“It’s not how much money you make, but how much you keep, how hard it works for you and how many generations you keep it for.”
-Robert Kiyosaki, Author of Rich Dad, Poor Dad
Financial literacy is an essential life skill for the continuity of your family wealth. We define financial literacy as having the confidence and ability to make responsible financial decisions.
We work with many successful business owners (wealth creators) and find it very common for them to hire skilled professionals who help manage their finances, companies, and investment portfolios. But who is training the next generation of wealth inheritors: your spouse, children and grandchildren? Your answer to this question will determine the longevity of the wealth you are working so hard to build.
The largest transfer of wealth in human history is underway. In Canada alone, it is expected that $1 Trillion will transfer from baby boomers to Generation X and Millennials by 2026[1].
For over 20 years, FLC has been committed to building financially literate generations to better prepare heirs and beneficiaries for the responsibilities of wealth. We believe there are 3 important reasons why family financial literacy needs to be prioritized. We hope this article will help you ensure your wealth will have a positive lasting impact on the lives of your children and grandchildren.
Reason #1: The Circle of Life
My 18-month-old son loves to mimic what he sees on TV. Lately, he has been raising up his favourite stuffed toy in the air “Lion King style” and that got me thinking that one day he too will have his own household and the financial responsibilities that come with it.
It’s important to prioritize family financial literacy because money habits are developed in childhood based on how children see parents manage, communicate, and behave around the topic of money. Research from the University of Cambridge found that many concepts relating to financial behaviours will have developed in children by age seven[2].
Children need to learn that wealth is not limitless at an early age. They also need hands-on experience managing their own personal finances so they can achieve their life goals in the future. We recommend you start with the 3-step approach to introducing financial literacy to your children.
Reason #2: Life can change in an instant
“Confidence comes from being prepared.” – John Wooden, UCLA Coach
The past 2 years have taught us that our health—as well as the health of our family members—is fragile. A person can suddenly experience the loss of a parent, spouse or partner and find themselves having to make daunting financial decisions.
The goal behind prioritizing family financial literacy is to help your family members develop a stronger understanding of basic financial concepts. That way, they can feel more confident and be better prepared to manage finances.
One of the easiest ways to get this started is to include your spouse and children in meetings with your Financial Planner, Accountant and/or Lawyer, so they can build and strengthen relationships with your trusted advisors.
Reason #3: Wealth tends to only last 3 generations
According to NASDAQ research, “70% of wealthy families will lose their wealth by the second generation and 90% will lose it by the third.”[3].
In our experience, the core reason for the dilution of generational family wealth comes down to the lack of communication. To improve communication families need to prioritize the following:
- A written financial plan
Families need to have a regularly updated financial plan that communicates your family’s present as well as future needs and goals by integrating financial, tax, retirement, and estate planning.
- Family meetings
Family meetings provide a platform to openly communicate family values, financial goals, and priorities as well as solve any challenges that arise. When structured effectively, family meetings encourage inclusion by giving each family member a voice in how decisions are made.
A growing number of our clients are also creating family constitutions to anchor their family meetings. These documents clearly lay out the policies and process for how family wealth will be governed across multiple generations.
- Hands-on experience
Although attending workshops and classes can be good for increasing financial awareness, there is no substitute for practical hands-on experience! Family financial literacy needs to go beyond learning concepts and include practical age-appropriate action steps.
Making family financial literacy a priority will be a fruitful and rewarding experience. Every parent wants the best for their children and to give them the tools they will need to thrive and reach their life goals. It is never too late to start giving your children and their children the gift of financial literacy.
[1] MacLean’s. Generational wealth often comes in the form of trust funds. Does it also include grocery runs?
[2] Whitebread, D. & Bingham, S. The Money Advice Service. Habit Formation and Learning in Young Children
[3] Kleinhandler, D. NASDAQ. Generational Wealth: Why do 70% of Families Lose Their Wealth in the 2nd Generation?