One issue which grabs the headlines and causes concern for families is around passing wealth onto the next generation. How much, to whom and when are pressing priorities for parents.
I wonder, however, whether these (admittedly important) questions obscure other key issues. These include the practical skills and knowledge sons and daughters have around money. Equally important, is the extent to which they have an awareness of money emotions.
While there have and continue to be policy interventions which seek to improve financial education, it’s still the case that the UK has very low levels of money skills. By way of example, one recent study found that “one in three adults in England and Northern Ireland cannot work out the correct change from a shopping trip.” Such gaps in financial numeracy clearly represent a challenge to an individual keeping a monthly budget of income and spending.
So, one practical issue is to improve the money skills of young people - being able to calculate percentages, being able to read graphs and charts and so on. Another is understanding financial products such as personal loans, mortgages, savings and investments. Given the potential returns of compounding over time, developing an awareness of equity investments is probably the most important. If a young person can grasp the importance of putting regular amounts into equity investments - and then leaving them alone for a considerable period of time - they will be doing a huge favour to their future self.
The other important area is for young people to explore their emotional relationship with money, in particular to recognise and overcome any self-limiting beliefs. For instance, if young person felt that they “couldn’t manage money” or “could never understand stocks like dad does”, there is huge potential to encourage more positive beliefs around money.
Empowering money beliefs might be particularly relevant to young people who stand to inherit wealth. It’s possible that someone in this situation might not feel that this money is “theirs” and therefore not touch it or even seek to get rid of it through high consumer spending. The potential for this to seriously erode wealth is supported by one piece of US research which found that “70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third."
Changing these money emotions into beliefs such as “I can be financially successful and a good person” and “money is as significant in my life as physical health and relationships” have the potential to transform such a young person’s financial well-being.
In addition to help from parents and financial planners’ young adults will get value by working with a financial coach on improving their financial education, money management and positive money habits. The coach’s solution-based focus develops an action and goal orientated mindset. Taken together this support will increase the opportunities for young people to improve their financial well-being, use future inherited wealth wisely and (crucially) generate wealth of their own.
Dr George Callaghan