Passing on Financial Values to Your Heirs
You worked and saved for years, and now you can sit back satisfied with a job well done. You built a network of friends and colleagues, and you may have had children who have had families of their own. Will you leave something to the ones you love?
The Best Inheritance? Knowledge and Values
The best gift to leave your heirs isn’t a big pot of money. In fact, famously rich people like Warren Buffett and Bill Gates have said they aren’t going to leave their kids massive fortunes. As Buffett told Fortune magazine back in 1986, the perfect amount to leave your children is “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
The best inheritance is the set of financial values that teach respect for money. Or as the old saying goes, “give a man a fish and he eats for a day; teach a man to fish, and he’ll eat for a lifetime.
Here are seven golden rules to teach your children about money, no matter how old they are.
1. Money Isn’t Valuable, but It Helps You Find Value
Money in itself isn’t valuable. You can’t eat it. You can’t build a house out of it. But money does help you understand value. As Denise Cummins, a Fellow of the Association for Psychological Science and the author of Good Thinking: Seven Powerful Ideas That Influence the Way We Think, notes, giving children an allowance based on the work they perform makes them think about the utility of what they want to buy versus how much their effort to earn the money is worth.
She tells a story about her two daughters in the toy aisle of Target deciding whether they want to spend all their money on a toy they may play with once or saving more to buy something better later on. For her, an allowance based on work, “is the quintessential way to teach children financial literacy as well as character traits like patience, thrift and generosity.”
2. Investing Is a Lifelong Project
There is a difference between keeping money under your mattress and using your money to make yourself and the world richer.
During the pandemic, Americans have been hoarding cash. According to The Economist, “the value of dollars in circulation is growing about twice as fast as the historical average. Since February, it is up by more than 11%.” Though a rush to the safest of safe assets is understandable in a crisis, eventually more level-headed thinking will lead us back to putting our money where it will do more than lose value to inflation.
When kids are in late childhood or their ‘tween years is a good time to create a custodial brokerage account for them. You can teach them how to do research on their favorite brands and show them the ropes of value investing.
Because of the tax implications of owning and trading stocks, you may want to include your kids on a discussion with a financial advisor, and you will want to set up periodic meetings with them, monthly or quarterly, to review their portfolio’s performance.
Ultimately, building wealth is more than competing for a high-paying job. And who knows, you might raise the next Warren Buffett.
3. Work Gives Meaning
Many of us remember our first summer job. Mine was at an ice cream shop. I didn’t want to do it, especially because some of my friends had parents who would subsidize their care-free summers. But the money I made was mine to spend or save.
Work teaches kids self-reliance, and having your own money to spend is essential to lesson one above. But having a job is more than just accumulating money. It’s also a source of pride and identity. I knew I didn’t want to work in an ice cream shop forever, which motivated me to perform in college and seek advanced degrees after college.
Adults are more likely to build wealth if they have a financial plan, and they are more likely to have a financial plan if they see the plan as a part of their larger career.
Teach them how to find meaning in work through the Japanese concept of Ikigai.
4. Financial Values: Credit Is Building Trust
Credit comes from the same Latin word that means “believe.” When people give you credit, it’s because they believe you will pay it back according to the terms of your loan.
Adding your tween or teen as an authorized user to your credit card is a good way for them to start building a credit history, but it’s important to teach them the necessity of paying back the money they borrow and being aware of high-interest debt and revolving credit.
The flip side of credit is debt. It’s important to teach children the difference between good debt and bad debt. As Robert Kiyosaki, author of the best-selling book Rich Dad Poor Dad, says, rich dads borrow money that will make money, like taking out a mortgage on a rental property, where poor dads borrow money to spend.
Building good credit is about building good habits, maintaining good debt, and using that to increase your wealth.
5. Setting Up a Budget Means Knowing Your Limits
Once children have graduated from college and have their first jobs, they will need to create a real budget, probably for the first time in their lives.
You might have made them pay for incidental expenses like gas and entertainment with their childhood and teenage allowances, but when they’re not living under your roof, they will also need to budget for basics like food and rent. If they had to borrow money to pay for college, they will also have to factor in paying off those debts as well.
Spending is only one side of a budget, the other half is income. You can set them on the right path by going over their new job’s benefits, like health and life insurance. Show them how to increase their income by focusing on paying off high-interest debt first, and make sure they don’t prioritize paying off low-interest student loans over taking an employer’s 401k match.
There are a lot of great budgeting apps that can help adult children manage their money, and you can help get them started using a retirement planner too.
6. Find a Fiduciary
Money is a tempting business, and if it were easy to build wealth, we’d all be rich. In addition to building your own good financial values and habits, teach your children to seek out financial advice from people who are legally required to be their fiduciaries.
Your care and interest in their financial education is a model for them of what a fiduciary does. You can also teach them to always look for the fees and costs hidden in the fine print, and tell them that if someone’s financial interest isn’t aligned with their own, it can lead to problems, like investment advisors selling over-priced, underperforming products, or brokers who try to churn their brokerage accounts.
When children are in their teens and 20s, it’s a good time to introduce them to the new, powerful tools that have been developed since the turn of the century to help people make more decisions in their best interests. It’s never too early to start saving for retirement.
7. Always Ask Questions
This is the most important lesson of all. Don’t put your financial future at risk by accepting other peoples’ assumptions or taking their advice uncritically.
Financial literacy has become ever more important as the old financial safeguards of the 20th century — pensions and Social Security — have either fallen away or grow more unsustainable. Teaching your children the basics of money management listed here is important, but teaching them how to be flexible in their assumptions and responsive to new information is also a bedrock principle of accumulating wealth.
Practical Tips to Teach Your Kids Financial Values
The suggestions listed above will help fortify the financial values you want to teach. It is important to incorporate these values into your everyday conversations.
No matter your children’s ages, talk about money. Convey what it means to you, how you think about it, and more. Too many people grow up thinking that money is a taboo topic that contributes to low financial IQ. We can’t learn if it isn’t discussed and demonstrated.
Here are additional concrete steps you can take at different points in your child’s financial life to teach them the value of money.
Create an allowance tied to performance. Many experts agree that the most effective way to teach children about money is with an allowance that is tied to performance. Giving them money with no strings attached won’t get the job done.
Set up an investing account in their name and go over results with them periodically. Kids as young as nine and ten years old can appreciate the strategies of value investing, and they’re at the perfect age to take research around investments seriously. A word of warning: a proprietary brokerage account for kids should not be enabled for margin trading.
Highlight trade offs you make: Talk about everyday money decisions. If you are considering buying a car, talk with your children about that decision making process. Are you giving something else up? How do price and value factor into your car choice? Are you getting a loan or buying it outright? Discuss the pros and cons of the options!
Make them get a summer job. Work is a trade-off between spending time earning money and spending money in your free time. That important lesson will help kids understand the value of their time as well as increase their bottom line.
Add your children as an authorized user to your credit card. Building credit early will help them when they need to borrow for big life purchases down the road. Adding a child to your credit card will help them build a credit history, and you can teach them about different types of credit.
Send them to the grocery store: It is important for kids to learn what things really cost, and the cost of groceries can be a real eye-opener. Challenge them to feed the family on the equivalent of their summer job earnings.
Discuss Education Costs: Education costs, particularly college tuition can often make saving for retirement difficult. You want your children to understand your financial needs and how they relate to their own current desires and future burdens. Children can learn from your mistakes and decisions if you are discussing the issues with them.
For Adult Children
Set up a Roth IRA. Once adult children have entered the workforce, they will be earning money, but they probably won’t be in a high tax bracket. A Roth IRA is designed for younger savers to invest after-tax money that can grow tax-free and won’t be taxed at retirement.
Help them buy a house. Home equity is a pillar of financial security. You can help your adult children navigate the complexities of buying a house, and if necessary, you can help them with the down payment. All the other lessons you taught them about good versus bad debt, how to invest in in their future and budgeting should serve them well as homeowners.
Assess your ability to lend or gift them money in the NewRetirement Planner.
Encourage them to maintain a long term financial plan: Once they start making their own money, it is the time for them to start planning retirement. After all, the earlier you start saving, the easier your future will be. Help them get set up with the NewRetirement Retirement Planner. The tools are comprehensive and easy for anyone to use.