Money Management: Guiding adult children on their journey

The best strategy for raising children to be self-sufficient and strong stewards of family wealth is to have a running dialogue with them about money management from the time they are toddlers. But whether you do a good job with that or not, one day they’ll be all grown up, college degrees in hand, their whole lives in front of them, and facing a series of new and uncomfortable financial challenges. At that point, as a parent, you still have some work to do.

Whether it’s at Sunday dinner, at a family meeting, or on a phone or video call, you’ll probably need to counsel your young adult child on a number of financial issues as they launch their adult lives.

Managing debt for the first time

Many 20-somethings get their introduction to debt when they graduate from college with a well-earned diploma and thousands of dollars in student loans. College graduation is a great opportunity for a parent to sit down with a young adult and discuss the need to take a disciplined approach to managing and paying off debt, and the consequences if they don’t.

Make sure your child is addressing—and you are advising them on—the most pertinent questions. For instance, if they have multiple student loans, which loan should they start paying off first? Should they consolidate their loans or refinance them to reduce their overall cost of debt? If they have the requisite funds, should they just pay off the loans? Or would it be smarter to keep those funds invested and pay down the lower-interest student loans over time?

If they plan to pursue a graduate degree, will it be smart to take out more student loans? And how would that impact the debt repayment schedule for their undergraduate loans?

If you’ve placed a premium on your child being self-sufficient, debt will be their constant companion in the early days of their financial journey and a key component of managing their personal finances. So also be prepared to talk to them about:

• Developing good credit. You don’t want your child to be a “ghost”—someone with no credit history. To that end, they will need to open a credit card account in their name. You can walk them through that process and explain to them why, even though they may have significant assets, obtaining a credit card is difficult until they have income. And, initially, when they are granted a card, they’ll probably have a low monthly spend limit.

Counsel your child about the importance of building a solid credit history by paying off card-related and other debt in a timely fashion, and explain how that can impact their ability to make future major purchases on credit.

• Obtaining a car loan or home mortgage. Your child’s first experience with using debt to make a major purchase will produce a number of questions. Be prepared to walk them through the pros and cons of buying vs. leasing or renting. And, then, if they choose to buy, they’ll need guidance on how much of a down payment they should make, and to understand how their borrowing rate and loan term will impact the total cost of their purchase.

• The importance of using debt strategically. Talk to your young adult about the difference between good debt and bad debt. Good debt allows them to acquire something of value—such as a car, home or more education—often using money borrowed at an interest rate lower than what they can earn investing their liquid cash. In contrast, bad debt is buying on credit something of limited or fleeting value when  they aren’t disciplined enough to first earn the money to pay for it.

Budget? What’s a budget?

For young adults just starting out on their own, budgeting is a critical activity that will help ease their new debt management challenges. But for most 20-somethings, budgeting is probably also something they’ve never done before. So, when introducing the idea, expect some resistance and the need for guidance.

To address the resistance, impress upon them that budgeting is vital to managing personal finances well. It is the best way for them to ensure not only that they don’t add to their debt burden, but also that all their spending is aligned with their personal goals and values.

Budgeting help for young adults

When it comes to budgeting, many young people factor in their major expenses but tend to forget about the many incidental expenses that eat into their monthly income. Here’s a detailed budget worksheet you can share with your child.

Accumulating assets

For most young people, the asset accumulation phase of their financial lives takes a while to gain momentum. Low initial salaries, student loans, rent payments, and the need to keep debt under control all make it hard to save. But that’s why young adults need a savvy parent in their ear explaining the value of getting started on investing early, and how much faster they can build wealth if they start in their 20s.

Two areas where parents can provide valuable counsel are:

• Navigating employment benefits. The first questions you might get are: What’s a 401(k)? And, why would I put aside money I won’t use for decades when there are fun things I’d like to buy today, like clothes or entertainment?

Once you’ve convinced your child of the wisdom of 401(k) investing, you can assist them with questions about how much to invest—push for at least the company match amount— as well as the specific investment alternatives they should select.

• Choosing a financial advisor. The sooner your young adult starts engaging in financial planning, the better. A financial advisor can introduce them to investing and counsel them on a range of money matters. As a parent, one role you can play is to encourage your child to find a financial advisor who has a personality and counseling style that’s a good fit. You should also be sure your child understands the difference between fee-based and commission-based financial advisory services.

Managing risks (including some not-so-obvious ones)

Once your child is out on their own, they need to learn about insurance.

When they land that first job, more than likely their employer will provide health insurance. But your 20-something will have choices to make, and possibly need your help to make them. For starters, they’ll need to know about deductibles and how the plan option they choose will impact what they pay for coverage.

Other coverages they will need to know about include renters, auto and, likely at some point, homeowners. In each case, you can help them locate a good insurance company and agent.

Insurance is the answer to most traditional risk management challenges. But there’s one type of financial risk young people often fail to address: the risk that comes with marriage. Too often they don’t consider the potential consequences to their financial situations—and their family’s hard-earned wealth.

One risk, of course, is that the marriage someday could end in divorce, putting family assets in jeopardy. For this reason, children of wealth should be counseled to consider the possible benefits of a prenuptial agreement.

Another risk is that the couple fails to have candid conversations about their finances and general approach to money matters. One of the best ways to avoid a future breakdown in the marriage, based on financial differences, is for a couple to have these conversations before they walk down the aisle.

The solution here is to urge your child and their intended to participate in premarital financial counseling—either with a knowledgeable parent or a financial professional.

Time for a legacy reality check

Not every family communicates early and often with the children about financial matters and money management. As a consequence, some children can grow to college age and beyond and not understand the importance of managing their personal finances, and the true extent of their family’s wealth.

This failure to communicate can cut two ways. On the one hand, a 20-something might have no idea the family is as wealthy as it is, nor understand that the responsibility of shepherding that wealth in the future will fall at least partly on their shoulders. On the other hand, there are children who reach young adulthood holding exaggerated views of the family’s wealth with unfortunate consequences. In one memorable case, a young lady had her sights set on running the family foundation as a career, only to discover that it wasn’t nearly big enough to require a full-time executive.

To avoid either situation, once a child is in their early 20s, it is important to offer details about the family’s wealth and the role you hope the child will take in acting as its steward. That means initiating or stepping up discussions about the family’s charitable giving philosophies and activities.

It takes a village

Parents don’t have to shoulder 100% of their child’s financial education. When a child reaches early adulthood and still has gaps in their financial knowledge, it’s a wise parent who leans on financial professionals for a little bit of help.

Talk to your Private Bank representative at Union Bank about how our wealth advisors and trustees can provide supplementary counseling, all in an effort to ensure your child has the foundation to be a financially successful adult.

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