It’s Always a Good Time to Talk About Money

Like religion and politics, money has traditionally been one of the topics people assume should be avoided in polite conversation. Parents are also reluctant to about finances in front of their children so as not to worry them. Couples avoid money discussions to escape conflict and tension. Even when their children are adults, parents often resist discussing money because they worry that their kids just want to know how much they’ll inherit.

Not talking about money, though, may be one of the reasons why so many people have a difficult time managing their finances. According to surveys by the Employee Benefit Research Institute, 50% of people do not save regularly for retirement, 48% do not have emergency savings, and 74% do not have an up-to-date will.

The amount of money people have doesn’t influence how well they manage it. In fact, the quote often attributed to Andrew Carnegie about families going from “shirtsleeves to shirtsleeves in three generations” often applies. Even when wealth creators start from humble beginnings to amass a fortune, 70% of the time their families lose it all by the second generation, and by the third generation it’s completely gone for 90% of families. Sadly, lottery winners lose their newfound wealth even faster. One study of Florida lottery winners found that 70% had spent every dime of their jackpot within five years.

Impart Money Lessons as Early As Possible

The best way to combat all this bad money management is to talk early and often about money. Parents should start when their kids are young. Bring them to work so they see how you earn money. Pay them for doing additional chores, beyond the ones that are expected of them as members of the family. Have them clip coupons with you to reinforce the notion that money is a finite resource that needs to be managed. Open a savings account for them so they will learn the importance of accumulating money over time.

Ensure Young Adults Get Off to a Good Start

Once your children have jobs of their own – both with part-time jobs during school and their first full-time jobs after their schooling ends – parents can provide valuable guidance. Advise your children to understand their pay stubs and what all their pay deductions are. Encourage them to start investing for the future early and show them the benefits of time on their savings and investments – a commodity they’re fortunate to be rich in.

Follow the Most Basic Principles of Good Money Management

Of course, setting a good example with your own actions is the most powerful way to teach good money management skills. You can greatly reduce the risk of raising a child who will squander their money if your family follows the basic principles of good money management.

• Live below your means. Spending less than you earn every month lets you avoid accumulating debt and leaves you enough to set money aside for your future.
• Budget. Tracking where your money goes helps you make better decisions about how to put it to use. If the term “budget” seems too constricting, think of it as your “spending plan.”
• Spend on education. A study published by George Washington University in 2016 found that someone with a bachelor’s degree on average earns $2,268,000 over their lifetime, while someone with a high school diploma earns only $1,304,000 and someone without a diploma earns only $973,000. In other words, every dollar spent on a child’s education is a dollar well spent.
• Invest as much of your income per year as possible. Saving 10% to 20% of your income will increase the likelihood that your family’s long-term needs – like your retirement and your children’s college education – will be met.

Never Forget the Virtues of Delayed Gratification

Parents may often remind their children that if they don’t spend all their allowance on trivial things – like soft drinks and candy – and instead save at least a portion of it, over time they can gradually afford to buy something more substantial that they really want.

Many adults, though, forget this lesson. In fact, when people inherit money, the first thing they usually do is buy a new car. But consider this hypothetical example of what happens when two 30-year-olds inherit $100,000. Jane can’t believe her windfall and because she believes her finances are already in good shape, she decides to splurge on a high-end sports car that costs $83,390. If she invested the remainder of the inheritance, 30 years later she would have a car that no longer ran and $97,774 (assuming she earned 6% year). Meaghan needed new wheels, too, but she decided to take a more conservative route. She bought a car that cost only $23,070 and invested the difference. Three decades later, assuming the same return, she’d have $463,358. At 60, when she might be ready to start thinking about retirement, Meaghan would have a far bigger supplement to her nest egg because she’d exercised some wise fiscal restraint with her inheritance.

At OppenheimerFunds, we’re fully invested in providing advisors with tools and resources to enhance their clients’ financial literacy. Gaining more knowledge about financial topics is probably one of the best investments people can make.