OCEAN CITY — 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 depressed 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 and judicious financial support.
1. Share information. Affluent parents are often so concerned about their children feeling entitled that they keep them in the dark about the family’s assets. But children often learn a family’s values best by observing those principles in action, notes Stacy Allred, director, Wealth Structuring Group at Merrill Lynch. “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.”
It can be helpful to ease into sharing elements of financial planning. 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.”
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.”
3. Use philanthropy as a teaching tool. For example, children can be allotted a giving budget and charged with 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.
4. Introduce investing. Investing smaller sums with limited consequences is a great way to learn about making informed choices and managing risk, particularly in a market plagued with uncertainty. “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.
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 that 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 identifies specific results for a beneficiary to achieve while offering some degree of flexibility. Alternatively, a trust could simply state that the children will receive their money whenever the trustee—who could be a family friend or a trusted financial professional—is confident that they are mature enough to handle it. 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.
(The writer is a senior financial advisor and can be reached at 410-213-8520.)