Macaroni Money Feature 1. Teach your children [well].
The song “Teach Your Children” that was released in 1970 by the folk group Crosby, Stills, Nash & Young has many meanings. As a finance professional, I tend to think of it as a good reminder that we need to teach our children certain values, skills, and behaviors so they become financially independent adults. This includes modeling the correct way to manage finances responsibly. I am excited to be able to utilize this column to express my views on personal financial management with regard to both children and adults. In working for a local financial institution, I am privy to many daily observations of human behavior with regard to money management. Personal choice and life decisions are so intertwined with financial well-being that the two cannot be decoupled. I will be addressing a number of different topics here in hopes of generating dialogue and sharing some best practices.
We have all heard the adage, “You don’t know what you don’t know.” This rings true in many facets of life, but for me it resonates very strongly with financial independence and wealth creation/transfer. I will share a story to illustrate this point more clearly. The story centers around two people who work at the same company here in Richmond doing the same job for 30 years (a rarity these days). This employer is very generous in providing competitive pay, a pension, and 401(k) retirement plan. Both employees smile when they receive a gold watch at their company retirement party as a thank you for their many years of faithful service.
The first employee leaves the workforce and enters retirement owning his home (no mortgage) and with a million dollars in his 401(k) plan. This person lives comfortably in retirement using his 401(k) withdrawals to supplement a pension and social security income. The other faithful employee enters retirement with a mortgage (he took equity out of his house over the years), no money in his 401(k) plan (he either took it out early with a penalty or borrowed against it), and he has to take out a loan in order to get through until his first pension payment is deposited. This person continues to live “paycheck to paycheck” even in retirement, and eagerly waits for monthly pension and social security deposits. The difference between these two people is that one was taught early on about the values of saving (early and often) and living within one’s means.
Not surprisingly, each cycle will continue for the subsequent generation because each person will pass on his learned behaviors to his offspring. Additionally, the employee that saved and lived beneath his means will have a decent amount of wealth to transfer via inheritance and life insurance, whereas the other person may leave behind only debts and tax liabilities. Thus, the cycle continues where one generation will start from a solid foundational footing while the other will start again from ground zero. For me, this illustrates the importance of teaching these behaviors early and often. This story has an even more urgent message if we think about the fact that pensions have gone the way of dinosaurs, and social security’s sustainability is clearly in jeopardy. The responsibility for retirement saving is clearly on the individual for these younger generations.
There is another trend that has been interesting (and concerning) to observe over the last few years. I have personally witnessed many parents (especially Boomers) who are shielding their teenage and young adult children from the financial realities of life. This is being done with the best of intentions but, again, good money management behaviors are not being passed on to the younger generation. All parents want their children to have better lives than they had. Times were harder for many folks in older generations, and they do not want their children or grandchildren to experience hardship. However, providing everything for teenage and young adult children does not help them develop good behaviors of their own, and instead is a disservice to their independence and livelihood in later years. If mom and dad always help their children to purchase cars, are joint owners on their bank accounts to cover overdrafts, pay their insurance, co-sign loans, gift down payments for houses, and purchase most of their personal effects – how will these teenage and young adult children be able to function and navigate their own finances as independent older adults?
It’s up to us to help ensure that our children, grandchildren, nieces, nephews, etc. learn positive, insightful lessons about money management. We need to get back to the basics with regard to sound financial behaviors. This includes learning the value of work at an early age, saving on a regular basis, living beneath our means, and sharing a portion of our resources with those less fortunate. In a world centered on instantaneous satisfaction, delayed gratification teaches meaningful life lessons over the long haul that help us to navigate life as adults. What values and behaviors are you teaching your children? What lessons are they learning from you about managing money? How can we model and demonstrate good financial behaviors for young people?
Teach your children well.
George Kite
Vice President & Chief Financial Officer
