Financially Helping the Next Generation

FINANCIAL RECKONINGS

By Clark Troy
Columnist

When parents typically list out their financial goals, they tend to look something like this, in rough order of occurrence, not adjusted for level of importance:

• buy a house
• raise children and support their interests
• buy a larger house, if necessary
• go on some enjoyable family vacations
• send kids to college or alternative educational pursuits
• retire and enjoy life
• support charitable causes
• provide for end-of-life needs, medical and funereal

Last, but not least, people will list out their desire to leave a little something for their children, to make things easier for them. They may be dimly aware that things aren’t quite as simple as that, that inherited wealth carries with it its own unique challenges, such as entitled kids who lack the skills, motivation and stick-to-itiveness to take care of themselves. But they nonetheless want to leave them something, at least as much as they received themselves if not a little more, often with a goal of helping their kids put money down on a house and start their own families—and perhaps help them start saving for their own kids’ college.

In the end, what people really want is not to have to worry about their kids, to know that they will be able to take care of themselves. In her book Raised Healthy, Wealthy and Wise, Coventry Edwards-Pitt—who works with families of considerable wealth–notes that all the second- and third-generation kids in her practice who grow up confident and comfortable with family money go through periods where they go without safety nets and learn to stay aloft through their own wiles.

Which means that financial planners have very valuable roles helping parents impart money lessons to kids, many of whom have limited interest in hearing any more of this kind of stuff from mom and dad and perhaps think that their parents have specific control-oriented agendas that they have heard all too much about their “whole freaking lives.” Just as doctors, nurses, teachers and clergy provide somewhat objective confirmation that mom and dad aren’t just pulling wisdom out of their butts, families’ financial teams confirm and deepen the things mom and dad may tell kids while also providing important correctives to facets of financial life where parents themselves lack knowledge and discipline.

In my practice I end up talking to client children about a wide range of financial topics, from what kind of credit cards they should get to initial forays into the alternately very exciting and all-too-foreboding world of investing and the passions, fears and foibles it arouses. I’ve talked to young people about how to search for jobs and to build and leverage networks.

Often I share with them my own tribulations and the winding road of my own career and lessons I learned about myself along the way. Often the most valuable lessons I can impart are around taxes, the difference between ordinary income and investment income, the power of compounding and deferral. Somewhere in there, admittedly, their eyes may start to glaze over a little, but it’s always fruitful to lay down a light base of tax awareness and a consciousness of the complex tradeoffs between public and private goods implicit in the tax code.

One facet of setting kids up for financial success that falls squarely in the parents’ court is that of setting consumption expectations. Most parents sense this, but it bears repeating: kids come to think that what they have is normal. If you live in large houses, drive expensive cars and vacation lavishly every year, you’re potentially setting your kids up for a harsh dynamic as they proceed through life stages, particularly in a nation where “generational progress”—doing  better than mom and dad—is, for some reason, fetishized.

As if there weren’t enough things to compete with in our immediate environs, many kids will consider themselves successful only if they can get back to where they started. If they don’t make it, they may view themselves as failures. Some may be able to set their own goals and escape the weird logic of generational progress, but not all.

To belabor the obvious, we need to leave kids not just with money, but more importantly with a relationship to money, an understanding of what it is and is not, and toolkits and frameworks for relating healthily to it and employing it in their lives. This is by no means a one-size-fits-all type of process, though there are patterns and commonalities imposed by culture. But parents don’t need to, and often can’t, do it alone.

Clark Troy was born in Durham and educated in the Chapel Hill-Carrboro City Schools, then elsewhere. He is a financial planner at Red Reef Advisors and may be reached at clark.troy(at)redreefadvisors.com. When not working, he reads, plays sports, naps, drinks coffee and plays guitar, not necessarily in that order.