Many clients come to us believing that the number one reason their kids are struggling and/or are acting entitled is because of their lack of financial literacy. While we believe that financial education is a sizeable piece of the puzzle, it is not recommended to begin by preparing future inheritors with budgets, investment strategies, and lines of credit because there likely won’t be any context as to how wealth actually brings meaning to a young person’s life. It’s best to start with conversations around money and a thoughtful approach to framing wealth.
Once the stage is set, financial literacy can absolutely be a key part of raising competent and confident stewards of wealth. Only 16 percent of high schools in the United States require a financial education course to graduate, and some studies show that the adult financial literacy rate in our country is just 57 percent, slightly above the rate in Botswana (1. NPR, 2019; 2. Investment News, 2019.)[1]
The responsibility falls on parents to provide this information. Oftentimes they learned the ins and outs of finances through trial and error … or did not learn at all. I was once discussing a financial education plan for a pair of college-aged siblings with their mother and mentioned credit scores. She said she did not think it was necessary to cover this topic since the family’s net worth was in the hundreds of millions, but she agreed to check her credit score in the spirit of full-family education. She was shocked to see a low score. Digging deeper, she realized she was often late on paying credit card bills. She shared with her children that she, too, was learning and modeled that it was something the family was learning together.
To support a full-family approach to becoming financially literate, here are some best practices and frameworks to consider.
- Financial education is about lowering anxiety, not raising it. When I ask young adults to define what a budget is, they generally use words like limits, rules, and buying less. I can usually feel their anxiety about what a budget may mean for their lifestyle. Feelings of resentment towards their parents can also rise to the surface What did they do wrong to receive this punishment?A budget doesn’t have to be the enemy. Rather, a budget should be viewed as two things: 1. A plan for your money so you can do/buy more of what you love, and 2. A way to practice managing cash flow. As with most financial topics, it is important to reframe the conversation as a way to take control of what you have and get more of what you want. (For a full list of resources to help teach financial literacy, visit Cresset’s website).
- Begin where they are without making assumptions. You might think that having an MBA, a successful career in venture capital, or a thriving business would indicate that person is financially literate. However, time and time again I find that young people with impressive CVs are just as likely to be confused by credit scores and how to open an investment account as their teenage cousins. When introducing financial concepts, always begin with the basics. If you are worried that they will take offense to introducing a beginning level of information, explain that you are starting at the beginning for your sake so you don’t forget the key points.
- Begin with the “top 10”. Financial literacy can mean many different things to different people, but the topics that seem to be relevant to most include goal setting, budgeting, credit, credit scores, compound interest, salary and negotiations, taxes, insurance, fraud and privacy, and investing. Begin with the topic(s) that you can implement in real-life situations quickest, such as teaching about budgeting through an allowance.
- Use teachable moments and experiential education. Young people who live in one of the few states that mandate financial literacy in high school often tell me that the education was dry and felt irrelevant. The best way to help kids relate to a lesson is to live it. Some moments in life, such as getting a pet, a car, or a new apartment, lend well to lessons in managing cash flow, negotiating, and even credit scores, but also look for opportunities for your kids to get involved with planning family vacations, back-to-school shopping, talking through the pros and cons of a new job offer a family member received, or helping them invest a small amount in cryptocurrency and having weekly check-ins on how the asset is doing.
- Let them fail. While the strategies above aim to help young people bypass painful and costly mistakes, some lessons are best learned through doing things wrong. Whether it is a hit to their credit score, an overdraft, a loss in the stock market, or money left on the table with a salary negotiation, these lessons are best learned early when there is time to recover and apply the learnings throughout their lives.
[1] https://www.npr.org/2019/01/23/687924531/money-moves-the-push-for-financial-literacy-in-schools (Source: Next Gen Personal Finance)
https://www.investmentnews.com/financial-literacy-an-epic-fail-in-america-78385 (this one references Source: Standard & Poor’s Global Financial Literacy Survey)
To explore how best to begin the “money talk” with your family, please contact Whitney Webb. Visit Cresset’s website for additional resources related to financial literacy.
