Building and preserving generational wealth is not easy. It’s a long process, one that requires a delicate handoff of responsibilities from one generation to the next. And while the process may take years or decades to play out, there are things we can do today to help our children and grandchildren prepare for the responsibilities of managing wealth.
In this article, we explore trends in financial education and share our thoughts on how to empower the next generation within your family.
The Case for Family Engagement
According to the National Bureau of Economic Research, roughly four in seven Americans are deemed financially illiterate. In addition, a 2018 study by the Financial Industry Regulatory Authority (FINRA) found financial capability, stability, and confidence are not improving. And although think tanks and state governments around the country recognize the need for financial literacy, less than 17% of students were required to take at least one semester of personal finance in high school.
This all goes to say: for most children, the lion’s share of their financial acumen will need to come from their family.
While the case for at-home engagement is clear, many wealthy families struggle to initiate conversations about financial stewardship. In fact, a 2019 study found that two-thirds of Americans with at least $3 million in investable assets have not discussed the family’s wealth with their children.
There are many emotional and cultural reasons why parents find it difficult to discuss finances with their children, and many parents avoid the topic out of concern that the family’s wealth may lead to a sense of entitlement on the child’s part. However, this isn’t a risk-free decision, and keeping children in the dark about family wealth can lead to negative outcomes ranging from spend-thrift behaviors to increased familial conflict once wealth is transferred.
For all of these reasons, we recommend that families with significant wealth develop a strategy for engaging the next generation. Your family’s strategy will depend on your wealth transfer objectives, time horizon, and unique family dynamics, but the following items are worthwhile considerations. These considerations are organized by life stage, so consider skipping ahead to the section that feels most relevant for where your children or grandchildren are today.
Around the time your child graduates from high school, it is valuable to begin asking about (and talking through) the key financial decisions they will encounter as a young adult. Examples include the decision to take on debt, begin investing, or managing the priorities of their monthly budget. And keep in mind that these questions don’t need to be groundbreaking. The goal is simply to open a dialogue, so good questions might be:
- How is budgeting going this semester at college?
- Are you starting to get credit card offers in the mail?
A second milestone for many young adults is when they complete college and enter the workforce. At this stage of life, the focus of the questions can shift to longer-term topics, some of which are investment related. Good questions for a recent graduate may include:
- What is the real estate market like in your area?
- Have you considered putting some money away for your trip next fall?
- What kind of retirement plan does your new company offer?
- Have you thought about what kind of portfolio to build as you begin investing?
- Have you been following what’s going on in the stock market?
Discussing these topics gives you an opportunity to share the financial principles and wisdom you have acquired over the years. It’s also an opportunity for you to share lessons learned and financial missteps from your own financial journey, which will, in turn, show your child that it’s OK to share their own mistakes or challenges with you.
Fundamentally, the goal at this stage is to make financial conversations a part of your relationship. And when that happens, it opens the door to more in-depth discussions covering legacy planning and generational wealth down the road.
For teenagers, the focus should be less big picture and more tactical. These formative years can be an opportunity to establish financial guidelines that give children the freedom to deal with their money how they want while still protecting them from immature or irrational decisions. As with children in their 20s, it can be valuable to share stories from your own teenage years to open a dialogue. What was your financial situation like when you were their age? What did you value? What did you save your money for? What things related to money change as you get older, and what things stay the same?
For this age group, it can be helpful to introduce the idea of setting goals and earning an allowance. Encouraging children to set an objective and save money toward that objective helps teach them the value of a hard-earned dollar and demonstrates the benefits and drawbacks of spending. In essence, you are teaching your children about cash flow planning in a very simple and practical way.
For very young children, consider creating simple games that start to convey what money is and how it is used. Setting up a play store with a cash register where children can pretend to buy and sell goods is a fun option to consider. At this stage in their lives, the goal is simply to help your children think about how money works in a very transactional sense.
Many of our clients come to us for guidance on how best to educate the next generation, and we are here to serve as a trusted resource for you, your spouse, and your children. Our goal is not just to help you build wealth, but to help you and your family preserve it for generations to come. The foundation of that work is financial literacy, and we hope this article provided some strategies for you to consider when it comes to engaging the next generation.
To learn more about how RVP can help your family effectively manage generational wealth, connect with our team.
Information contained in this article is obtained from a variety of sources which are believed though not guaranteed to be accurate. Past performance does not indicate future performance. This article does not represent a specific investment recommendation.
No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from Relative Value Partners, LLC which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact their Relative Value Partners counselor. All other inquiries, including a potential advisory relationship with Relative Value Partners, can be directed here.