3 Strategies for Raising Financially Literate Children

Two of the more common phrases I’ve heard from new clients over the years are “I wish I would’ve known this at a younger age” and “I wish I would’ve started this earlier.” People who have been saving and investing for decades eventually realize that two of the biggest assets someone can have in regard to their finances are knowledge and time. For a lot of Americans, unfortunately, it takes years of ignorance and learning from mistakes to realize how powerful those financial advantages can be.

Once a client is able to navigate through those struggles and begins to accumulate significant wealth, a common problem they’ll come to us with is something along the lines of “How do I protect and create generational wealth?” In other words, they’re looking for ways to pass on that wealth so it can continue to grow for their children and grandchildren. Most of the time, they’re looking for some sort of savings, tax planning, or estate planning strategy that will allow them to maximize the wealth that transfers from one generation to the next. These strategies are important and can add a tremendous amount of value to the family, but I’d argue that it doesn’t mean nearly as much without teaching your children/grandchildren how to continue on that legacy you’ve created. In other words, you should spend just as much time preparing your kids for the money as you do preparing your money for the kids. There are a number of different ways to do this, but the three cornerstones below are a great place to start.

Communicate

Like it or not, personal finances are considered by most to be a taboo subject. Finances are seen as a very personal and private subject, and most kids are taught to not ask questions to avoid being rude. While I would agree that certain boundaries should exist to maintain a level of comfort and respect, completely shutting out conversations puts kids in a rough spot to learn. In most cases, kids aren’t being taught topics like budgeting, benefits, taxes, or investing in school. So, if they’re not taught it at home, they’re never taught it at all. They end up learning through the same mistakes everyone else went through, leaving important years of progress and compounding in the past.

In your child’s early years, it could be a simple and general discussion about the difference between saving, spending, and giving (Check out Moneybunny books). As children get older and enter their teenage years, it could be explaining how a credit card works, or what you’re doing at the start of each year to file taxes. As they reach early adulthood, a quick conversation on income opportunities or career could make sense. Whatever you feel comfortable bringing up can go a long way. Providing kids an opportunity to hear you and ask questions can get the ball moving in the right direction.

Educate

This strategy goes hand in hand with the “communicate” strategy. The fact of the matter is that the vast majority of Americans don’t do any major long-term financial planning because they don’t even know where to start. They’ve never been taught about what a 401(k) or Roth IRA is. They don’t know the difference between a stock or a bond. They likely haven’t even heard of the phrase compound interest, and if they have, they certainly don’t fully understand the power of it. This results in them usually doing whatever is easiest to implement, or potentially nothing at all. Also, as discussed in the previous section, most of this education isn’t happening at school. It’s up to you to teach it at an early age. As your kids approach adulthood, taking the time to explain these concepts at a high level will provide them the confidence they need to start implementing strategies at a young age. I’ve even had numerous clients invite their adult children into our regularly scheduled review meetings to expose them to these topics.

Participate

Communicating and educating your children about finances provides them the tools they need to be successful, but nothing sets kids up for financial success like having a little skin in the game. I’ve seen clients do this a number of ways, but giving kids real hands on experience with financial topics at a young age can drill home these topics better than any discussion can. I’ve included a few of my favorites below, but there are countless other ways to get your kids involved in their own finances while simultaneously building their habits and net worth at an early age.

• Opening a Roth IRA or investment account for them.
• Buying the stock of a company that makes a product they use at each birthday (Example: Nike for the athlete. Disney for the kid who loves movies).
• Having them help with their own taxes from a summer job.
• Requiring them to set aside 10% of any summer job earnings into a savings/investment account.
• Involving them in family charitable discussions.

At the end of the day, creating generational wealth requires more than just complex financial and estate planning strategies. Proper communication, education, and participation will give kids the tools they need to properly handle and build on the wealth you pass them.

Cleveland Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.