Nurturing financial literacy is a lifelong process. None of us are born knowing what something costs, how hard it is to earn money, save money (i.e. budgeting and investing), and how taxes impact our decisions. There are different lessons we can learn at different ages. Engaging together in financial literacy and being educated together is a great way to tighten the bond between family members, especially across the generations.
When the intension is to pass the baton over to the next generation, financial literacy is a must. And this begins at an early age. It begins as early as when your child points at something at the grocery store and speaks the words “I want”. Every time there is a purchase to be made in the presence of a child is an opportunity to give a financial lesson.
Let’s take a pause and celebrate how far you’ve come on the journey. You focused on the healthy characteristics of a family enterprise. You’ve shared your vision with the family. And you don’t intend the family assets to be retained in a single pot. Breath. Tap yourself on the back for a well taken journey to date. Now comes the question of how prepared are my children for inheritance? Many parents of wealth ask, “How much money will ruin my child?”
Money does not change the child, it amplifies them. Like the super serum Captain America was given, it amplified all his fine qualities and made him better overall. On the other hand when the serum was given to the super soldier who had some innate bad qualities, these qualities were made worse. The same happens with money.
Now note that because you have an ability to make money grow and you’ve succeeded at every entrepreneurial endeavour and the concepts of finance come second nature to you, it does not mean your offspring’s have the same ability. For many the concept of finances is foreign and very difficult to grasp. And imagine if you only start talking about finances when your children are well into their 30’s or worse past their 50’s.
The importance of financial literacy and stewardship is preparing the next generation because skill sets are not automatic, and are so essential to become a responsible, independent grown up.
Financial literacy begins with understanding your relationship with money. Are you a hoarder, are you a spender, are you a giver, are you an individual who will never spend your money but spend other’s money without a second thought? Awareness is the first step to this learning journey.
As a parent to three children myself and coming from a business family where my children would be the 3rd generation of wealth transfer I did not want them to be the statistic of “Shirtsleeve to shirtsleeve in 3 generations.” I welcomed all the readings on this topic to best prepare my children and share the importance of financial literacy. My goal is to raise great stewards and owners of wealth and I learned early on that these lessons begin early in life.
Money did not become a taboo topic in our household. We spoke about who hoards and who saves and the advantages and disadvantages of both. I included my children in the purchase of our family car and the planning of our next family vacation. My children did not have a cellphone in elementary school even though they came home saying “Everyone has one!” They learned boundaries and that money funds are not limitless. Every purchase is made knowing where the funds come from even being added to the smart phone family plan. My children were responsible for chores around the house and received a weakly allowance while in elementary school. With this they were introduced to a 5-wallet system that taught then certain values.
- There was an Angel wallet: which ties to the value of giving. Whenever the school had a fundraiser or there was a cause they wanted to give to, the Angel wallet had the funds from which they can give and every week part of their allowance went into this wallet and by the end of the year a yearly donation was made.
- There was the Plan wallet: which accumulated funds for future purchase. This worked with the value that not all purchases are instant gratification. Many things in life you need to work towards and when you set a goal, work out some calculations, you work towards something that makes the purchase that more rewarding. These purchases included things like a new bike, a skateboard and a new video game.
- There is the Learn wallet: which focused on the value of continual education and that education is more than what you learn in the classroom during school. This included purchases of book on topics of interest and learning additional skills such as typing, or an app that taught how to play the guitar.
- There is the Wealth wallet: which accumulated money that once a year would be invested and began the learning on the importance of compounding and not touching your capital. This was the valuable lesson to learn that your money can work for you.
- There is the Fun wallet: which tied to the value of living a balanced life. All work and no play does no one any good. For the hoarders, this is a valuable lesson that at the end of the month what was in the Fun wallet had to be spent. This can be treating themselves to ice cream or having a night out at the movies.
Later when my children were a little older I would read them books like: Robert Kiyosaki’s Escape the Rat Race: Lear How Money Works and Become a Rich Kid. This taught my children about assets and liabilities and how to look for opportunities. You can never start too young to teach some valuable entrepreneurial lessons. In fact, learning personal finance and budgeting from an early age can go a long way in your younger adult years. Or there is the book How to turn $100 into $1,000,000 by James McKenna and Jeannine Glista. After learning about Earn! Invest! Save! There is a chapter on how not to become a millionaire and it outlines 5 points:
- Earn less than you spend
- Load up on debt
- No plan
- Fall for cons, scams, frauds and flim-flams
Once my children turned 18 years old I sat them down and had them create their own budget for University. They also created their balance sheet and personal self worth statement. In my case, I gave them the capital and the growth of their RESP and with that they were responsible for their university finances. If they fell short, they were to present me with their budget and explain why they did not meet it. At this age they would also learn to file their first tax return and have a basic lesson on tax 101. I introduced them to our wealth manager and moved their investment account that was in trust to their name directly. This empowers them to take personal interest in their investments and have a talk with the wealth manager to create their own investment plan. And by 21 they would have sat with a lawyer and drafted their first will. All part of the journey to financial literacy and being a steward of the family wealth.
What are the main components of financial literacy? Financial literacy includes the following five components:
- Creating a budget and understanding cash flow
- Prioritizing Savings, earn more than you spend
- How investments work and the power on compound interest
- Debt Management
- The impact of taxes
- Identity Theft and Financial Safety
Who needs financial literacy?
Children, teenagers, and adults should all be familiar with financial matters. Young children can be taught many financial literacy components. As they get older, they become more advanced.
You don’t need much experience to learn these concepts. You can master finances over time if they are broken down into small steps and continually spoken about.
Why is financial literacy important?
The importance of financial literacy lies in its ability to prepare you with the skills you need to manage money and avoid financial difficulties. You leave yourself vulnerable to poor financial habits if you do not understand how finances work. It can cause you to be the generation that brings you back to “shirtsleeves to shirtsleeves in three generations.”
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki
Decision Tree Question: Is the rising generation prepared for inheritance?