We teach our children not to talk to strangers.
We show them the importance of manners.
We instruct our kids to wear seat belts and look both ways before crossing the street.
We help them memorize vocabulary words and proofread their essays.
When they’re old enough, we even talk to them about sensitive things like sex and relationships.
But do you know what we don’t teach them about?
Money.
The (Poor) State of Financial Literacy
Money is one of the foundational principles of adulthood.
Poor money management destines an individual for failure from the start.
A high financial acumen can establish a foundation for future success.
Yet if you study the numbers – and if you simply take a cursory look at your surroundings – it’s clear that today’s young adults have virtually no financial literacy.
According to the Standard & Poor’s Global Financial Literacy Survey, the United States, despite representing the world’s largest economy, ranks 14th in the world in literacy.
At 57 percent, the U.S. adult financial literacy level is below that of countries like Singapore, New Zealand, Norway, Israel, and others. It’s barely above nations like Myanmar, Hungary, Bhutan, and Botswana.
Another separate study shows that financial literacy is declining year-over-year. In 2015, 37 percent of Americans were able to answer four out of five basic financial questions correctly.
That number was 42 percent in 2009.
To say that Americans have a financial literacy problem is an understatement.
We may earn a lot on a per capita basis, but most people don’t know what to do with it. Approximately 44 percent of Americans don’t have enough cash to cover an unforeseen $400 emergency.
Roughly 43 percent of student loan borrowers aren’t even making minimum payments. More than one in three households have credit card debt.
One-third of American adults have saved nothing for retirement. We’ve missed the boat and, if we aren’t careful, our children will too.
As an advisor, part of your responsibility is to empower your clients with the knowledge and resources they need to elevate the financial literacy of the next generation – i.e. their children.
You do this both in how you communicate/educate, as well as how you approach their financial planning.
It Starts With Parents
When a client becomes a parent, they aren’t just taking on a new title of mom or dad – they’re also embracing a new list of responsibilities.
Their primary obligation is to keep their child healthy and safe.
This means providing food, water, shelter, healthcare, and other basic necessities. Once these are taken care of, it’s their responsibility to train the child up to be a functional, productive member of society.
While it looks different at every age, the ultimate objective is to mold these little humans into independent adults who can become more successful than the previous generation.
That’s how we leave our mark.
The issue is that so many of today’s parents don’t realize this, nor do they particularly care to embrace the responsibility of raising independent adults.
While most won’t admit it, they’d much rather ship kids off to the public school system and let teachers, school administrators, and peers take control of the reins.
But if you look at the history of the public school system – or most private school systems, for that matter – they don’t exactly have a glowing track record. And that’s because they were never designed to support the burden of raising children.
If we want to teach our children anything – from manners to financial literacy – it starts with us.
We have to educate our children and model financial principles in a way that prepares them for life outside the safety of the family bubble.
How to Prepare a Child to Manage Money
There are three primary ways a parent can influence a child’s view of money and enhance their financial literacy:
(1) They can make smart decisions for them (like setting up savings accounts).
(2) They can model fiscal responsibility in how they manage their own money matters.
(3) They can teach them tangible money management lessons.
Every parent will likely gravitate towards one of these three approaches based on their own personal circumstances, experiences, and resources. However, it’s wise to implement elements of all three.
As you raise your children and/or work with clients who are in the midst of their own parenting journey, here are some specific ways you can prepare a child to manage money well:
- Protect Wealth Through Estate Planning
Politics aside, history tells us that, as time passes, taxes increase and more restrictions are placed on the passing of wealth from one generation to the next. As an advisor, you can’t ignore this.
You must work with your clients to tackle it head-on.
This is something Anthony Latella of Latella & Bastone Financial Group in Montreal, Quebec strongly believes in.
“Over the next decade we will live through an unprecedented generational wealth transfer,” Latella explains. “For this reason, my team and I work diligently with our clients to implement appropriate wealth and estate planning. It is our obligation to ensure that the next generation receives the wealth their parents have worked so hard for and continue to be properly advised.”
If tax-efficient estate planning isn’t one of your specialties, partner with someone who does specialize in this area and refer that element out.
This is a critically important and extremely timely piece of the equation.
- Set Up Whole Life Insurance Policies
When a child is born, the parent is more focused on getting quality sleep than on securing the baby’s financial future – but it’s helpful when both are emphasized.
Setting up a life insurance policy is one of the first financial decisions a parent should make for a newborn child.
Because of their young age, it’s possible to get insurance at incredibly low rates – rates that would be unheard of for adults.
And though there’s always a choice between an array of insurance products, you know that whole life typically makes the most sense at this point.
Unfortunately, many parents have been led to believe that whole life insurance isn’t a good product. The key is to explain it in a way that makes sense to your clients. Infinite banking is one such option.
Alberta-based advisor Will Moran, who authored the book Think Like a Banker, has a very specific approach to these conversations.
“We have been taught that when we spend $1, we get one use out of it. It buys food. It pays a bill. But once it leaves your hands, it’s gone. It can do nothing else for you,” Moran tells his clients. “What you are not taught is a simple strategy that can be used by anyone where your $1 could still earn for you – even after you’ve used it – simply by moving it through an asset you own and control. One group of consumers understands this better than most – the ultra-wealthy. Now, you can too.”
Whether a client chooses to set up a family bank or they simply want the security that comes from knowing their child has some insurance money set aside regardless of what happens in the future, a whole life insurance policy can play a significant role in securing a young child’s financial future.
- Tuck Away Money in a 529 Plan
Speaking of college, it’s never too early to begin thinking about the high cost of education.
The average tuition and fees at public universities has risen more than 181 percent over the last 20 years and will likely continue to surge over the next couple of decades.
Encouraging your clients to start investing now, as opposed to when their children reach high school can let the power of compounding interest work to their advantage.
If you’re going to convince a client to begin investing in college education 15 to 18 years beforehand, you better be confident in your ability to explain concepts like compounding interest.
One way to do this is by explaining that compounding interest is basically interest on interest.
In other words, if you invest $1,000 today and it grows by 9 percent this year, you’re left with $1,090.
If it grows by another 9 percent the following year, you not only gain interest on the original $1,000, but also the extra $90. Over time, this leads to a sharp increase in your rate of return.
The Rule of 72 states that, based on the average rate of return in the stock market, you can expect any safe investment to double every seven to ten years.
So if you start putting money into a 529 college savings plan today, you won’t have to contribute nearly as much principal to help your child attend school without attracting significant loans.
You know these things, but your clients might not. And by educating them, you’re teaching their children by proxy.
- Teach These Four Money Categories
Children as young as three- or four-years-old can be trained up in how to use money. There are four categories to focus on:
- Saving. Children need to understand the value of putting money away for a rainy day. Whether for financial emergencies or important purchases, it’s nice to have money in the bank.
- Investing. Just as a client is investing in their future, they should teach their children to value the role of investments. Help them understand both the risks and rewards.
- Spending. Money is designed to be spent. Help parents understand and embrace the power of budgeting so that they can communicate this concept to their children.
- Giving. We aren’t supposed to hoard all of our resources. Teach children the power of generosity and what it means to give to others in need.
When a child is young, parents might consider giving them money for chores and then show them how to divide it up.
For example, they might give a child $4 per week and have them put $1 in four envelopes labeled Save, Invest, Spend, and Give.
As they grow older and develop an income of their own, they probably won’t divide their paychecks quite so evenly. But nonetheless, it helps develop a framework for balanced money management.
- Involve Children in Major Decisions
When it comes to major financial decisions, children shouldn’t be kept completely out of the loop.
While there’s something to be said for sheltering them from major financial stress, parents should involve them in elements of key decisions. Here are some examples:
- Buying a house. Obviously a child isn’t going to pick the house a family buys, but parents can teach them to use an online mortgage calculator. Even a child as young as eight or nine can learn about things like mortgages, interest rates, down payments, etc.
- Switching jobs. Is a client considering a couple of job opportunities? They can involve children in running the numbers.
- Planning a vacation. When it comes to planning a trip, an older child can help formulate a budget and develop a spreadsheet that shows how much the family can spend on flights, hotels, and outings.
As children age, parents should give them more weight and responsibility. These real-world exercises will prepare them to make key choices in their own adult lives.
- Let Children Hear Other Voices
As you know from being a child, something carries a lot more weight when someone other than a parent reiterates it.
Encourage parents to expose their children to other financial experts via blogs, social media, podcasts, or YouTube – even if it means getting information from someone other than you.
Mark Wade, President of Echelon Wealth Strategies is a great example of someone children can follow and learn from online.
“As a member of The Elite POZ Advisor Group, Mark is one of the top tax-free retirement experts in the nation,” says bestselling author David McKnight. “He has developed a mastery of all the tax-free planning strategies you’ll need to shield your hard-earned retirement savings from the impact of higher taxes.”
In addition to encouraging your clients’ children to immerse themselves in online learning, you might also encourage them to come along to meetings with their parents.
Turning these gatherings into family affairs is a great way to educate children and earn future business.
Help Clients Embrace Their Own Financial Literacy
Here’s the thing: A parent can’t teach children financial literacy if they aren’t financially literate themselves.
Your clients don’t need a degree in economics, but they do need to recognize the difference between good debt and bad debt; understand how to budget; and be able to explain basic financial terms like credits, debts, interest rates, etc.
If you find that your clients’ financial acumen is lower than it should be, let this serve as a wakeup call.
Educate them first so that they can then impart this wisdom to their children. You’ll be better for it, they’ll be better for it, and you may just change their family tree.
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