stories about how a candy bar that costs you $1.30 today would have cost just $0.40 in 1980. But in 1980, your employer could pay you just $3.10 per hour versus $7.25 today. So, your candy might be cheaper, but you'd also make less money to pay for it. 
  4. Expand out the options for allowances from saving and spending to include growing and sharing 
    1. Apply a methodology to distribute their allowance between all four categories 
    2. Grow (Investing) 
      1. Buy a share of stock that children are familiar with, such as Apple or Disney. 
      2. After a certain period of time (month, quarter, year) share and compare the results in terms of market value and performance. 
    3. Share (Philanthropy)
      1. Set up a small fund that can be directed by the family and look for local charities with which your children can connect (e.g. one providing school supplies or food to kids less fortunate). 
      2. Have them choose a charity of choice, find out about its programs, fund raising activities, financials and success. Designate a sum of money to go to one or more charities after the research project; reevaluate the following year. 

Teen
  1. Use events in their lives as teachable moments. For example, if a child will be purchasing a new car, this is a perfect opportunity to discuss budgeting, credit and insurance. If they are getting a part-time job, it’s an opportunity to learn about paychecks and taxes. We strive to make them confident with their finances as they grow and collect responsibilities. 
  2. Budgeting 
    1. With greater financial independence comes greater fiscal responsibility. To ensure that they'll have enough to make ends meet, help them prepare a budget that reflects their income, as well as any expenses (needs – car insurance; wants - movie tickets). Budgeting helps children learn cash flow and value of money and gain a clearer picture of the time and effort involved in obtaining something of value. 
  3. Investing
    1. Helping older children learn about topics such as risk tolerance, asset classes, time horizons, market volatility, and asset diversification may predispose them to take charge of their financial future. 
    2. You can help young children by setting up custodial accounts to help them start saving and educate them on investing the money. Give them a small amount to invest every year, review the results at each year end. 
  4. Family Business 
    1. If you have a family business, discuss the process for getting family members involved. 
    2. Discuss what educational needs and skill sets are critical to their success in the business. 
  5. Other topics could include credit cards, payroll taxes, car insurance, education funding. 


Early Adulthood
  1. Investments 
    1. Parents can encourage their children to take an even more hands-on role by asking them to research and report back on various types of investments, whether real-estate investment trusts (REITs), exchange-traded funds (ETFs), or master limited partnerships (MLPs). This process helps educate them about the workings of various investment types and provides them with a better understanding of the investing process. 
    2. Parents should involve their adult children in annual reviews with the family’s financial advisor. This will give the children strong knowledge of how the family’s assets are invested.  
  2. Consider establishing a family bank  
    1. Essentially, it’s a way for families to lend money to younger generations in a way that’s empowering and educational. Instead of simply handing money over to a child so that he or she may start a business or buy a home, creating a family bank allows the child to gain more of a real-world borrowing experience. 
    2. The family bank can be as formal or as informal as the family prefers. Regardless of the specific requirements, undergoing a simulated loan process will provide the child with practical experience that will be useful throughout the child’s lifetime. 
  3. Other topics could include: Trusts and other Estate Planning vehicles, Mortgages, Life Insurance, and Retirement Plans 



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