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You Owe Your Children Financial Hygiene

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There are certain financial absolutes that come with achieving adulthood including: filing tax returns, understanding the basics of credit cards, mortgages and checking accounts, learning how to save and invest, and preparing for one’s retirement. I refer to these basic skills as financial hygiene. Far too many people achieve adulthood without any financial education. You’d think these basics of modern life would be taught in schools, but only a handful of states require financial education as part of the secondary school curriculum. Consider that in a recent survey of basic financial literacy, baby boomers averaged only a C grade, still, faring better than millennials who completely failed. In fact, only 40% of millennials even understand the concept of “interest.” As a society (and as parents) we are doing an awful job preparing our kids for their financial futures!

Financial hygiene is imperative in today’s world, and like most good hygienic habits they begin at home. It’s important to teach your children about money from an early age, because if you don’t it is likely that no one else will. Approaches vary from family to family, but an allowance tied to specific chores or opening a bank account to deposit cash gifts can teach valuable lessons about work and the importance of savings.

Unfortunately, as the survey cited above showed, young children are not always the only ones in need of a financial education. When it comes to kids, I have found it very effective to focus on the financial principles that will help the next generation grow, protect, and administer the wealth they ultimately will earn as well as inherit.

We have an organized approach to developing financial hygiene that we encourage clients to consider implementing, sometimes with our direct involvement.

I believe the best way to learn how to do something is through hands-on experience. I like to start by recommending an approach to understanding investments. Over the years we have counseled families on empowering the next generation by having the kids work directly with one of our younger investment professionals. We often suggest that parents gift their teenage and young adult children enough capital to allow them to construct an investment portfolio, perhaps with the kids kicking in some of their own money as well. The process includes opening an account with an investment custodian, developing an asset allocation and populating the portfolio with ETF’s and mutual funds. Occasionally, the kids may want to include some tech stocks in search of the next Apple or Amazon, which is fine with us. We also teach them how to read and interpret periodic statements, including assessing risk adjusted returns.

The process, even more than the outcome, provides newfound knowledge and experience that no book or seminar could ever duplicate. When the account is in their own name and it’s really their money, young people get interested in a hurry. I’ve seen several teenagers apply their “gamer” focus not only to engaging with seriously probing discussions about finance, but also learning financial ratios and googling annual reports and proxy statements!

When it comes to addressing financial education, every family is different; the comfort of seeding one’s child’s financial education varies greatly, because individuals mature differently. I have worked with childish 50-year-olds and very mature teenagers. The commonality is they all needed basic financial literacy.

When it comes to preparing our children to deal with the money they will earn and inherit, parents really have a serious responsibility to instill good financial hygiene. Now is a great time to start.


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