As an investment advisor and wealth planner, Sigma represents many clients who have already accumulated substantial savings through hard work, responsible spending habits, and sound financial decisions. However, to many parents’ dismay, their children are not following their example. Compounding the problem, many parents have a natural tendency to help their kids financially. Yet, in doing so, these young adults fail to learn valuable life lessons and the parents’ retirement plan may also be impaired. Thus, it is sometimes a balancing act between supporting one’s children without squandering one’s retirement plan in the process.
The best way to avoid raising financially irresponsible adults is to educate children early about saving and investing. Good financial habits start early. If you give your child an allowance, make them earn it! Encourage them to save a percentage of every dollar received whether earned or received as a gift. Discuss a percentage that should be set aside for some future goal. Building these habits early can build a lifetime of financial security.
Once children learn how to save, they need to be taught about investing. One method is engaging kids in a stock picking game, an assignment often found in high schools and colleges (in fact, this assignment led me down my career path). Typically, students are given a hypothetical dollar amount to invest in a stock portfolio after doing their own research. At the end of the semester, whoever has the highest portfolio value wins. Although this project is valuable, a semester is hardly enough time to measure the quality of a stock portfolio and it is important to teach the long-term nature of stock investing.
Better yet, we encourage clients to actively engage in a similar exercise from the time their children are in elementary or middle school. Typically, children will pick a stock or two that they can relate to, such as Disney, Apple, Mattel, etc. Family discussions may include reviewing these companies’ products, recent news reports, share price performance, etc. If given enough time, the share price will appreciate in value and the kids can see first-hand the power of compounding. They may also learn patience and the importance of tolerating market volatility.
With a foundation set, it becomes much more natural that when these children enter the workforce, there is an inclination to immediately set aside a small portion of their wages into a savings account, 401(k), IRA, etc., knowing that these funds are being set aside for some important future goal.
All questions and comments are welcome.
Suzanne M. Antonelli, CFP®