Financial Planning

Instilling Financial Responsibility in the Next Generation

July 19, 2021

The success and happiness of our children are top priorities for most parents. But are we doing everything we can to build a solid financial foundation for the next generation? In a study conducted by FINRA Investor Education Foundation, participants were asked “five questions regarding economics and finance encountered in everyday life,” including compounding interest, inflation, basic investment principles, and the impact the term of a mortgage can have on payments over the life of the loan.

In 2009, 42% of respondents were able to answer four or more questions correctly; however, in 2018 this number fell to 34%. The biggest decline in financial literacy took place in younger age groups, particularly among millennials.

The good news is that there are steps families can take to help their children become more financially literate and responsible, and we are always here to help.

Share your Story, Values, and Goals from the Start

Many families are reluctant to talk about money. Reasons may include their parents have never discussed financial matters with them, a belief that it isn’t their children’s business, or a fear that the next generation will take the money for granted and be unmotivated to succeed. Conversely, children often feel that their parents don’t trust them enough to have “the money talk.” But helping the next generation understand the origins of your wealth, what it means to you, and what you wish to achieve with it will help them feel that they are part of the story. Having an honest and open conversation grounded in trust, may also avoid difficult, if not forced, conversations later. If your lifelong wish is to donate your assets to a cherished cause, don’t avoid telling your children until it is too late. If you plan to leave a legacy to your family, but have specific thoughts about who gets what, giving everyone a clear picture can help set expectations and prevent future conflict. Your Wealth Management Team is available to help you frame and/or facilitate a collaborative and productive family meeting. Please reach out to any member of your Team to start the conversation.

Build Financial Knowledge at a Young Age

It’s never too early to start “teaching” your children the financial basics. For younger children, some first steps might be:

Budgeting: A weekly allowance is a great way to help children of all ages understand the value of money and budgeting tradeoffs. For younger children, consider an allowance that they can spend on toys. Explain that if they want to buy a larger toy, saving their allowance for a few weeks is a way to reach their goal.

Saving: Opening savings accounts for your children will help them understand the value of accumulating assets. Set aside a small percentage of their allowance and any cash gifts they might receive for special occasions. Regularly review progress to show how their savings have grown. Discuss their future goals for their funds and what it will take to get there. Note: Try to reserve judgment on whether you believe these are “good” goals or not. One of the ways we learn is through mistakes, and a good time to make them is when the stakes are low!

Giving: A concern that often arises with clients is the fear that their children will feel a sense of entitlement. A great way to combat this is to communicate the importance of being part of a community and helping others who may not be as fortunate. Tactics include encouraging young children to set aside part of their allowance for giving, involvement in a community-oriented youth organization, helping you in your volunteer activities if feasible, and participating as a family in community events for children.

Financial Responsibility should grow along with your Children

As your children reach young adulthood and beyond, the “lessons” of financial literacy and responsibility should continue.

Financial education: As your children get older, you can move beyond basic deposit and savings accounts to more sophisticated concepts, such as debit and credit cards, loans, interest rates, mortgages, and different types of investments. As your children become mature adults, include them in family planning discussions and sessions, so they are in the loop should the unexpected happen. You can also take advantage of financial literacy classes now offered in many schools. Custodial accounts where a parent is the custodian of a child’s brokerage account (up until 21 years of age in most states), is a great way to take investing to “the next level”. Please feel free to reach out to us to talk about how we can partner with you in this important lesson in life skills. Also, introducing children to your Financial Team demonstrates the value and benefits of having an established team of trusted advisors.

Earning a living: Whether it is a part-time job when younger or a full-time career as an adult, having a job helps individuals of all ages learn about financial and personal responsibility, budgeting, and accountability. It also helps give purpose and structure to one’s life, helping one to learn that it is not all about money.

The benefits of financial advice: For even the most knowledgeable adult, embarking on an independent financial life can be stressful. That first mortgage application (and every other one after that!) can be overwhelming. This is a good time to introduce your children to your advisor, who can help them navigate their finances and identify the right solutions for their needs.

In summary, instilling financial literacy and responsibility in the next generation from an early age can help set them up for financial success, alignment with generational family values and personal fulfillment. Our Trusted Advisors can provide the advice and guidance you and your children need to achieve your personal and family goals.

1 - FINRA Investor Education Foundation (FINRA)

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