We spend a lot of time with our clients talking about personal financial planning issues that relate to their children. This might include the cash flow impact of having and raising kids, planning for their education costs, and planning for the transfer of their assets to their children in their estate plan. One especially difficult but very important aspect of this is making sure our clients’ children are ready for the real world (not the MTV version) when they graduate from college and move to the next stage of their lives.
Our children’s generation may be the first of many to experience a standard of living that is not higher than their parents. It is a challenging time and there are many risks that the next generation will face as they enter the workforce. In addition to a tough economic climate and high unemployment, they will face potentially higher taxes, reduced entitlements, and budget deficits here and abroad that will weigh on countries for years to come.
So how do parents make sure they are raising financially literate children who are well equipped to fend for themselves in the financial world? While there is no magic pill, over the years we have seen a number of areas that are critical to success in this area.
- Good budgeting skills – making sure you know where your money is going is critical to any financial planning that you do. With the influx of great online tools like Mint.com, this next generation can (with a little work on the front end), set up a process that is easy and gives them great information to make decisions about their finances.
- Live within your means – the end result of good budgeting is to make sure that you are not spending more than you bring in and that you save for longer term goals on a regular basis. Credit card debt, education loans, and other consumer debt is a real concern for today’s next generation of workers. If they are not able to completely avoid debt they will have to learn how to manage it carefully or they will be trying to dig out of a very deep hole for a long time.
- Start saving early – The power of compounding is very important. While it is hard to see the progress you are making when you are saving just a small amount of each pay check, taking a long term view is critical. Understanding the power of compounding really puts that small initial saving in perspective.
- Learn the basics of investing – Knowing the difference between stocks and bonds, the importance of a cash reserve, and what asset allocation means is critical to getting a good start. Being able to understand historical returns and put expectations in the proper context is also important.
We have an obligation and a desire to help our kids get off to a good financial start in their lives. Giving them the tools to do that is potentially more important than any amount of money we can put in their hands. Having been through this with my own children and seeing them grow into very responsible young adults, I feel well suited to help others in this area. We have worked with many of our clients’ young adult children, helping them get a good start financially. Chris is taking on a more active role in this area and can relate well to the younger generation as they enter the working world. He can help them understand the basics of investing and budgeting and developing a long term financial plan (and at a much lower hourly rate than mine!) We would be glad to talk with you about your situation and how we might be able to help with these important family financial goals.
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