How to teach financial literacy to your next gen.
No one is born a financial expert – these concepts are learned, sometimes from a very early age, but sometimes later in life, if at all. Although 93%* of children learn financial skills and practices from their parents, often the example demonstrated does not include sound financial practices. In many cases, children do not learn the basic knowledge and essential skills associated with successful financial management at all; yet teaching financial literacy to the next generation of wealth owners is one of the most critical aspects of successfully sustaining your wealth.
In our practice advising wealthy families, we have found there are very simple ways to educate younger family members on the basics of sound money management. These skills, when learned from an early age, can help foster successful wealth transfer between generations and responsible financial behaviour.
First, we start with the ultimate goal of growing the family wealth, which is represented by more than a number on a balance sheet. It includes the human, intellectual, social, and financial capital held by your family. Teaching financial responsibility enhances all of these forms of capital.
A useful strategy is to apply a methodology to distribute their allowance before spending it, classifying it into four categories:
The allowance they receive should be earned by a combination of task completion and positive reinforcement (rewards). There are four useful practices that can be implemented in any family to engage young family members, encouraging responsible financial practice from the beginning, and enhancing the cognitive connection between your family and your wealth. These basic practices can be accomplished easily, and should be done consistently and continuously with a great deal of reinforcement at home, and in daily practice in general.
Practice 1: Teach the value of money, and delayed gratification
We were born with an inherent urge to react without considering long-term consequences, so it’s necessary to explain to children that patience pays off by explaining the definition of delayed gratification. It is also important to learn how to earn money in order to truly know its value – there are creative ways in which this can be demonstrated with daily tasks around the house.
• Compare the difference between desire and need: Walk around your house and categorise the items inside: need? Or want? Identifying the difference helps a youngster understand we don’t NEED everything we have.
• Establish a basic allowance system for accomplishing specific tasks. When your child receives their allowance, take them to the store to allow them to help with household purchases, or purchase their own lunch. This will demonstrate the challenge between earning and spending.
• When your child asks for something, teach them the concept of waiting by using a timer for a short period. For larger ‘asks’ encourage waiting for more time to teach delayed gratification.
Practice 2: The importance of having clear savings goals
To be effective, savings should have a clear goal and be measurable, attainable, realistic and specific, with a determined timeframe. When teaching children about savings, the idea is that saving should come before spending, and with an assigned percentage such as 10 or 25%.
• Work together and prepare a list of various forms of income from your children’s perspective: allowance, extra housework, gifts, etc… Next, prepare a list of all their expenditures, including snacks, games, toys, and activities. If the difference between income and expenditure results is positive, consider a “match” to positively reinforce; if the result is negative, consider a “loan” with interest.
• Work with your children to establish clear savings goals. Once those goals are established, consider some incentive for meeting the goals such as matching the savings.
Practice 3: The difference between saving and investing
The number one enemy of savings is debt. However, it is important to understand that there is positive debt, which gains value over time (e.g. a business loan). By saving a little at a time and investing wisely, money can grow significantly with compound interest. The message to convey is: Put your money to work.
• Buy a share of stock that children are familiar with, such as Apple or Disney. Have each family member pick up a different company and after a certain period of time (month, quarter, year) share and compare the results in terms of market value and performance.
Practice 4: The exponential effect of sharing
Protecting your family’s money is critical to sustaining wealth, but just as critical is giving back. Sharing time and resources with the community proves an invaluable experience for young family members because it demonstrates the positive impact wealth can have on the community at large, rather than just themselves.
As a family, decide on a philanthropic mission or purpose. Encourage your children to identify ways they can contribute to the cause. Discuss and establish a percentage of the family income that will be dedicated to philanthropy. When your children receive money, dedicate a portion to savings, a portion to spending, a portion to investing and a portion to philanthropy so they can begin to understand how to maximise the money they receive.
The bottom line is that your example will shape your children’s attitudes and behaviours towards money, and their ultimate spending habits. The legacy you leave behind will be continued in your children. Plan it carefully.