TECCanada

Wealth, Health & Kids: Strategies for Raising Financially Competent Children

Sarah Bull, Member Visit Website

I’m in favor of giving my children enough money that they can do anything but not so much that they could do nothing. - Warren Buffett

For the past 12 months, we have spent time talking to current and prospective families about the global credit crisis. Many of them are worried about the impact and implications of the crisis on the next generation. All of them agree that the financial literacy of our kids is essential to their wellbeing and of vital importance today given the changing economic landscape. To that end, we have dedicated this issue of Wealth, Health & Kids to “Strategies for Raising Financially Competent Children”.

No matter the size of the portfolio or the age of their children, many of our clients are wondering how to raise their kids with the skills and knowledge they need to be financially competent. Today, very few schools teach personal finance as part of the curriculum before high school graduation. As such, our clients have ranked financial literacy as a high priority.

This paper addresses some uncertainties in the economy that could create challenges for the next generation and suggests some approaches for teaching your children basic financial management skills. It also discusses some of the challenges around inheritance and provides some solutions to transferring your wealth to the next generation.

WHY NOW?

We have just experienced the greatest financial crisis of our time; one we hope we will never see again. This has created a rare opportunity to teach a historical lesson to our children. We all know that kids are smart and perceptive and most kids are aware of what has been happening in the world to date. Describing the financial crisis with your children can be the first step in engaging them in their own economic development.

The credit crisis has also changed the economic landscape in which we live. We are in unchartered waters and the next 30 years are bound to be very different than the past ones. The next generation of kids could face some very different pressures:

• A changing interest rate environment. When our children talk about interest rates they may well be referring to numbers in the double digits, akin to the experience in the 1980s;
• The ability to source credit has been reduced and, as such, things like securing a mortgage may be considerably trickier for the next generation; and
• There is uncertainty around retirement funding plans, as well as, healthcare and social security benefits.

With all of this uncertainty, it is more important than ever for adults to teach their children how to be financially competent.

CULTIVATING FINANCIAL VALUES AND INTEGRITY

Financial competency is not just about money. It is about instilling in your children values equivalent to overall good character. Kids with good financial skills have the inner structure that corresponds to great kids: they are self reliant, responsible, disciplined, resilient, economically independent and know how to give back.

One idea in cultivating financial integrity is to create a family mission statement. The statement formally articulates the family’s financial values and provides the guiding principles for financial decisions. It affirms what the family stands for, what it values and how the family will use its wealth. Whether it is short or long, the mission statement must be one that everyone understands and remembers. It should inspire and motivate, be achievable and realistic. All of these characteristics can help it be passed from one generation to the next.

In creating a mission statement, there are several key questions to ask including:

• What is it about money that is important to you? An example: Security and Opportunities.
• What do you want your child to learn about money? For example: Are they able to distinguish between needs (food, water and shelter) and wants (clothes and electronics).
• What has to happen over the next few years that will make you feel good about the progress your children make on financial basics?

You may also want to assess what skills you want your children to have before they leave home. Typical goals and objectives would include managing cash responsibly, balancing a cheque book and learning how to comparison shop. An example of a family mission statement might look like this:

Wealth helps our family grow and develop and gives us an opportunity to help others. Education, hard work and optimism have played a large part in where we are today.

HOW TO NURTURE FINANCIAL COMPETENCE

Once you have created a clear family mission statement and have a grasp on some agreed upon financial values, you may still have to overcome some of the challenges inherent in North American culture.

Most families in North America are dual income families and struggle with the pressure of fitting everything into their day. Even if you want to raise financially competent kids, you still need to pay attention to their homework, nurture their musical talents and coach them on the soccer pitch. Employing the old adage that it takes a village to raise a child, you can create a network for your kids of “money coaches” that will, over time, reinforce key ideas and expectations with your children. Whether family or friends, these coaches can explain their money skill building experiences in ways that will hopefully resonate with your children.

Another challenge you may encounter is that North America is a society of consumers. Kids are subjected to hundreds of media messages to consume and spend and are targeted in multiple ways. It is important to teach your kids media literacy. Teach the important skills of analyzing messages and information for validity and bias.

The third most common challenge is technology. Debit cards, credit cards, email money transfers, etc. are lending a hand in the creation of a cashless culture and changing the perceived value of paper money and coins. ATMs magically dispense money and, at a very early age, kids get the idea that money is limitless. To overcome these challenges, you may try reading your bank statement to your children or spend time openly discussing the value of money and how to earn a living.

Nurturing financial competence is a lifelong process. You want to start talking about finances early because learning about money is like learning a language – easier to acquire the earlier you begin. The key for nurturing financial independence is to build an understanding in your kids around the five pillars associated with basic financial management: save (delayed gratification); spend (consume responsibly); invest (relationship between time, money, risk and return), donate (use money to make a difference) and earn (make a living).

The following chart illustrates some tactics and strategies you can use at various ages and stages. The five pillars remain constant but the skills become increasingly sophisticated over time.

TRANSFERRING WEALTH TO THE NEXT GENERATION

Your wealth can provide for and deeply enrich the lives of generations to follow. However, the wealth you have created can also pose challenges to you, as well as, to those who will receive it. Many of our clients fear that the comfort of wealth will distort the values of their children and grandchildren. The following are four challenges associated with inheritance and some approaches for maintaining your family financial values as your wealth is passed to successive generations.

1. Sense of Entitlement: Parents and children may have very different opinions on whether their children should be entitled to their wealth. Although most of our clients are looking to leave a legacy for their children, some demand that their children adopt their values and that inheritances be earned by establishing strategic trusts that reward children for achieving certain milestones.
2. Lump Sum Distributions or Extended Distributions: Many people are uncomfortable with the idea of leaving their children with a lump sum payment upon their death. Again, transferring assets to a trust that distributes money in increments can encourage adult children to develop independent means.
3. By the Roots or By the Head: How to divide the estate among descendants can be emotional and cause tension. By way of example, if child #1 has three children and child #2 has one child how should you distribute your wealth? By two equal pots or by four equal pots to your grandchildren. Again, parents should discuss the pros and cons of these distributions with their estate lawyer.
4. Differing Needs: Often, parents believe that dividing assets equally is the only way to treat their children fairly. Many times there are certain situations that might require parents to treat their children differently. These issues are very hard to resolve but must be thoughtfully discussed with both your advisor and children to ensure everyone understands the reasons behind the disposition for the wealth. Flexibility in the design of your estate plan is also important. Your family’s estate plan needs to be reviewed at least every five years and must be flexible enough to accommodate changing family circumstances.

STRATEGIC PHILANTHROPY

It is important to consider what portion of your wealth you want to give to charitable causes. Deciding how much to give to descendants versus how much to give to charity requires serious thought and consideration. Charitable giving can be a wonderful tool for promoting your family’s financial values and teaching basic financial skills. Strategic philanthropy is the process of becoming intentional about your giving (money and time) by investing in issues that articulate your family’s passions and are close to your heart. A family foundation or a donor advised fund offers children ongoing involvement in the financial affairs of the family and an understanding of how you can make a difference with your money. Whatever vehicle you choose, strategic philanthropy is about hopes and dreams and teaching your children to give time, talent and/or treasure to causes they are passionate about.

SUMMARY

Teaching your children about money is very important, especially given the events of the past year. Children and young adults today have more spending power than ever. While schools focus on reading and writing, North American culture is shaping kids’ attitudes toward money from a very early age. The task of raising financially competent kids can be achieved through thoughtful planning, communication and by leveraging various opportunities as they present themselves.