When should you start talking about financial matters with your kids? I suggest as soon as possible. My father worked in the investment field his whole career and I grew up hearing stories about how putting a little away each year can add up to a lot in 30+ years. I remember being a freshman in high school and my dad telling me if I put $2,000 in my IRA for 20 years, when I was ready to retire I’d have a million dollars. Now that got the attention of a 15-year-old. Don’t worry if you or a family member aren't in the financial industry, there are a lot of resources to help educate your kids about money.
There are plenty of books, websites and YouTube videos that not only educate, but can confuse and overwhelm. Therefore, I suggest keeping the message simple: “save a little every month until you retire.” The amount will change as income increases but the premise of paying yourself before you pay others is the message you want your kids to understand. My father gave me a book that I have given many of my clients who have given it to their children, called The Richest Man in Babylon, by George S. Clason. The book is about a man in ancient Babylon who put one coin for every 10 coins he earned into his pouch and later he was able to use those saved coins to earn more coins for himself. His simple act of saving and investing is how he became the richest man in Babylon.
The goal of the conversation is to get kids excited about saving by showing what they can accomplish with baby steps. As their savings grow, the next conversation is about where to put the savings and how much to save. (For related reading, see: Teaching Kids Financial Literacy.)
Applying to College
Eighteen-year-olds should not be expected to make a decision about whether or not to attend a university without understanding or at least having a conversation with their parents about the cost and how their schooling is going to be paid for. At that age, if their options are properly explained they will understand enough to have an opinion on their selection. If the choice is $100,000+ in college loans for a private university or $40,000 in loans from a state school, the child who will be responsible for the loans certainly needs to be involved in that decision. Treat them like the adults you want them to be. (For related reading, see: The True Cost of Attending College.)
I have seen clients take very different approaches to talking with their kids about finances, but I believe it is prudent to educate them about your goals and financial philosophy. Kids don’t need to know their parents exact net worth at age 21 but as their parents enter their 70s I think they should. For estate planning, legacy and philanthropic planning, it is important to understand what a total estate looks like. Waiting until an illness or advanced age occurs can cost a family financially by not having enough time to initiate a plan, and your goals might not be achieved.
Before You Get Ill
Too often advisors are contacted by the children or grandchildren of someone becoming ill later in life. Suddenly they are in charge of their financial affairs. Between the illness and the newly appointed responsibilities for their financial wellbeing, it can be overwhelming, but having a proper estate plan, healthcare directives, and well-organized financial assets will make the responsibility less of a burden. We help our clients remove some of those stresses by keeping their financial affairs organized, and during the legacy planning we’ll create a wealth transfer plan (WTP). The WTP is incorporated within a comprehensive estate plan and helps the beneficiaries understand what is important to you and why. This makes the management of your assets easier for them and hopefully keeps everything more in line with your goals. (For related reading, see: Tips for Family Wealth Transfers.)
A WTP is comprised of three parts:
- A wish list, containing your personal goals, values and desires that you would like to be carried out for/ by your future generations.
- An implementation outline listing the steps that are necessary to satisfy the wish list.
- A personal letter written in your own words to your future generations in which you express your goals, rationale and desires regarding your intentions. This is not a legal document, just an opportunity for you to speak from your heart about what you want and why you have made the decisions you have. (For related reading, see: Letter of Instruction—Don't Leave Life Without It.)
Ask for Help
Many people don’t feel comfortable trying to explain their financial state to family members, sometimes because they fear they don’t fully understand it themselves. But these concepts and conversations don’t have be covered by a family member. I have been asked to help friends and clients have these conversations with both their kids and their parents. If you don’t feel comfortable having these types of conversations, consider asking a friend who is financially savvy, your advisor, CPA or attorney to help. Starting the conversations early using examples like savings and college will hopefully make you feel more comfortable with future financial conversations. Either way, I do recommend that you bring in a trusted advisor when you start your legacy planning.
(For more from this author, see: Financial Conversations to Have With Your Spouse.)