The role of financial literacy in generational wealth planning

Ensuring a smooth and sustainable transfer of wealth between generations means starting as early as possible. As advisors, we should aim to bring clients’ families into meetings together early and often.

But, the good financial habits that will lead to a smooth transfer of wealth from one generation to the next are not formed in financial advisors’ offices when heirs are well into adulthood. Beyond family financial planning meetings, I encourage my clients to begin instilling good financial habits in their children at home. Advisors who are serious about helping their clients with generational wealth planning should help clients begin the process at home.

According to a 2015 National Report Card on State Efforts to Improve Financial Literacy in Schools produced by the Center for Financial Literacy at Champlain College, only five states get an A for their financial education initiatives. A FINRA study released months earlier indicated that only 24 percent of millennials surveyed could answer four out of five questions correctly in a financial literacy quiz. 

The importance of financial literacy cannot be overstated. Yet very few students are receiving the education they need to leave school equipped to make the financial decisions that await them throughout their lives.

Teaching these habits to future generations is especially important when clients plan to pass on a substantial amount of money or assets. According to a 2003 study, 70 percent of family businesses fail to successfully transfer wealth from one generation to the next.

With five children and two grandchildren of my own and many multigenerational clients with a variety of unique circumstances, I’ve found several best practices for teaching financial literacy to the next generation. As your clients’ children head back to school this fall, equip your clients with the tools to give financial literacy lessons at home.

Elementary school

In my own household, we taught our young children the value of a dollar and the basic principal of compounding interest through our “Daddy 401k Program.” Our elementary school-aged children had opportunities to earn money through chores, allowances and special projects. We explained to our children that they could spend the money as they earned it, or they could invest it in the “Daddy 401k,” resulting in more money at a later date.

Typical vehicles for programs like this are UTMA (Uniform Transfers to Minors Act) accounts, UGMA (Uniform Gift to Minors Act) accounts or 529 plans, as appropriate.

I encourage clients to begin programs like these to lay the foundation early on for their children to see the full potential of each dollar they earn.

High school

Help your clients teach their teenage children to spend their money wisely. Teenagers should begin the habit of dividing the money they accumulate through part-time jobs, gifts from family and friends, or allowances. For high school students, I suggest a basic formula of 10 percent for a charity of their choosing, 50 percent for saving and 40 percent for spending.

I encourage clients to give their teenagers the opportunity to pay for their own things and help them learn how to balance a checkbook. As parents, we hate seeing our children go without things that they want, but cutting off handouts at this age will help them build a financial foundation that will last.

Parents should resist the urge to help teenagers make ends meet when their income cannot buy them everything they think they need. Learning to budget and stretch funds now will help them as they move to adulthood and will give clients peace of mind if they intend for children to inherit wealth down the road.