Step 2: Take a lifelong view toward financial literacy
Every child, and especially those who will one day inherit substantial wealth, should have a tool kit of basic financial literacy skills by age 18, including concepts such as how to spend, how to save, how to give, and the value of a dollar.
This can start very early with an exercise as simple as a three piggy banks analogy. You encourage the child to divide any money he or she receives into three piggy banks: spending, saving, and community/charity. This shows the concept of different types or purposes of money as opposed to all being for spending. McKown explains that repeating this exercise can ingrain the habit of saving regularly.
By late childhood or adolescence, parents can add concepts such as what it means to invest, what companies one might invest in, and how you assess risk with an investment.
You can encourage children in high school to think about college expenses logically by examining the costs and coming up with a credible college budget. Ask them to consider basic questions: What will you need in order to make this happen? What will the family need to supply, and what will the student be expected to supply, in terms of tuition, books, room and board, transportation, and normal spending money?
And parents and grandparents can continue to encourage responsible, long-term financial responsibility by giving young adults an incentive to begin saving for retirement early. “If you’re able, offer to match what they save into a Roth IRA,” says McKown.
It’s also wise to coax contributions to a 401(k) at work; in the 2017 Wells Fargo Retirement Study, 89% of respondents with a 401(k) say they wouldn’t have saved as much without it.
Step 3: Show your kids how it’s done
“If you have a lot of money, you might not want to reveal it to your kids, thinking it’s going to dampen the motivation to work hard,” says McKown.
But the most important thing, he adds, is that your child’s healthy relationship with money begins with an open and honest relationship within a family that models good money behavior. These discussions can be challenging, but the fruit is well worth the labor.
“Stress education and expect them to do well in school,” says McKown. “The parents who do really well in teaching financial literacy lead by example — they tend to be savers, and they’re more careful with spending money. Remember to be that example.”