Money Advice Every Parent Should Give Their Children
- July 20, 2020
By: Jonathan I. Shenkman, AIF®
One of the more common scenarios I encounter in my practice is sitting down with a seemingly highly successful young married couple who are struggling to reach basic financial milestones. They have a hard time maintaining an emergency fund, coming up with a down payment for a home, saving for their child’s college education, and participating in their employer’s 401(k) plan. At first glance, one wouldn’t expect these folks to be struggling financially. Many of these HENRY (High Earner Not Rich Yet) couples are earning over half a million dollars a year between both spouses and have great jobs with tremendous upside potential.
In truth, much of these financial pressures are caused by just a few poor financial decisions and lifestyle choices that could have been avoided with proper education. Unfortunately, most schools don’t have a financial planning curriculum. The burden of teaching financial literacy is left to parents. Imparting the below money tips to children starting at a young age can drastically change the child’s relationship with money and help secure their financial future.
A healthy relationship with money should start at a young age. While teaching budgeting, cash flow management, and savings are all important skills, few elementary or high schools students have the patience to sit down and discuss any of those topics. It’s far wiser to start with simply instilling an appreciation for the things one has: an iPhone, computer, car, family vacations, nice meal, new clothes, or any other luxury that may be in their lives. Teaching kids to be grateful through casual discussion not only reinforces a positive attitude towards money, but will also serve as a springboard for other financial related conversations. It will also open the child’s eyes to families that may not be as fortunate. That awareness and understanding is helpful beyond the world of just personal finance. As I tell my clients, financial planning is not only about the accumulation of wealth, it is also about the transmission of values to the next generation.
Student debt may be the single biggest financial mistake people make. Many high school seniors choose a university based on national rankings, campus life, or junior year study abroad options. In reality, college should be viewed as an investment towards a successful financial future. If a student needs to take out debt to finance their education, it’s essential that they have a well-defined plan on how they plan to repay it. If there is no repayment strategy in place, it can have a domino effect that will impact the rest of their life. Cash flows will be tighter, the ability to save will be impeded, and lifestyle goals like buying a home and having kids may need to be postponed.
Thankfully, there are many affordable ways to further one’s education. This includes choosing an in-state school, going to community college for a couple of years, or choosing a school that provides the student with the best financial package. Failing to view your child’s college education as an investment can have the unintended consequences of saddling them with an insurmountable level of debt that will derail their financial future.
As college graduates enter the workforce and begin to make money, there is a natural desire to spend that money on more things. This temptation to spend more as one’s income increases is known as “lifestyle creep.” It’s important to understand that this mindset will not lead to more satisfaction. Instead, it usually will lead to more financial strain as one tries to maintain an increasingly expensive lifestyle.
One of the smartest decisions a young professional can make is to continue to live like a student until they bolster their financial reserves and get a handle on their cash flow. For those fresh out of college and accustomed to living with roommates, continuing in a shared living space will not impact their lifestyle, but will allow them to save more money for the next stage of life. After college, I lived in a dilapidated townhouse in a less popular neighborhood with nine roommates. Looking back years later, it doesn’t seem like a pleasant way to live. However, I saved money on rent and utilities, had a wonderful social life, and was able to max out my 401(k) on an entry level salary. It turned out to be both a great life and financial decision.
When starting a job for the first time, some of a new hire’s biggest priorities should be making sure their health insurance is squared away and that they are contributing to their firm’s retirement plan. It’s astounding how many people decide not to do the latter. They often justify this decision because their employer doesn’t match their contributions or they need the cash flow for other expenses. In reality, the matching is just the cherry on top of what is a wonderful way to save for your future in a tax efficient manner. As for needing the cash flow, I often find that after careful review many find other expenses that are expendable or simply a case of lifestyle creep.
A key component of investment success boils down to one’s time horizon. As a 22 year old first entering the workforce, your 40+ year time horizon is your biggest asset. In order to capitalize on this asset, it is essential to enroll in one’s 401(k) and contribute the maximum amount, if possible. Once the money is automatically contributed, you probably won’t miss it. Odds are you will just learn to live on less. Over time, the power of compound interest will work its magic and increase your nest egg exponentially to provide for a comfortable retirement.
Many sophisticated people don’t understand how credit cards work. Credit cards exist to ease transactional burdens and allow people to shop without carrying wads of cash. The added benefit is to build your credit score. A good credit score impacts many areas, including allowing one to get lower rates on borrowed money (e.g. to buy a house or start a business), makes getting approval to rent a house or apartment easier, and potentially lowers auto insurance rates. Building your credit score is as simple as paying off your full credit card balance, on time, every month. The credit card issuer reports each monthly payment to the credit reporting agencies. This will help increase your credit score because it shows lenders that you can manage credit responsibly.
Many folks believe it’s only necessary to pay the minimum balance every month. This is the wrong approach. Interest on credit cards is astronomically high and can get out of hand very quickly. Think about credit card debt as a rapidly growing cancer to your financial health. Missing just a few payments on your credit card bills can lead to a large debt burden that can quickly derail you financially. It’s imperative to use credit cards correctly or it can be devastating.
Many parents may feel overwhelmed when it comes to providing sound financial guidance to their children. This may be because they don’t have expertise in this area or because they’ve made poor money decisions themselves. In reality, merely understanding the above points may be enough to change the financial trajectory of many young adults and lead them to build a successful financial future.
Jonathan I. Shenkman, AIF®Title:
Associate Director - Investments
OMEGA Portfolio Management
This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice. Adtrax #: 3142334.1