Financial Literacy for Young People: Math and Family Communication are Key

Child-Financial-LiteracyWe work with families. In some cases, three and even four generations. We love that aspect of our work and we’re often asked about ways to improve financial literacy for young people. Our experience and recent research show that a good understanding of math and regular, excellent family financial communication go a long way.

43 states currently require personal-finance classes to be taught in high school. These classes are intended to produce good long-term financial behavior. Typically, the kids are taught financial facts and strategies long before they even need it. Furthermore, recent studies, including those by Harvard professor Shawn Cole have shown that that these finance classes are not working and there “is virtually no effect of (high school) financial education on (future) behavior.”

However, studies have shown that math has an impact on students’ financial outcomes. Students required to take more math classes ultimately practiced better fiscal responsibility than other students as young adults. This included a greater percentage of investment income as part of their total income and lower rates of home foreclosure and credit-card delinquency. Charlie Wells of the WSJ recently put it this way: “Focus on teaching math-not money.”

Without strong math skills, people tend to use more emotion in their investing, spending and saving patterns. Further, people with less math experience don’t easily understand the concepts and benefits of basic long-term strategies such as exponential growth and compounding. Studies show that people that are comfortable with numbers and making numeric comparisons make better financial decisions.

The other big key is that financial education should begin at home. Unfortunately, that is easier said than done. In fact, a research professor at North Carolina State University has found “parents talk more about sex with their children than they do about money.” Parents need to have a process to include the children in family financial discussions.

Here’s how one family did it. Scott Parker of Encinitas, CA, stopped by his local bank and withdrew his entire monthly salary in cash. In singles. It took 24 hours for the tellers to put his $10,000 request in stacks and bags. At dinner that night, he dumped the money on the kitchen table.

It certainly got the kids’ attention. Parker’s 15 yr. old son initially thought Dad had robbed a bank. After a pause, Mr. Parker and his wife then went through the expenses, taking money off the table for each one. Taxes, house payment, food, car payments, soccer, scouting, tithe for church, hamburger night and everything else. By the end, there wasn’t much left on the table.

This type of exercise is a great example of communicating with your family. Initiate them early, even at 4 or 5, and keep communicating as they grow. Shielding children from the realities of everyday financial life makes little sense, particularly given the financial responsibilities their generation will face.

Communication helps solve a major problem for children. Money is a source of mystery to them. They sense its power and ask many questions: “Why isn’t our house as big as my cousin’s?” Why can’t I get Lego Mindstorms- it’s only $349 and educational?” Adults often do a poor job of answering. They may deflect the question as impolite. Or they may respond defensively. The right way is to use the question as a “teachable moment”- an opportunity to increase the financial education of the child. Of course, this isn’t always easy, especially after a full day or work, school and outside activities.

Over time, the children should understand both the family budget and the choices made in determining it. “What are our needs, wants and wishes?” “What priorities did we determine?” “Why did we make those choices?”

It’s good to have them involved in the decision-making process on certain items. For example, spending money on a high-end family dinner out or putting the money towards the “Disneyland fund.” They see much of the spending. However, credit cards make it difficult for them to quantify items. That’s why Mr. Parker’s bag of money was so instructive.

Wealthy families have special challenges. You may worry that the children will flaunt their good fortune or think they never have to work. Full disclosure may not be the best solution. Rather, involve the children is smaller financial learning experiences requiring math comparisons and making good choices.

Financial literacy is a process. Over time and with regular communication, children will better understand the family budget, key questions, priorities, and choices. And, they will understand the math involved in evaluating choices rationally rather than emotionally. This is particularly valuable when they become teenagers, as they start to make choices about college and student debt and as they move into the working world. A good financial education will help them throughout their lives and hopefully will be passed along to their children someday as well. Our core purpose at DWM is to protect and enhance the net worth and legacy of our client families. Financial literacy for the entire family is a key to meeting that goal. Please let us know if we can help in any way.

The Ideal Contribution Rate

How much should I save? It’s a big question that many people ask themselves and a question we are asked quite often.

As Les pointed out in his January 13 blog, there are so many numbers out there, but really only five key ones. The percentage of your paycheck that goes to savings/investments is one of those five.

He also pointed out that there is no magic percentage – that everyone’s circumstances are different – but a good rule of thumb is 10-20% of your GROSS pay. Millennials who have 30 or more years to build their retirement nest eggs can get away with a smaller percentage, perhaps even high single digits like 8%. But if you’re 45 and haven’t saved much, even 20% may not be enough.

This may sound overwhelming to many. The fact is the majority of people out there are severely under-contributing to their savings. It’s easy to spend on another latte and there’s always other bills to pay. And for parents, there is also educational funding to worry about.

We’d like to help you overcome these hurdles. Here are some of the ways to do that:

  1. Start small, start early. Start today and get the power of compounding working!
  1. Save money regularly. A good idea is to match your saving schedule with your payroll schedule and set up automatic contributions to your retirement or investment accounts. See how much you could save.

Here is an example of how saving and investing small amounts, i.e. $100/week, can really make a difference. If you contribute $100/week, growing at 4%, after 40 years you will end up with $514,064. With an 8% rate of return you would have $1,530,399!

Savings 8

  1. Enroll in your employer’s company plan. If you are working, make sure that you are enrolled in your company’s retirement plan and let the power of tax-deferral (or in the case of Roth: tax-exempt) work for you!
  1. Get your “free lunch”! Most employees can get a company match of 3% or more assuming they make a big enough salary deferral. Make sure to max out your company match – you can’t get a better risk-adjusted rate of return anywhere.
  1. Sign up for auto-escalation! If your employer’s plan has it, enroll in the auto-escalation program. This is a program where your deferrals automatically increase each year. If you employer does not have this feature, remember to manually adjust your deferral up a little bit annually (perhaps 5-10% more than the previous year). Put a reminder on your calendar.
  1. Save all or part of any salary increases. With inflation running south of 1.5%, any salary increase over that amount can/should be directly applied to your savings. “Pay yourself first!”
  1. Save all or part of any bonuses. If you’re not confident in your long-term plan, avoid dropping 100% of that bonus on the latest wide screen TV and put it into one of your investment accounts.
  1. Save all or part of any tax refunds. Another potential area to get working for you.
  1. Reduce your spending! Americans are notorious for spending their whole paycheck on things that you might wish for or want but certainly do not need. Start tracking your budget through an online program or a simple Excel spreadsheet to identify areas of spending that can be cut and applied to savings.

Keep in mind that our government’s tax code has presented you with opportunities to save more within some fine vehicles. IRAs, 401Ks, 403Bs are some great tax-deferred or tax-exempt vehicles that should be maxed typically before contributing to non-tax-advantageous accounts. See below for some important dates and contribution limits.

Probably the most important decision one can make about retirement is to take responsibility for funding it themselves. There is much uncertainty about your future and what resources you will have. Make a more stable tomorrow by taking matters into your own hands now by saving. Don’t let time slip by. Take action today. Be realistic with what you can do, but do something before it’s too late.

IRA REMINDER: There’s still time to make your 2014 IRA contribution. Deadline is April 15. 

  • 2014 IRA Contribution Limit: $5500 + $1000 catch-up for those age 50+
  • And it’s never too early to get going on this year!
  • 2015 IRA Limit: $5500 + $1000 catch-up for those age 50+


  • 2015 Maximum 401K Contribution: $18,000 + $6,000 catch-up for those over 50.

Estate Planning – Put Yourself in Charge!

estate plan ducks in a rowTalking about death is uncomfortable and estate planning is one of those topics that no one really likes to discuss. This fall, we were saddened at the passing of three clients and helped their families work through the process of tying up their estates. It reiterated how important these discussions and plans really are. More than half of Americans don’t have wills or any sort of estate plan in place. Estate planning attorneys call this the “do-nothing” approach and the technical term for having no plan when you die is called “intestate”. Basically it means that everything you own, all of your assets that you have accumulated and imagined leaving to your heirs someday, will now be appraised, managed and distributed through the probate court system, not by your family or beneficiaries. As you can imagine, there are tremendous fees and legal costs to this process, requiring probate attorneys for public and lengthy reviews by the court system. In South Carolina, for example, a probate account must remain open for at least 8 months and assets can be frozen while it is sorted out. The process can take well over a year or more to settle the estate.

Aha! So we will just have a Last Will and Testament that spells out all of our wishes, you say. It’s true, a will helps set out the guidelines for how you want your estate to be distributed. However, the will is still administered by the probate court, not your family, and it becomes public upon your death. All of the costs associated with probate will still be there. Probate fees can run as much as 5% of your gross estate value, assessed on the total even before all of your liabilities are paid off! Probate court is not just for estates of the deceased, either. There is a Living Probate, which means your estate can go to probate if you are alive, but become mentally incapacitated. Then the probate court steps in to appoint an agent to control all your personal affairs in a “conservatorship.” This may become more of an issue as people are living longer and we face increased age-related cases of Alzheimer’s or dementia.

You may also have some of your assets titled in Joint Tenancy, short for Joint Tenancy With Rights of Survivorship (JTWROS). The right of survivorship gives ownership to the last remaining owner. Married spouses will often hold property this way so that their asset will automatically transfer to their spouse or joint owner. However, once both of the spouses or both owners have died, the asset, unless it was retitled earlier, will still have to go through probate. And neither a will nor the Joint Tenancy will prevent a Living Probate if one of the owners becomes incapacitated.

One good way to protect your assets and make sure they are managed and distributed the way you wish is to establish a Revocable Living Trust. Used in conjunction with your will, it controls all your assets while you are alive and after your death. Basically, you title all of your assets to your trust, and, with the trust as owner, you (or you and your spouse or others) are your own trustee(s), which means you control your assets just the same as you do now. IRA’s and 401K’s are treated separately and won’t be titled in the trust. You will then designate a successor trustee to take over and manage everything when you die. But when that happens, the assets are not in your name, they are owned by the trust and so there is no need for probate. The successor trustee immediately steps in as your estate manager and can distribute or manage your assets as you have designated. You can also write instructions of how to manage things should you become incapacitated, avoiding the need for a Living Probate. It is a win-win.

Take some time to look at your current estate plan, titling of all assets and all beneficiary designations. Discuss with your financial advisor, perhaps at Detterbeck Wealth Management, and your estate planning attorney the best way to protect and title them. It can take some work to track down lost stock certificates, deeds or account numbers, but it will be worth it in the time, angst and costs saved by avoiding probate. Your loved ones and beneficiaries will be grateful.