Does being good at math mean you can direct your finances? Rebecca Clark, Director of Wealth Planning for BMO Private Wealth, isn’t so sure having a way with numbers is enough on its own. Even though all her kids went to university for engineering, she worried they were missing some of the fundamentals of how to manage their money wisely.
While some people are learning more about money in school, Clark, who is also a part-time personal finance lecturer at Toronto Metropolitan University (TMU), says there is still a big gap in the education system when it comes to personal finances. To set her kids up for success, she took matters into her own hands by developing a series of at-home lessons for them to take.
Many young adults continue to have questions about the basics, and there are things the next generation needs to know about money if they want to successfully manage and protect their wealth. Clark adds that judging from the demand from her kids’ friends, roommates, boyfriends and cousins for her makeshift course, young adults are actively looking for answers.
Don’t count on a free ride
While everyone learns at their own pace, she finds that children from high-net-worth families often have the most difficulty managing their budgets. “With high-net-worth families, parents think they’re helping their kids, but those kids end up being worse spenders than their counterparts,” she says. “Children that have to struggle fare the best in the long term.”
If it sounds like Clark is dishing out some tough love, it’s because she feels it’s risky for anyone to put too much faith in getting family support or an inheritance. Parents can pick up bad habits around spending and managing money, so they aren’t always the best role models for the younger generation, who are still figuring things out and may not have access to the same level of wealth to maintain their lifestyle.
Also, just because you or your parents got help doesn’t mean your kids can assume the same, she explains. These days, not every family plans to pass on their wealth to their children. It’s not because parents are spendthrifts, although that can be an issue, it’s that there are several reasons why some families may not leave their kids as much as they expect, including living longer lives in retirement, increasing healthcare costs or the family wealth being tied up in the business.
Clark cautions the younger generation about counting on an inheritance because family circumstances can change suddenly. The death of a parent or divorce can have a significant impact on the transfer of wealth, for instance. “Things happen like parents become widows, then get remarried and rewrite their Will and people expecting an inheritance get nothing,” she says. “It happens more than you’d think.” She recalls one instance where a widow unexpectedly married her caregiver without her kids’ knowledge. Suddenly, that $6-million estate the kids were counting on was signed away, she notes.
Understand the value of money
“The more you spend, the more expensive your life is and the more you need to save,” says Clark. It sounds obvious, but it’s a concept that individuals in all income brackets can struggle with. Overall, there is a perception that having wealth today will ensure it will be there for you in the future.
“People don’t realize how much life costs if you start to let go of the reins,” she says. “Once you’ve had a taste of a different lifestyle, it’s very hard to pull back.” She’s seen her wealthiest clients struggle with this at times, noting she’s had multimillionaires run out of money by age 80 because of their spending habits. “They don’t think anything of it because that’s what they’ve always done,” she says.
She’s seen a similar scenario for those just starting out when they get a promotion and a raise. A $10,000 raise can sound significant to some, but most people will spend that money in their minds more than one time. She explains they may not be thinking about the tax on that increase or how their spending could change in that new role. They might decide they need a new wardrobe to fit the part or increase spending on convenience foods since they’re working longer hours. “They spend that money over and over again, forgetting that it’s only available once,” she says.
Live like a student
Regardless of your financial situation, Clark encourages everyone to live like a student at some point in their lives to appreciate the value of money. On occasion, for her high-net-worth clients, she’ll highlight the advantages and disadvantages of gifting large sums of money to their kids every year, noting that they will naturally start to factor it into their budgets.
Clark isn’t against parents lending a hand, but she thinks there are better ways to help children that will also assist them to become more self-sufficient. Instead, she’ll often suggest that clients give a one-time gift, like a down payment on a home, and then leave it to the kids to cover the mortgage. That encourages them to find something they can still afford if interest rates rise.
Young adults must also be mindful of how their financial situation could impact their wealth. The example Clark thinks of would be someone paying for a home but sharing the space with a partner. That’s a particular risk for high-net-worth families. Having a cohabitation agreement in those circumstances could make sense if you want to protect that asset should the relationship end.
Read up
Even if you don’t have an expert in the family to run a personal finance course, there are other ways to learn. Talking with your advisor is a good place to start. Clark notes that she’s hosted mini-sessions of her personal finance course for the children of her high-net-worth clients.
It’s about understanding the basics. Most Canadians know about the importance of contributing to things like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts, but Clark isn’t sure everyone understands why they’re doing it. With RRSPs, people might know they’re getting a deduction on their tax return, but they may not appreciate that they have been deferring the tax for 30 years, says Clark.
The other tip she gives all her young pupils is to take advantage of the excellent money-management content available. The one source she recommends to everyone is a book called Millionaire Teacher by Andrew Hallam, a former middle-school teacher from Comox, B.C., who talks about how to grow your wealth even with an average salary.
Some sample key tips from that book include:
- You can look wealthy or be wealthy – it’s hard to do both.
- Invest early to capitalize on compound returns, which is when you earn gains off your gains.
- Control your emotions and resist the temptation to sell when markets get choppy.
- Avoid home country bias and diversify your investments globally.
- Avoid hot stocks or opportunities that seem too good to be true.
- If you decide to pick individual stocks, limit your exposure to no more than 10% of your total portfolio.
Clark offers one other tip to that list: avoid analyzing your investments all the time. “Don’t look at your stock prices every day every week,” she says, noting that obsessing over the day-to-day movements can be stressful – and counterproductive. “We’re looking for the long game,” she adds.
