who is on the hook for early financial education

by: michael h. meyers, partner, mountain hill investments

Unfortunately, many young people aren't getting an education in the fundamentals of dealing with money. According to the Council for Economic Education, in 2022, only 23 states required students to take a class in personal finance to graduate from high school. That means it’s important for parents to step in to educate and prepare their kids to understand money.

At the same time, employers are dealing with financially stressed employees across all income levels. According to Price Waterhouse Cooper’s Annual Employee Financial Wellness Survey, finances are the number one source of stress—more so than work, health and even family issues. I think this is directly related to a lack of early education. We can work with employers through financial wellness and education programs to help their employees, but I think a strong review of our education practices beginning with our kids is imperative as well.

I thought it would be interesting to share some of what I have done for my daughters (I have three - ages 8, 11, and 14) and the advice I’m giving those young people entering the workforce now.

It’s important to start introducing kids to money early and with basic concepts. I remember years ago my business partner explained how he talked with his kids about money at an early age. He said: you can save some, spend some, and give some away. I thought it was brilliant in its simplicity and a perfect approach for young kids. If you ask my daughters what you can do with money, this is precisely what they’ll tell you. Now that we’re entering the teenage years with my oldest, we’ve begun to discuss the topic in greater detail (she’s looking for her first job). Lastly, I’ve had a considerable amount of experience with people in their twenties as they enter the workforce and become introduced to 401(k) plans.

Early Years:

1.Saving – Your kids’ first interactions with money will likely involve spending but the goal for me was to get them to think about saving first. We used separate jars to designate the three things money could be used for and the savings jar always came first. At this age, I think it’s important to keep savings goals very short term, we’re not talking about college or retirement planning here. Saving teaches discipline and delayed gratification, and also financial preparedness. You may even find they don’t want to part with their money once they reach their goal and instead, set another one.

2.Spending - I always found it useful to pay with cash if my daughters were with me in a store. Physically showing them how money works is powerful and using cash made this lesson simpler. It’s just harder to convey an exchange of value with credit/debit cards, cash apps, and Apple watches. We’re also lucky enough that our daughters’ school still accepts cash for lunch; many don’t. I know it’s easy for parents to load up a card and not worry about having cash all the time but having your child interact with cash on their own is invaluable. It won’t always work perfectly though. My experience is that our oldest has nearly always come home with change, our youngest is about 50/50, and our middle daughter typically runs a debit balance with the school.

3.Giving – One of the benefits of teaching your kids about money is you can share your values with them simultaneously. If you value giving to others, you can instill that value in your children by helping make it a habit for them from an early age. My firm donates to various charities every year and we enlist the help of clients to make decisions as to where those donations go. I think it’s important to do the same with your children. Ask for their input and help them support organizations they can relate with. They're far more likely to want to support a cause that they know about and identify with. It’s not all about money either; they can also use their time to volunteer or donate food and clothes as well.

Teenage Years:

Working at a young age can provide valuable lessons about managing money and further influence the financial choices that kids make as they grow older. My 14-year-old daughter is eager to start working part-time, and if she finds something, she’ll have an opportunity to continue the lessons she’s learned, and we’ll have the opportunity to begin new ones. I think this is an appropriate time to start talking about investing, for example, as opposed to just saving. The difference is understanding how much money should be immediately available to her (savings) at any point vs. what she should consider earmarked for the future (invested). A Roth IRA is a powerful tool you can set up with your child to begin this conversation. These can be set up any time and age your child has earned income during the year. We’ll be opening a custodial Roth IRA when the time comes. In this case, the custodian (parent) maintains control of the Roth IRA including decisions about contributions and investments, however, your child remains the beneficial account owner.

A Roth IRA is a retirement savings tool; I realize this is probably not going to appeal to someone 14 years old, but the lesson is about setting money aside for different purposes and creating habits that will stick as they get older. The habits they create, in my view, are even more important than the investments made in the account at this point. If your kids are interested, have them discuss the brands they like and use and invest a portion in individual stocks. The rest can be put into something simple like a low-cost exchange traded fund.

Early Working Years:

I’ve been in front of a lot of people in their twenties lately. My firm is part of the onboarding process for our 401(k) clients and so part of the corporate employee education we provide is meeting new hires and educating them on the benefits of the 401(k). We also spend considerable time making sure they have their basis covered before participating in the plan.

1.Budget - If they haven’t already, this is an important time to create a budget. They have a salary now and understanding how much comes in vs. what goes out is imperative. This is especially true now given all the subscription services people are signed up for; everything from entertainment to razor blades. It seems that it’s all delivered monthly and directly debited from somewhere.

2.Debt - Paying off debt should be a priority in your twenties. School loans are a major issue right now, but I’ll focus on credit card debt here. For anyone that has accumulated credit card debt at this age, creating a plan to pay it off aggressively should be paramount. You’ll never out earn the usury interest charges levied by the credit card companies.

3. Emergency savings – An emergency fund is a simple savings account earmarked for unexpected expenses like car and home repairs. Having an adequate amount of savings in the bank to cover unforeseen expenses will allow them to avoid racking up credit card debt or taking a loan against a 401(k) or elsewhere. The great thing about savings accounts now is banks are paying interest again. Regardless, this should be money that’s not invested and is easily accessible.

4.Retirement – I mention retirement as a topic that seems foreign to a 14-year-old, and this is still the case in their twenties in my experience. It’s never too soon to save for retirement and as I mentioned the Roth IRA previously for teenagers, the Roth 401(k) is a powerful tool for someone in this age group as well. There are several types of employer sponsored 401(k) plans; some offer profit sharing contributions; some offer matches. Regardless of what the employer does, it’s important for people in this age group to work to get to a personal savings rate of 10%. Going beyond that is fine provided it doesn’t impact your life in a negative way, but 10% should be the goal.

5.Pay Attention – Reaching your goals and checking off the “to do” boxes is important, but it doesn’t mean you take your eyes off the bigger picture. Check your bank accounts online to spot any charges you don’t recognize or services you no longer need. Review your investment account performance and allocations and re-set your goals when you feel comfortable doing so.

My firm works as an advisor and co-fiduciary to corporate 401(k) plans, specializing in the construction industry. We work with UTCA firms to enhance their 401(k) offering by building employee education programs.

Contact me, Mike Meyers, at (732) 291-3338 or mikemeyers@ mhipartners.com for more information and to schedule a plan review.

Disclaimer:

Mountain Hill Investment Partners is an SEC Registered Investment Adviser. We have a clearing and custody relationship with Fidelity Brokerage Services LLC, Member NYSE/SIPC.