How to talk to parents and children about money
“The money talk.”
It may be one of the most important conversations you ever have with your parents and your children, but many families aren’t sure how to approach the subject and what precisely they should be discussing.
This article will help you start the discussion and make sure you’re covering some important bases.
Remember that your advisor can be a valuable partner as you implement estate planning strategies for parents and early saving strategies for your children.
ASSESSING YOUR PARENTS’ SITUATION
One of the reasons many families avoid talking about personal finances is that it can be difficult for both adult children and their parents to contemplate the challenges of aging. Topics such as chronic illness, disability, mental incapacity and death are painful to think about – but there are significant advantages to addressing them head-on as you and your parents plan for the future.
First of all, talking about how you will deal with a particular situation in advance saves you from making difficult choices at a time when logic may be clouded by emotion and when it may be impossible to find out your parents’ preferences.
Second, if your family waits until a crisis occurs, it may be too late to put money-saving and tax-saving strategies in place. Acting earlier increases the range of choices you and your parents
have to structure their affairs in a way that works for all of you.
To start the conversation, take a look around at your friends, relatives, co-workers and acquaintances and consider whether there’s a situation you and your parents can learn from.
For example, you may know someone who recently moved into a long-term care facility, had to leave work for an extended period following an illness, or passed away without an estate plan in place. Raise this situation with your parents and express your concerns about something similar happening to you or to them.
Another good approach is to seek your parents’ advice on your own plans. Explain that you want them to be aware of the strategies you have developed to deal with various scenarios, and then ask if they have similar strategies for themselves. Involve siblings in the conversation whenever possible, so everyone in your family understands what everyone else has done to prepare for the future.
WHAT IS YOUR FINANCIAL SITUATION?
Try to find out what assets and liabilities your parents have, including investments, real estate and pension plans. If your parents don’t feel comfortable sharing their precise balances with you, ask them to make a list of all their accounts and tell you where they keep important papers such as birth and marriage certificates. It’s particularly important for you to know where their safety deposit boxes (and accompanying keys) are.
DO YOU HAVE A WILL AND POWERS OF ATTORNEY?
Encourage parents to discuss the contents of their will with the entire family, because understanding their intentions can help to avoid disputes and resentment later on.
Also, raise the important topic of powers of attorney – for finances and for health care. Keep in mind that your parents may have signed power of attorney documents with their financial institution, but that these only cover the assets held at that institution. Also, find out if they have appointed alternative powers of attorney in case their primary power of attorney isn’t able to act on their behalf because of illness, injury or death.
HOW ABOUT INSURANCE?
Ask if your parents have life, disability, critical illness and long-term care insurance. It’s vital that you know what protection they have in case they are unable to tell you themselves – for example, if they develop an illness such as Alzheimer’s. Raising this topic can also be a good way of introducing the concept of appropriate coverage if your parents haven’t considered it yet.
WHO ARE YOUR ADVISORS?
Find out the names, telephone numbers and addresses of all the professional advisors your parents work with, including their lawyer(s), accountant(s) and financial advisor(s). That way, you’ll know exactly whom to contact if the need arises.
WHAT ARE YOUR WISHES?
Although it may be difficult to discuss health care and funeral preferences with your parents, it is very important to know how they feel so family members don’t end up arguing when the time comes to make tough decisions.
DOES YOUR ESTATE PLAN MINIMIZE TAXES AND FEES?
Parents generally want to maximize the value of the legacy they leave to their children, but they may not have taken the steps necessary to minimize taxes and probate fees.
For example, there are tools such as testamentary trusts and segregated fund contracts that can enable more of an estate to pass to the next generation. If your parents would like additional guidance, suggest that they speak with an advisor.
TEACHING GOOD HABITS EARLY
Now it’s time to turn from your parents to your children. Teaching kids about money from a young age can ensure that they start off on the right foot when they become old enough to manage their own affairs. The key is to guide them towards making their own sensible decisions, rather than dictating a particular course of action. Children need to learn from mistakes, as well as successes – so let them make small-scale mistakes from time to time, and talk constructively about the good and bad consequences of their choices.
In addition, children learn by example, so try to demonstrate the behaviors you want them to adopt. Most money management lessons for children revolve around five basic concepts: *Reference 1
Children can earn money through allowances and various jobs. There are many different perspectives on the question of allowances. Some experts advise that parents provide payment for household chores; others argue just as forcefully that it’s important for children to learn that some tasks are considered “family responsibilities” without any monetary reward.
One compromise may be to provide a base level allowance to all your children, and then to offer additional money for out-of-the-ordinary chores, such as shoveling the driveway or helping to organize the basement. When it comes to jobs outside your home, encourage children to start small (for example, raking leaves on a neighbour’s lawn) and move on to jobs that require a bigger commitment (such as paper routes or babysitting).
As soon as children start to earn money, point out that they have choices for spending it. Then let them weigh the options and make their own decisions. Teach them the difference between “wants” and “needs,” and show them that you don’t buy yourself everything you want either.
Explain the relationship between price and quality, and go through grocery store flyers together to compare prices and demonstrate that sometimes it’s possible to get the same thing for less money. You can also encourage children to start budgeting by tracking all their earnings and expenses in a special notebook.
Saving is one of the most important life lessons when it comes to money. Starting the habit of setting aside some money each time they receive it (10 per cent is a good rule) will serve children well as they grow up.
Begin with a piggy bank and work up to a first bank account. Explain that saving lets them accumulate enough to buy more expensive toys or trips to the movie theater with friends. Consider matching the money your children save at the end of each year to help motivate them.
As children get older, you can begin to teach them the basics of borrowing.
For example, you could top up their savings with a small loan that enables them to buy something they
want, and offer an interest-free grace period during which they can pay the money back – after which you will charge a reasonable rate of interest. Rather than forgiving a loan if children don’t think they can pay it back, show them how they can reduce expenses or earn extra money to meet their obligations.
Children often have a natural desire to help others. Encourage this by getting them involved in community projects and pointing out that they can share their time or their abilities, as well as their money. Explain that the rewards of sharing go beyond public recognition, and that they can make themselves and others feel happier through some very simple, generous actions.
The bottom line is that it’s important to ensure that your parents are prepared for the financial consequences of growing older, and that your children learn good money management skills that will last a lifetime.
In addition, talking to your parents and children openly about financial matters can enable you to plan as a family for the best long-term financial results.
For more ideas about how you can start the conversation with your family, speak with your advisor.
WHAT’S APPROPRIATE AT WHAT AGE?
Every child develops at his or her own pace, but here are some guidelines that will help you determine what money concepts to teach and when. *Reference 2
* Sort coins into separate piles and talk about their different values
* Ask your child to pay for something he or she enjoys eating (such as a popsicle)
at the corner store
* Explain borrowing by taking out a library book and returning it together
Grades 1, 2 and 3
* Consider starting up an allowance
* Set up a children’s savings account and explain how interest works
* Guide your child through the process of comparison shopping before purchasing something he or she needs or wants, such as school supplies or a new toy
Grades 4, 5 and 6
* Provide the opportunity for a child to earn additional money either in the home
or with a job in your neighbourhood
* Encourage your child to set aside some money each week for savings and for charity
* Start talking about long-term goals, and explain how you’re helping your
child save for post-secondary education through an RESP
* Let your child do the family grocery shopping and give him or her any money saved
* Get your child involved as you plan and budget for a family vacation
* If your child has a job, help him or her complete an income tax return to start
accumulating RRSP contribution room
* Encourage students to pay for part of their education themselves by taking a summer
* Explain the pros and cons of credit, and guide your child through the process of
applying for a first credit card
* Discuss ways to deal with unexpected expenses, such as starting an emergency fund
and purchasing insurance
* Reference 1: University of Minnesota, http://www.extension.umn.edu/distribution/youthdevelopment/DA6116.html
* Reference 2: University of Minnesota, http://www.extension.umn.edu/distribution/youthdevelopment/DA6116.html
Content provided courtesy of Manulife Investments
© Copyright of this article is held by The Manufacturers Life Insurance Company (Manulife Financial). You are free to make copies of this article and to distribute it, either in paper form or electronically, as long as you do not change or remove any part of this work. All other uses are prohibited.
Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. As one of Canada’s largest integrated financial services providers, Manulife Investments offers a variety of products and services including segregated funds, mutual funds, principal protected notes, annuities and guaranteed interest contracts.
WealthStyles, Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation.
Latest posts by Mark Huber (see all)
- How To Be A Success In 21 Days - April 26, 2013
- Mortgage Changes Affecting You – In Effect In 15 Days… - June 26, 2012
- Why I don’t recommend RESPs - July 26, 2010
- How Your RRSPs May Devastate Your Retirement Plan - July 6, 2010
- 21 Tips To Financial Freedom - July 5, 2010