What do you do when your college-age children, whose financial acumen is typically limited to managing the modest income from a smattering of summer jobs, are in line to inherit a sizable sum? That’s the predicament Don, a longtime Schwab client living in Cincinnati, was facing late last year.
Don was on the verge of selling his publishing company for some $40 million and knew he’d one day be passing down a large portion of those proceeds to his two kids. The problem? How to ensure they knew how to manage the money before it hit their hands.
That’s when he approached LisAnne Beard, a certified financial planner in Schwab’s Denver-based Wealth Strategies Group, for help educating his offspring about the basics of finance and investing. He wanted to share his own experiences with his kids his successes, his failures and what his financial situation might mean for them.
In a series of discussions, LisAnne and Don explained the fundamentals, like compound interest, diversification, dollar-cost averaging and the eroding effects of fees. Then LisAnne helped his kids set up investment and retirement accounts of their own.
“It might seem comical that I helped Don’s children—who would one day be multimillionaires—learn the importance of saving for retirement,” LisAnne says, “but that was part of Don’s plan. He wanted his kids to understand the true value of money, not just take it for granted.”
Lead by example
Not all families are as financially fortunate as Don’s, but LisAnne believes that all parents, regardless of their net worth, should prioritize conversations about money with their kids. “Most adult children have a better appreciation of financial independence—and the hard work it entails—when their parents share their own stories,” she says.
That was the approach Julia, a 57-year-old mother of two living in Atlanta, took with her own son, who’d recently graduated from college and was about to embark on his first real job. Eager to impart her financial wisdom—and not just write another check—the Schwab client helped the 22-year-old develop a budget, which included saving for retirement.
At first her son was dubious about sacrificing for such a far-off goal—until Julia shared her own experience. In the early 1980s, she and her husband were both employed at a firm offering a 401(k) plan. At the end of four years, Julia had socked away $18,000, while her husband had forgone contributions entirely. “Today, that $18,000 is worth more than $225,000,” Julia says. “My husband still kicks himself for not saving even a little each month.”
Talk early—and often
LisAnne recommends starting money discussions when children are still young. These conversations should cover concepts such as living within your means, saving and investing, and giving back. They can become more detailed as your kids mature.
Take advantage of opportunities to demonstrate how money works in the real world. For example, if young children want a new toy or game, encourage them to save up their allowance in order to buy it. If they need to borrow money for larger purchases a bit later on in life, have them pay it back with interest. The goal is to make money tangible, rather than abstract.
As with any sound investment, LisAnne believes all parties involved will reap returns from these conversations. “It’s really rewarding to see your children grow into responsible adults,” LisAnne says, “and successful money management is a big part of that.”