Financial Literacy: Money Matters!

As you all know, we provide proactive financial advice on matters such as investment management and value-added services such as tax planning, risk management and estate planning to name a few.  Something you probably didn’t know is that earlier this year, we launched a campaign to promote financial literacy for children and young adults!  It is called the Young Investors program.  Some of our clients have recently become the first recipients of this new program!

Financial literacy is a person’s ability to recognize and use the money and other resources he or she has to get what is needed and wanted.  Another way of saying this is that financial literacy is being able to set goals for using financial resources, make plans, and use the plans to meet financial demands and achieve goals.  To achieve financial literacy, a person needs to have experiences with money.  That is why it is important that children begin to learn about money and its use when they are young.

You might not know this, but financial literacy availability for young children is scarce, primarily because the school systems lack time and budget resources to incorporate financial education into the curriculums.  In fact, only 16 states require any instruction in economics between Kindergarten and 12th grade.  Even worse, only 7 states require students to take courses in personal finance.

There’s been a greater awareness of this educational need in the past 10 years and some financial-literacy advocacy groups have begun to take some steps to fill this educational void.  Some have responded by offering summer camps to young children whose parents want to teach their children the basics of money management.  Feedback from many of the attendees is that, believe it or not, they had fun!  Of course, we want to join in on the fun, and we are also excited to be a part of the solution.

We know that a financial foundation is best achieved when started early, reviewed, as well as reinforced often.  It’s important to teach young children even before they are in school about the concept of money, and that it’s not all about spending!  For example, something simple that a parent can start as early as age 3 can have lasting effects for the future.  Consider this:

Activity: Tell your toddler that you’ll give him a cookie now if he wants it, but you’ll give him two cookies if he waits an extra ten minutes. See what he chooses and try to encourage him to wait for the extra cookie.

Lesson Learned: Be patient and wait for a bigger payoff, rather than always going for instant gratification.

Although it might not look like much, it sets the stage for a less impulsive, more thoughtful response, and hopefully not just one involving money in the future!

Thinking about the scenario above, in an article I read the other day from the Wall Street Journal on personal finance summer camps, a 12 year old boy cited some camp attendance takeaways such as stopping and pausing before making purchases and long term planning!  I suppose it’s true that small things do matter!  And more interesting feedback from the camp directors is that many children ages 10-14 didn’t know what stock and bonds were.  Some thought the investments were a form of real estate.  Clearly, more attention needs to be given to this area.

We love the opportunities these summer camps offer and hope to provide some of our own financial education to our client families year round.  With our financial literacy agenda, our Young Investor program is structured with several tiers of age appropriate interactions and dialogue starters on financial matters for our clients to have with their children or grandchildren.  Age appropriate financial suggestions, tools, links to pertinent financial articles and fun activities to engage their minds are some of the content we will be sharing.  With the importance of starting as early as possible, we literally start at the very beginning, with newly born children/grandchildren, and capture all ages through the early 20s.  Specifically, we break out the tiers in roughly 5 year intervals, so age 0-5 years is the first group, 5-10 years is next, then 10-15 years, with 15-20ish years being the last group.  Our goal is that by age 25, the child or grandchild will be more than ready to begin a lifetime of investing!

Even after your children and grandchildren start their careers, it is our hope that they will join our Emerging Investor program, where they can establish their own brokerage accounts with Charles Schwab and have some of the same great DWM advantages and services as their parents and grandparents.  We are happy to help them by protecting and growing a diversified portfolio to preserve assets and provide moderate growth with minimal risk.

With our help, the young children of today will come to ask for financial assistance and have some of the best mentors in their lives, YOU!  And we all know that money is not an elective in life, so let’s keep the dialogue going with our young generation and keep providing them with good ‘sense’!  We hope you find this program to be a valuable experience.  As always, please let us know your thoughts or if you need financial assistance with a young investor in your life.

Ready for a quick quiz?


Two-thirds of the world can’t pass this financial literacy test.  Can you?  You don’t need a calculator, just 3-5 minutes of time.


Risk Diversification: Suppose you have some money to invest.  Is it safer to put your money into one business, piece of real estate or investment or to put your money into multiple businesses or investments?

a)One business, piece of real estate or investment

b)Multiple businesses, pieces of real estate or investments


Inflation:  Suppose over the next 10 years, the cost of things you buy including housing, food, taxes and health care and all others double.  If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?


b)The same


Mathematics: Suppose you need to borrow $100 for one year.  Which is the lower amount to pay back: $105 or $100 plus 3% interest?


b)$100 plus 3% interest

Compound Interest:  Suppose you put money into a bank and the bank agreed to pay 3% interest per year to your account.  Will the bank add more money to your account in the second year than the first year, or will it add the same amount of money for both years?

a)The same


Compound Interest II:  Now suppose you have $100 to invest in a (very aggressive) bank who will pay you 5% interest per year.  How much money will you have in your account in 5 years if you do not remove any of the principal or earned interest from the account?

a)Exactly $125

b)More than $125

c)Less than $125


Pretty simple, right.  The answer is b for all.  We’re sure our regular DWM blog readers got them all right.

Across the world, however, the 150,000 people who took the test didn’t do so well.  Two-thirds of them answered at least 2 of the 5 questions incorrectly.  The survey pointed out some key findings.  Norway has the greatest share of financially literate people worldwide.  Canada, the UK, the Netherlands and Germany also finished in the top 10. The U.S. didn’t.

downloadIn the Emerging Market countries, like China, India, Brazil and Russia, the young people, ages 15 to 35 were the most financially literate.  Apparently the kids in Shanghai “knocked the cover off the ball” (just like George Springer of the Astros).

So, what’s the takeaway? Financial literacy for Americans could use improvement.  In addition, as we pointed out in our blog two weeks ago highlighting Nobel Prize winner Richard Thaler, people, even if they are financially literate, can make systematically irrational decisions.  This means you may need a financial coach and advocate.  That’s what we are for our DWM clients.  Whether it’s professional investment management, financial decisions and planning, income tax planning, insurance and estate planning matters, we provide our financial literacy, rational analysis and proactive solutions and suggestions.  It’s our expertise and our passion.  At DWM, this is how we hit home runs!

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.