Raising Financially Literate Kids: Transferring Knowledge Before Wealth

One third of Americans who receive an inheritance spend all of it within two years. Research shows a significant number of young adults are either financially precarious (32 percent) or financially-at-risk (36 percent). In fact, the average American becomes financially literate at age 28.

Are kids and young adults generally to blame for this? No, not really. The trouble with money almost always starts with the parents, who would rather talk about literally almost anything else. This is in part due to self-admitted low financial literacy, which is a major issue. Survey findings revealed:

• • • Half of surveyed parents rate their understanding of finances as a C grade or lower.
    • Two thirds of surveyed parents have discussed saving money with their kids, but just shy of half have discussed budgeting.
    • Fewer than a third discuss managing a credit score, dealing with debt, filing taxes, or investing.
    • And even fewer discuss student loans and retirement planning.

If you want your children to take care of your money responsibly, they need to learn about money early on in their lives. If you are not financially literate and confident, the best thing to do is learn more – and then transfer that knowledge to your children.

Encourage Your Kids to Be Financially Literate Early On

The strongest associations and habits are formed during childhood. When the brain is in its earliest stages, it aggressively absorbs information and tries to form as many synapses as possible. It’s only after taking in everything it can, the brain begins to prune and curate the information it keeps, on the basis of how useful it tends to be.

Parents intuitively know that their children have a much greater learning capacity while younger. After all, it is why children pick up second and third languages so easily. Nonetheless, that window begins to close as adolescence draws nearer, and early-learned habits begin to cement.

We are still plenty capable of learning new things well into adulthood, but the strongest habits are formed while we’re still at our youngest. It’s then, around ages five and up, that parents should focus on the basics to create a foundation of knowledge for later lessons on:

• • • Curating and managing investments
    • Dealing with debt
    • Planning for retirement

It’s not enough to teach your kids how to set up a bank account, count their money, and set aside a few dollars for a rainy day. Savings and basic money skills are important, especially since one third of young adults account for being financially literate, but don’t neglect these important topics either:

• • • Avoiding debt
    • Taking out a home loan
    • Using a credit card responsibly
    • Navigating the stock market
    • And knowing when, where, and how to file taxes

Be Transparent With Your Own Money Habits

Once your kids are old enough to comprehend more than the basics of earning, saving and spending money, consider cluing them in on basic financial habits and talking to them about how you manage your personal finances. The next best thing besides experience is second-hand experience.

What better way to teach your child about taxes and loan payments than walking the through filing a Form 1040, or going over basic credit score do’s and don’ts together? Once your teen is old enough to have their own credit card, teach them financial responsibility through managing payments, establishing credit and avoiding debt.

The best way to avoid raising a spendthrift is by ingraining useful money habits early on. Ultimately, the goal here isn’t just to help your child save a little extra pocket cash by creating a foundation for long-term investing. So that when the day comes and they’re left with a sizeable estate, they can make it last.

Should You Discuss Your Inheritance Plans?

If you're the fence about having the inheritance conversation with your kids, know that you’re not alone. Roughly 40 percent of parents with over $1 million in investable assets haven’t discussed their estate plans with their children. The decision to avoid talking about it largely stems from fears of complacency, entitlement, or perhaps laziness in anticipation of a big payday. Other parents fear their children might reveal critical information to friends and other family members.

On the other hand, avoiding the topic altogether also contributes to the problem that many inheriting children are surprised and sidelined by their inheritance, and woefully unprepared. Whether or not you decide to inform your kids about your financial plans is your business. However, an important consideration to make is whether your children are ready to receive an inheritance to begin with.

If you have assets and properties to leave as inheritance, you can be sure that your children are aware that they will inherit at some point. Leaving them in the dark may be acceptable, but take steps to ensure your kids understand what their responsibilities may be should they inherit, as well as how best to manage their inheritance.

For many wealthy parents, an important worry is the loss of self-reliance if children are given too much of an inheritance. In such cases, there are ways to design a strategic estate plan that would reduce the size of the estate over the years, via gifting and other methods. Whatever your inheritance plans are, it’s important to navigate these topics with the guidance of an experienced estate planning professional.