By Myriah Lipke August 9, 2019
A common question we receive from clients is determining appropriate ways to communicate about wealth and finances to the next generations. This question spans all age groups from parents and grandparents who want to teach the concept of saving to young children, to talking to adult children about estate planning and wealth transfer. Why have these discussions at all? After all, money Can’t Buy Me Love. However, it is important because money affects practically every part of our lives, from our well-being, to the decisions and options we have in the future. Becoming fluent in the language of our consumer society will only help our children and grandchildren harness opportunity and live their best lives. This article breaks down communicating wealth and financial concepts to the next generations at each major stage.
When I was 6 years old, my grandmother came to our house for one of her regular visits. Typically, she had a small gift or treat for me hidden in her pocketbook, but this time she presented me with her latest creation from a painting class she was taking. It was a plump milky-white ceramic piggy bank with long eyelashes, a painted pink bow around its neck, and on the side in magenta letters was my name in my grandmother’s hallmark calligraphy. It instantly became my most cherished possession. Before long, the piggy bank was the centerpiece of my bedroom and finding coins to feed her was my regular pastime, searching along sidewalks, under couch cushions, and performing chores for my newly established allowance.
The conversations or actions we begin with children can be as simple as a gift of a piggy bank or as in depth as a discussion about interest and compounding. These conversations don’t have to feel like complex investing concepts, rather you can start with a discussion of family values surrounding money and why dedication and hard work is important. Relating the concept of hard work to school, a sport, or an instrument can be the foundation. This naturally leads to getting paid for work, such as beginning a chore-based allowance. This is a great time to start the conversation about saving. From the very beginning, teach your child or grandchild the habit of saving a portion of his/her allowance for the future. Giving a child the opportunity to work, save, and earn a coveted item is a powerful lesson and a joyous moment to watch when they proudly step up to the cash register to make their purchase.
Once your child or grandchild understands the concept of working for money, the next step is understanding how money can work all by itself. “Did you know your money can grow bigger just like you do? You started out as a tiny cell, which became 2 cells, 4 cells, 8 and so on and now look how big you are! Your money can grow like that too!” Another example of compounding, or exponential growth, is folding a standard piece of paper. Although paper is only 0.004 inches thick, if you fold it in half the thickness doubles, and in half again – it doubles again, if you fold it a third time it’s about the thickness of a nail. After 6 folds you’re probably stuck because you don’t have enough physical force to keep folding, however if you were able to continue to just 42 folds the thickness of your paper would hit the moon! And at 103 folds your paper would be outside of the observable universe – compounding is out of this world!
Our very own Andy Herron had an entrepreneurial idea at 12 years old with his lawn mowing business – what if the first mow only cost a penny but the cost doubled each time? Although his customers would have been getting a bargain in the beginning, it only would have taken a few months for the cost to get hefty; mow number 15 would have been upwards of $163. The 28th mow would have cost more than a million dollars! Realizing he’d quickly be priced out of a job, Andy opted for the more conventional approach to pricing his middle school lawn mowing service.
Hindsight, as they say, is “20:20.” With the benefit of having experienced and seen the power of planning and compounding over the decades of their lives, we often hear clients say, “I wish I started planning earlier, how do I encourage my children/grandchildren to start saving early?” Did you know you can open a Custodial IRA as soon as you earn your first dollar? For many of us our first official jobs were as early as 14. While a teenager is typically making less money than his/her professional counterpart, most if not all their income is expendable. Paycheck number 1 is a great time to start a discussion about target saving rates. Suggest to your teen, saving at least 20% of his/her take home pay. You can teach them about automatic bank transfers into a high interest savings account, or better yet, they can open a Roth IRA and start investing. Let them know that the historical US market annual return is around 10%. That means if they invest just $50 per month beginning at 18 years old all the way until they reach age 70, they will potentially have a million dollars! But you must start young for the numbers to play out, those early years of investing are crucial for compounding to work its magic.
One way to encourage your teen child or grandchild to start investing is by creating a “family match.” While they probably won’t have access to an employer sponsored retirement account nor the matching benefits that often go along with one, you can create the same motivation to save. Suggest if they contribute to an IRA each month, you’ll match up to $25.
There are so many important discussions to have with a young person during this time. Upon graduating high school, a student is typically debt free, however, many young people are about to embark on the most expensive educational years of their lives. The misnomer of college being “good debt” makes a lot of young people ignorant to what a loan payment might look like in 4 years. Important discussions to have prior to the college selection process is how much the family can assist, and for what portion, if any, the child will be responsible. What majors/careers is he/she considering and what kind of salary can be expected upon graduation (here’s a handy site from the Bureau of Labor Statistics about job outlook and salary averages). Other strategies are estimating rent and typical utility bills, and of course what that paycheck will look like after taxes.
As your child or grandchild moves into their twenties it is time to teach them the indispensable skill of budgeting their money. If they don’t figure it out innately, help them learn to set aside money for future goals (car, house, wedding, retirement). While doing a budget with paper and a pencil, or a spreadsheet still work just as well as they used to, there are now so many electronic resources and apps to streamline the budgeting process. Encourage your child or grandchild to find their favorite. Typically, the bank they already use will have electronic resources, other popular options are Mint or YNAB.
Teach them to be cautious with credit. Once they have a career and a paycheck, countless companies will be attempting to get them to spend their future dollars by opening a line of credit, whether it’s for a house, car, electronics, furniture, you name it. Imparting this invaluable wisdom can save them from years of digging themselves out of a financial hole and jeopardizing their own retirement goals.
The twenties and thirties are also an age where parents and grandparents often find they want to determine the best way to help provide relief as children get on their own financial feet. What’s the best way to help? Pay off debt, help with a down payment toward a house, contribute toward the grandchildren’s education? Of course, there’s no one right answer, each situation is unique. One of the services we offer our clients is a complementary analysis for their children. We can help determine the best debts to pay off first, how much to set aside for their own children’s college, their retirement, among other financial concerns. An examination of finances early on can save a person from major mistakes that can negatively impact their future. Knowledge is power!
Conversations surrounding topics such as estate planning are some of the hardest financial discussions to have. Few people are comfortable talking about what will happen after they’re gone, and adult children typically want to avoid thinking about life without their loved ones. Despite the difficult and potentially awkward nature of the conversations, these are some of the most important to have.
Communicating about family wealth can pose other concerns as well. Telling children about the assets they can expect when you pass may feel like a can of worms you never want to open. On one side there may be concern you will disincentivize your children from having their own successes if they expect a windfall. On the other side you don’t want them to structure their lifestyle expecting a substantial inheritance when you have other plans of charitable giving. You also don’t want to worry your children if your plan is to spend down your assets to maintain your own lifestyle. All these concerns are valid, however, the need to communicate at least some basic information is still paramount.
You don’t have to provide specifics about net worth or what’s happening with your budget, rather you can start the discussion with a small amount of information to see how it is received. Try beginning by talking about your values surrounding money, your vision for your own life and loved ones. Later you can go deeper into your wishes for how your legacy will be received and the structure of your estate plan (such as a trust for the grandchildren’s education) or who will be the executor of your will. You can spread the discussion over multiple conversations before revealing actual amounts of funds to be expected and even then, you don’t need to provide specifics if you’re not comfortable.
Don’t overlook the basics. Be sure children know where to find important documents and that they know who to contact for questions and assistance, such as your financial advisor and attorney. If you have an estate plan and living will, be sure your loved ones know where they are located and when they were last updated. And keeping a basic list of where your assets and deeds are located can save lots of time and confusion – just make sure they know where to find the list!
In most cases it’s better to prepare your beneficiaries in advance so they can know what to expect, which gives them time to devise their own plan. You want your children to be able to manage their inherited assets successfully. Communicating your wishes and concerns is an important part of their ability to carry out your legacy.
No matter the age of your children or grandchildren, imparting the wisdom of your own stories can be one of the most powerful tools to help the next generations navigate their own paths forward. Tell them about your triumphs and tribulations regarding financial decisions. Tell them what you wish you would have known at a younger age. Break the cyclical mistakes every generation makes by sharing your own narrative with your loved ones.
At Stone Pine Financial we know these conversations are difficult and we are here to help with complementary planning sessions for our clients’ children and grandchildren. We’ve worked with clients to facilitate discussions and impart wisdom on the next generations at every stage, from younger children learning about basic investing concepts, to helping adult children prepare to step into a family leadership role. Please do not hesitate to reach out to us to discuss your family’s situation and what steps you can take to have some of these difficult but very important discussions.