IT’S AN AGE-OLD PARENTING DILEMMA. When a child begins to edge into adulthood, how do you make sure he or she has the knowledge and skills needed to make smart financial decisions? Even if you’re wealthy enough to provide your kids with support and security, you may not want to deprive them of motivation or the gratifying—and educational—experience of succeeding on their own. At the same time, however, today’s job market for younger workers could present challenges.
It’s critical to recognize that becoming financially independent is a journey—one that may take longer in today’s uncertain economy. “Achieving financial autonomy is a transition rather than an abrupt change,” notes Eileen Gallo, co-author of Silver Spoon Kids: How Successful Parents Raise Responsible Children. “Early adulthood is a time of exploration, of finding out who you are. If your son or daughter is on target by 25, that’s great. But maybe that’s not to be.”
Fortunately, there are ways that allow parents to ease the journey to financial autonomy. Here are six ideas for providing education about money matters while offering judicious financial support.
1. Share information. Affluent parents are often so concerned that knowing about family money will undermine their children's motivation that they avoid talking about the family’s assets. But children frequently learn a family’s values best by observing those principles in action, notes Stacy Allred, managing director, Merrill Lynch Wealth Management Center for Family Wealth Dynamics and GovernanceTM. “Entitlement is a natural state we all go through in youth,” she says. “To emerge into stewardship, you need to learn about money and accountability.” If parents don’t intentionally pass along their values and engage their children in conversations about money, they can miss some important learning opportunities. You might consider asking your children what they would like to learn about money and finances.”
It can be helpful to ease your child into your family’s financial life. Rather than revealing your entire investment portfolio, for example, start by reviewing a college savings account once each quarter. “One family I worked with had their son attend family finance meetings from when he was quite young,” Allred says. “Early on, the statements he saw had percentages instead of dollars; then later, when he was emotionally ready, he got to see the dollars as well.”
Start early by combining an allowance with age-appropriate incentives for saving and spending responsibly.
2. Explain the importance of budgeting and saving. Helping a teenager or young adult create a monthly budget is a great way to instill financial discipline. “Sit down and discuss the basics of money management,” Gallo urges. “Or, if there’s resistance to your involvement—which is common at these ages—bring in your financial advisor. He or she can help kids create a budget, learn basic skills like paying bills online and discuss planning their financial future.” Some families may choose to start early by combining an allowance with age-appropriate incentives for saving and spending responsibly. Parents can foster solid financial habits in their children by asking them what they are saving for right now and what that goal is going to cost, in effect giving them a chance to develop their own relationship with money. A debit card tied to a checking account without overdraft protection can also be a useful learning tool. “At the end of the month, you or your advisor can review and discuss monthly statements with them,” Gallo says.
3. Use philanthropy as a teaching tool. “You can learn important life skills—doing research, making decisions and having accountability—through philanthropy,” Allred says. She notes that for many families, philanthropic decisions are important but generally less controversial than, say, strategy decisions relating to a family business or estate investments. “So it’s a great place for siblings to learn how to make joint financial decisions.” For example, children can be allotted a giving budget and armed with responsibility for jointly evaluating charities and deciding which ones to support. Of course, this will also have the direct effect of teaching kids about the importance of philanthropy itself. Naming the coming generation as co-advisors to a donor-advised fund (DAF), for example, can get them started early on deciding the best and most effective ways to give to others, as they would then be tasked with making recommendations to the DAF on how and where to spend its assets.
4. Introduce investing. Investing smaller sums with limited consequences is a great way to learn about making informed choices and managing risk. “One option is to open custodial accounts with starter funds for each child and let them work with your financial advisor to create a small portfolio and evaluate its performance,” Allred says. “Be sure to explain that it’s not about never making a mistake; it’s about learning from those you make.”
5. Let them falter. Whether it’s a bad investment or a splurge that busts the monthly budget, a misstep is bound to happen every so often. When one occurs, resist the urge to swoop in and rescue your child financially. “If you take away the consequences, you do your child a disservice,” Allred explains. “Instead, talk it through and work out a way to solve the problem together, whether that means cutting back on spending the next month or getting a part-time job.”
6. Offer selective support. There are some expenses it may make sense to fund, such as medical insurance, continuing education, vocational testing or therapy. “These are things you feel are important but which, faced with paying such costs themselves, your son or daughter might not do,” Gallo explains. “Making sure your child has health insurance or the guidance she needs to figure out what she wants to do with her life is not an indulgence.”
Families with greater assets who want to set up trusts for kids can actually tie trust distributions to certain benchmarks. One idea, Gallo suggests, is to create a “results-oriented trust,” which ties distributions to specific milestones a beneficiary achieves, but is flexible enough that the trustee can make distributions if a beneficiary’s circumstances or needs change. A financial advisor can help you obtain more information about the various trusts you can use.
Every family will have its own idea about what specific assets to give the next generation, and when. But the most valuable things to give your children may well be the knowledge and skills they need to spend, save, invest and share their income responsibly. Beyond allowing them to become financially independent on their own, such skills will also put them in a better position both to help others and to make sure they in turn leave something for the generations after them.
3 Questions to Ask Your Advisor
- What resources do you have to help me explain my values when it comes to the earning, spending, saving and sharing of money?
- Do you offer any programs on financial skills for teenagers or young adults?
- Can you meet with my child to discuss his or her financial goals?