Strategies for Cultivating Generational Wealth

Melissa Linn | CFP?SVP, Senior Wealth Planning StrategistComerica Wealth Management

Key Takeaways:

• Financial literacy is a critical skill for young people to develop in order to succeed in adulthood and maintain generational wealth.
• For young children, focus on exposure and foundations; for teenagers, focus on long-term thinking; and for college-age and early career adults, focus on independence and responsibility.?
• Some core concepts to cover include income, banking, expenses, savings, investments, budgeting, credit cards, retirement and taxes.?

When it comes to building and maintaining wealth, you are your child’s first financial teacher.?

Financial literacy is a critical skill for young people when it comes to building and maintaining generational wealth. As children grow and mature, they’re exposed to money decisions that shape their understanding of everything from income and expenses to budgeting and saving. By early adulthood, your child should have a foundational knowledge of personal finance. Adults in the early phase of their career face increasingly complex money decisions, navigating 401(k) investments, taxes and more. Knowing how to assess their finances will set them up for success as they enter the workforce and it will grant them a better understanding of estate planning, when the time comes. Unfortunately, many young people don’t receive the financial literacy they need to succeed as adults. A recent report found high schoolers were only able to score a 48% on basic financial literacy questions.1 This lack of fundamental knowledge translates into hesitancy when using financial services and money mistakes that can have long-reaching consequences.

As a parent, you are uniquely positioned to help your child build financial literacy skills. 75% of young people learn financial literacy from a parent,2 highlighting the importance of developing a plan for your child today. In this article, we’ll walk through major life stages as your child matures and map these stages to critical literacy milestones. By the end of this article, you’ll walk away with a foundational plan you can tailor to the age and needs of your child.?

Let’s get started...

Young Children (Age 5 - 13)

At this age, focus on exposure and foundations.

Young children are in the process of forming their worldview and knowledge base. This is the perfect time to start talking about finances. Expose your child to important concepts and lay the foundation for thoughtful financial planning. By doing this, you’ll enable your child to take early ownership of their literacy and think critically about decisions.

Here are some core concepts to start with:?

Earning Income

Income is a good starting point for personal finances. Help your child understand the process of seeking out work and bringing in money. At this age, many parents set up a small weekly or monthly allowance to simulate earning money in exchange for doing household chores, such as making their bed picking up their toys. You can also help your child pursue small jobs out of the house or create an entrepreneurial venture. Mowing the neighbor’s lawn, babysitting and setting up a lemonade stand are ways your child can make early money. Preparing them for financial responsibilities and systems at a young age makes it easier for them to build on that understand as and charitable giving.

Banking

Once money is coming in, it’s time to talk about storing it. Here, you can introduce your young child to the concept of banking. A piggy bank or glass jar works well for elementary school-aged kids but as your child grows, consider opening a basic bank or savings account. At Comerica, custodian accounts can be opened for your child at any age, savings accounts can be opened for children beginning at age 11 and checking accounts can be opened for individuals beginning at 18 years old.?

Spending Money (Managing Expenses)

Lastly, help your child form good spending habits. Family expenses, such as groceries and essentials, offer a great opportunity to discuss costs and tradeoffs. For example, if they see a toy they want, you can explain purchasing the toy requires a certain amount of money. And if you spend your money on a toy, that money is no longer available to be spent on something else they might want later. You can also include your child in basic family budgeting. Highlight the balance between income and expenses, as well as the role of saving and charitable giving.?

Teenagers (Age 13 - 17)

At this age, focus on long-term thinking.

Teenagers are beginning to picture their future. This is the perfect time to help them embrace the long-term thinking needed for many financial decisions. Expose your children to research, analysis and putting together a plan. By doing this, you’ll enable your teenager to think through long-term impacts and achieve financial goals.

Here are some core concepts to start with:

Career

Early career decisions have long-lasting financial impacts. During their teenage years, your child should start thinking about their career goals and ambitions. Questions to consider may include:

• What does the day-to-day look like?
• What education and experience would they need to break in?
• What salary and lifestyle could they expect from their desired career?

These questions can help your teenager begin formulating a career strategy. For older teens, summer internships or volunteer opportunities may become available and are a great way for your child to gauge if the career path they have in mind is right for them.?

Savings

Delayed gratification is difficult, even for adults. Help your teenager practice by saving up for a larger than usual purchase. To reach a financial goal, such as buying their first car or paying for a trip, they’ll have to work hard and plan. These are valuable habits that pay long-term dividends.

Investing

Prudent investments are essential to a strong financial plan. At this stage, help your teenager dip a toe in the investment waters. Discuss investment types, diversification and risk. Then, pick a stock and track it over weeks or months. Seeing the ups and downs of the stock will help your teenager think about important investment concepts. It also serves as a good opportunity to teach them the relationship between growth, income and realized gains/losses.

Budgeting

In a few short years, your teenager may be living outside the house. Whether they’re moving away for college or getting an apartment with friends, budgeting will be key to financial success. Sit down with your teenager and talk about their current needs. Put together a realistic sample budget of what living out on their own would look like.

College-Age and Early Career (Age 18 - 24)

At this age, focus on independence and responsibility.

College-age and early career adults are stepping out of your shadow. This is the perfect time to help them embrace independence and the responsibility that comes with personal finance ownership. Help your young adult navigate advanced literacy topics, such as credit, retirement and taxes. By doing this, you’ll help set them up for financial success.

Here are some core concepts to start with:?

Career

At this stage, young adults typically begin navigating the job market and will need to understand the market value of their job positions, as well as learn how to negotiate salaries and benefits. Establishing this way of thinking at the beginning stages, could help advance in their careers.

Credit Cards

Responsible credit usage can help your young adult prepare for their financial future. A good starting point: opening their first credit card. This establishes credit history and gives them a safe space to navigate purchase and repayment.

(Small) Mistakes

Everyone makes financial mistakes. At this stage, don’t be afraid to let your young adult make a few small ones. Missing a payment, or spending too much in a month, can help them experience the consequences of financial irresponsibility in a low-risk environment.

Retirement

As soon as your young adult begins their first full-time job, they’ll need to think through retirement savings. Come alongside them to talk about employer-sponsored retirement programs, Roth and Traditional IRAs and contributions. Make sure your young adult understands the power of compounded investment and taking advantage of employer matches.

Taxes

With income comes taxes. In their college and early career days, your young adult will start navigating tax returns. From withholdings to tax rates, terminology can be confusing and overwhelming. Be there to support your young adult as they budget for tax payments, gather tax documents, and file their returns.

Comerica is Here to Help

Comerica Wealth Management can help you and your children navigate every stage of the financial journey. At Comerica, our team takes the time to understand your needs and align them with world class products and services. Reach out to a Comerica Wealth Advisor today to see how we can help prepare your child for their financial future.?

1Turner, T. (2023, February 3). 47+ Fascinating Financial Literacy Statistics in 2023. Annuity.org . Retrieved April 18, 2023, from https://www.annuity.org/financial-literacy/financial-literacy statistics/#:~ :text=62%25%20of%20teens%20said%20they,they%20learned%20from%20their%20parents.

2youth.gov . (n.d.). Facts about youth financial knowledge & capability. Facts About Youth Financial Knowledge & Capability | Youth.gov . Retrieved April 10, 2023, from https://youth.gov/youth-topics/financial-capability-literacy/facts

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