The ability to deal successfully with money is one of the primary survival skills a child needs to master. Whether they earn their own money or are able to handle inherited money, learning to manage finances is critical to responsible and successful adulthood. Many of our clients express concern about the impact of wealth is having on their children and grandchildren. At the same time we are startled by the statistics surrounding the sad state of financial literacy among young adults today.
Of course like most of life’s important lessons, financial literacy begins at home. The good news is that we can help our children or grandchildren by proactively getting involved in their financial education. Research by the National Endowment for Financial Education has shown that as little as 10 hours of personal financial education positively affects spending and saving habits.
Learning another language, how to swing a golf club or even play the piano is often best done at an early age. The same can be said about financial literacy. The dialogue should begin at an early age with basic financial education – budgeting, saving, spending, donating, and investing.
But remember, it is never too late to educate, even if your children are older or you have grandchildren. All children no matter what age need a good dose of “Financial Parenting”.
Why “Financial Parenting”? Financial Parenting is the process of educating children/grandchildren on the financial and social responsibilities that come with money. It’s important to start the educational process early in life; helping the children/grandchildren become familiar with managing money they will earn or inherit someday.
Too often, parents do not give their children lessons in the financial “facts of life”. This lack of communication may be the result of many different things: lack of time, privacy concerns, geographic separation of family members, and just not knowing how to get started.
How can you educate your child financially? Financial Parenting isn’t easy — but here are several creative ideas that can help.
Build Business Smarts
Consider employing older children in your office or family business after school or during the summer vacation. Children will not only get an up-close look at how real-life business functions, but also will develop confidence and self-esteem from mastering basic business skills.
Activities such as answering the phone and dealing with customers help develop social skills, while matching invoices with purchase orders develops financial skills. Most of all, working as part of a family team can help build family togetherness.
Involve your children/grandchildren in charitable activities or volunteer work to boost social consciousness. Just make certain the activity is something your children are passionate about. The more kids enjoy the activity, the more excited they will be about participating.
Consider setting up a family foundation with children/grandchildren and engage them by allowing them to participate in the distribution decisions. Think the grandchildren are too young? I have clients who have set up a Grandchildren Board of Directors on which the youngest is 5 years old. It really works!
Family Income Trusts
Consider establishing a Family Income Trust as a way to motivate and encourage (rather than simply support) a multigenerational line of heirs. A form of irrevocable trust, a Family Income Trust allows the trustee to make discretionary distributions to heirs, guided by criteria established by the trust’s creator.
The power of this type of trust lies in its ability to encourage positive, productive behavior. The trustee could be directed to match an individual’s savings for a college education, for example. Heirs who maintain a certain grade point average in high school, college, or graduate school could be rewarded with a fixed sum. Or annual awards could be established to recognize outstanding contributions by a family member in a particular area (for example, law, medicine, charitable activities, or art,).
Weighing Your Options
There is no “right way” to educate and develop financial or social acumen in your children. But critical factors include starting early; emphasizing hands-on experiences; and selecting activities in which the children/grandchildren have an interest.
As a parent I know I cannot prevent my children from making mistakes, but I can arm them with the knowledge and experience they need to make sound financial decisions – at least most of the time. We make it a point to engage our children in conversations about money.
As with any teaching tool, Financial Parenting requires sensitivity to the needs and personalities of each family member. Be sure to weigh the potential advantages/disadvantages carefully and consider the facts for your particular family situation.