In recent months, many of our clients have faced big changes in their lives. For those with children and grandchildren, that’s meant playing a more hands-on role in their young ones’ education — and teaching the next generation about wealth and wealth management. Just as you work hard to secure your financial future and legacy, you’ll also need to ensure that your loved ones can make thoughtful decisions when they’re on their own.
Understanding the Basics
Some financial literacy concepts are universally important, particularly in terms of spending, saving, and giving. It’s critical that children understand the connection between what they do and what they have. Oftentimes, there’s a habit of spending money without knowing how money is earned. Regardless of age or circumstances, the focus must remain on the future. You can ensure that your legacy will be successfully passed on by teaching the next generation that hard work will enable them to achieve true financial independence. Sophisticated, forward-thinking financial decision-making also requires taking certain realities into account. These include opportunity costs — in choosing one option you may forgo another — and cost-benefit comparisons. There’s also the time value of money and the magic of compounding.
Getting Down to Business
Teaching the next generation about the value of financial literacy can be challenging, but this doesn’t mean that you should shy away from the task. In fact, the easiest approach for most of our clients is to lead by example. Below are five strategies you may fi nd useful when teaching the next generation about money.
1. Communicate and Collaborate on Money Matters
Engaging your children in frequent conversations about finances helps to keep the topic familiar and on their radar. Drawing them into family discussions about spending, saving, and philanthropy can make them feel more involved.
2. Turn Abstract Ideas into Tangible Reality
Children tend to be more engaged in learning when they experience it through the senses. Telling the next generation to save more or donate to good causes without explaining why can make it hard for them to understand. Taking them along to a meeting with your wealth advisor and showing them how you invest for the future can help them see things more clearly.
3. Highlight the Advantages of Thoughtful Planning
It’s not easy for young children — and many teenagers — to understand that delayed gratification can make them happier. Helping them recognize that disciplined saving and investing will allow them to acquire an item, vehicle, or lifestyle they really want and can reinforce the benefits of acting responsibly.
4. Help Them Learn Better with Incentives
A central tenet of economic theory is that incentives influence behavior. This helps explain why, as research firm Cerulli Associates found, the majority of employees say an employer 401(k) match “was the reason they started saving for retirement.” By offering your children or grandchildren a similar way to grow their savings faster, they can learn good behavior that will hopefully stick with them for life.
5. Transform Mistakes into “Teachable Moments”
We all make mistakes, but when we see our children do the same, it’s only natural to want to fi x things. However, it’s generally better for all involved if they understand that actions have consequences. If they don’t get bailed out after blowing an allowance or what they have in savings, they’ll probably think long and hard before doing it again.
Keeping Your Children on the Path to Financial Literacy
There’s more to teaching your kids about money than these five strategies. Remember that your Boston Private advisor is always happy to recommend ways to keep the next generation engaged in their financial future.
With families in mind, we have put together a special program for Raising Financially Responsible Children. Browse our collection of articles, webinars and checklists to help you begin this important part of your family's financial future.