How to prepare your kids for financial adulthood

Nick Dalmaso
Nick Dalmaso August 14, 2017
Illustration of a man and woman putting money into savings and checkings account

This is part two of a two-part series about teaching your children sound financial habits that will last a lifetime.

In my last post, I wrote about instilling great habits in your children, encouraging the value of hard work and saving money.

Today I want to focus on that age where they’re about to take their first real steps into adulthood. As a father of four boys, there is no shortage of things that occupy my mind when it comes to where they are and what they might be doing, and I know I’ll worry about them no matter how old they (and I) become.

I’m always looking for ways to prepare them for life beyond the protective ‘nest’ at home. And as they grow more independent, my wife and I – just like any parent – want to make certain our kids are financially independent as well. On the surface that is simple: spend less than you make. Beyond that truth, however, are layers of additional complexity: How do you not only save but make sure the money you work hard to earn also works hard for you over time?

What message are you sending?

No matter what socio-economic bracket you fit into, I think most parents wonder what messages they are truly sending their children. One of my biggest concerns has been whether they really understand the value of money. I suspect many parents just let their kids figure it out and hope they will get it right when they start working and start paying real bills.

I have been in the financial services industry my entire career. While there is the slight possibility that some of my investing knowledge was picked up around the house through some sort of informal osmosis, my kids were never given the opportunity to learn about, or participate in investing on their own. I had a growing fear of sending them out into the world without an understanding of how to manage and invest their money.

The Test

A few years back, we gave each of our four boys an equal amount of money in a checking account and instructed them not to spend it, but to invest it. No other instructions were given.

To my chagrin, not one of the boys took the initiative to invest the money. Their checking accounts paid little or no interest and given the cost of inflation they effectively were losing money every day.

After a year had passed, I called the brood to a family meeting. I was slightly relieved to hear that they had reached out to a family friend who was a broker at a large Wall Street firm for help, but his response was clear and simple: It was just too little money for him to help.

They informed me that they had also spent some time online and they had happened upon some established online brokerage firms. My youngest, who was still in high school, commented that each place they reached out to was ‘too noisy.’ Interpretation: Each place they had contacted, knowing full well they were searching for guidance, seemed to be adding confusion for confusion’s sake. “We need a place to invest, but we are not professionals,” my youngest son confessed.

Avoiding the ‘no interest’ market

My kids have never known an environment where you put money into a bank account and you could expect interest compounding. With the lowest rates of return in decades, you have to be middle aged to remember those times. In the 1970s, if you put your money into CDs or a savings account, you could expect a 10% annualized return. Back then, it was easy to understand why saving made sense and you could quickly see impressive results. Those days are gone.

Statistical data indicates my kids should live a heck of a lot longer than me. They work out, eat better and presumably will continue to have better healthcare. So, how do you help anyone plan for retirement when they realistically could live to be 100? It would have to start with the basic principles of saving and investing.

To avoid any confusion, I only stressed a few of the basic investment tenets to my boys:

• There are no quick fixes. Yes, sometimes lighting does strike. Try and catch it in your career, but don’t count on it in your portfolio.

• Work hard. It’s the only acceptable approach.

• Invest. Make money, live below your means and invest the rest.

We’ve all heard the saying: Hindsight is always 20/20. And, yes, people have made money investing in Apple, Amazon, and other high-performing stocks. Personally, I think Jeff Bezos is a genius, but what average investor has the stomach to invest most of their net worth with any company for 20 years? People work hard for their money and shouldn’t bet the farm. Spread it out a bit. While diversification will not always make you rich, or guarantee positive results, it will help protect you if the market drops.

The Teaching Moment: M1 Finance

The day I introduced my boys to M1, it was amazing to see how immediately they connected to it. They loved the graphic interface, the prepopulated pies concept and the ability to completely customize their portfolios. They were amazed how easy it was to connect to their bank account and transfer funds to their M1 Finance brokerage account.

At the time, my boys were in their late teens and early 20s. The three younger boys were very aggressive and risk tolerant. My oldest son, the only one who was actually in the workforce, not surprisingly, was far more cautious. I stood back and let them explore the M1 website. Each one of them reviewed the library of pies and made decisions on risk tolerance, while easily adding stocks and sectors in just a few minutes.

Maybe most impressive of all was the job they did diversifying and giving their portfolio a little spice without ‘ruining the taste.’ They had just enough confidence to take the leap because there was enough information to make intelligent decisions – but they were never overwhelmed.

Friendly family competition

My boys are very competitive with each other at virtually everything they do together. Our whole family is that way. And when it came to their M1 accounts, of course, they openly shared their allocations and returns.

Maybe the most shocking thing of all is they even got their mom into the M1 competition. Unlike them, she is highly conservative and she has a very real fear of the markets. She isn’t making as much return on her M1 account, but her portfolio is not as volatile either. She made a few hundred dollars and was disappointed. The boys were quick to point out she had an impressive annualized return in excess of 5% and she didn’t put much at risk. Sure, bigger bets paid off bigger, but not all picks were winners. Good lessons all around.

It never ceases to amaze me what kinds of things bring our family together. M1 certainly managed to do that. Try it. Dinner conversations will change. On occasion, you may even be able to watch CNBC with your kids. I do not envy their situation, they are building for a long, uncertain future. One thing is for certain, they now understand that they can be in control of saving and investing.

By starting their financial education at a relatively early age, they got to witness their periodic investments growing wealth in small increments. You need time in the market to take advantage of compounding. The best thing of all is they are young, have the required time and can stomach the volatility of stock portfolios — even if their mother cannot.