Financial advice used to be so simple. Save your pennies. A fool and his money are soon parted. Don’t ever shell out cash for a TV from a salesman who displays his inventory in the trunk of his car.
Those are still solid recommendations, and the fundamentals haven’t changed much. “You spend less than you earn, save plenty, invest wisely, and after you get those three down, you give generously,” says Barbara Stanny, daughter of one of the founders of H&R Block and author of Secrets of Six-Figure Women (Collins). The details surrounding the financial basics, though, are more complex than ever.
That's why we checked in with some financially successful grandparents to see what advice they’re giving their own children and grandchildren.
Choices, So Many Choices
What's changed, are the number of wealth accumulation choices available and the surplus of tempting items that can be impulsively purchased on credit says Brett Wilder, grandfather of three grandchildren younger than 8 years old, who wrote, The Quiet Millionaire: A Guide for Accumulating and Keeping Your Wealth (FMG Publishing). While there are more options, Wilder suggests you consider these four options without reservation for your grown children and grandchildren: a 401(k), a Roth IRA, no-load mutual funds, and a 529 college savings plan.
A 401(k), would be mistake to pass up since most employers match an employee's contribution to the fund. It can be handy, though, to have a financial advisor on hand, since the rules are like a briar patch. For instance, if your son or daughter moves his or her 401(k) into an IRA or another 401(k), and instead of doing a direct rollover accept a check from their company without depositing it into another qualified retirement plan within 60 days, the funds will be subject to income taxes and, if you're you're younger than 59-and-a-half, a 10 percent penalty.
And, you can’t stress enough to your grandchildren to start investing as early as possible. Those who start saving at age 25 have 40 percent more money when they retire than someone who begins at age 35, because the money has more time to grow.
Roth IRAs are the boon of all financial advisors and economists. As long as you wait until six months prior to your sixtieth birthday to remove any funds from this account, everything you remove from your Roth IRA account will be free of income tax.
No-load mutual funds are popular because investors in them are not charged a sales commission. But, with no broker involved, they require the investor to have more financial savvy. That said, if you guide your adult son or daughter (or grandchildren) toward investing in a trusted no-load mutual fund that is diversified and large such as Vanguard Windsor II, Fidelity Equity-Income, or T. Rowe Price Equity-Income, you’re not likely to go wrong.
And, 529’s are important for adult children who are parents because as expensive as college is now, think how much a four-year college education will cost in 2025.
Wilder says that your kids will go wrong if they’re attracted to credit cards and the less obvious debt-destroyers like home equity “ATM” borrowings, credit lines, 100 percent financing, interest-only and adjustable-rate mortgages.
Because these options are so popular, it’s easy to understand why your otherwise bright offspring might be sucked into something like an interest-only mortgage, better known as a sub-prime loan, which starts off with a low mortgage payment because you’re only paying the interest. After a couple years, when that period ends, and you’re paying money toward the actual house, the interest can skyrocket.
The most influential financial advisor isn’t the one your kids hire — it’s you, according to John Brown, the author of How to Run Your Business So You Can Leave it in Style (Amacom Books) and founder of the Golden, Colorado-based Business Enterprise Institute, an organization that helps business owners sell thier companies or leave them to the next generation.
His advice is universal, whether your kid owns a company or washes the company’s windows: “You have to be consistent. If you’re telling your kids or grandkids not to spend a lot, but you do the opposite, it’s not very effective.”
Encourage grandchildren to be fiscally responsible and cautious about taking on debt, says Brown, who adds that if you can steer your kids toward buying a perfectly good $25,000 car over a $50,000 car, do so; and, impress upon them that going into serious debts is generally only smart as an investment — such as starting a company or taking on student loans.
Wilder agrees that some debt is good, suggesting to “intelligently leverage low-interest borrowing rates with higher investment returns. For example, advise them against prepaying a tax-deductible 6 percent mortgage. Instead, use the additional cash flow to contribute to a retirement plan that could earn a tax-deferred 8 percent average rate of return.”
Saving & Spending Smart
Your grandchildren can’t save much if they aren’t spending their money shrewdly. Wilder suggests helping them plan specific financial goals, knowing what amount of money is required to fund them. "If they want to retire at age 65 and live on $50,000 a year in today's dollars, after taxes, then they need to assume an inflation rate to determine the dollar equivalent of $50,000 at that time, and establish an accumulation program which ensures this financial goal will be met.”
Jeff Harris, 49, is a relatively new grandfather with two grandsons: Bryan, 2 months and Luke, 4 months. But, he’s an old hand at handling money. He owns Family First Legacies, Inc., an investment firm in Charlotte, N.C. Similar to Wilder, he suggests helping your grandchildren or adult children write down a plan — and adhering closely to it.
“The government requires employers to have a written Investment Policy Statement that describes how employees’ retirement funds will be managed for their benefit,” observes Harris, implying that if it’s good enough for the government, why not for us?
“Wealthy families, endowment funds, and pension plans do the same thing, because they help reduce the odds of making a poor decision in turbulent market conditions — like September 11, 2001, Iraq War 2003, and the sub-prime loan collapse of 2007,” says Harris.
“Emotions rule many investors so they continually buy when stocks are going up and sell when they’re going down. A written Investment Policy Statement helps reduce the tendency to do the wrong thing at the wrong time.”
Harris also advises utilizing an automatic bank draft. “Successful investing is more about establishing good lifetime habits than it is about picking hot investments. By setting up an automatic monthly bank draft you'll easily get in the habit of investing money regularly, regardless of what’s happening in the stock market,” he says.
Start Them Early
It’s those lifetime financial habits that are so important to instill in your grandchildren as early as possible. Laying a foundation of money management skills can start with simple lessons. Three-year-old Kaiden wants everything when Barbara Stanny walks into a store with him. “With a strong ‘no,’ accompanied by a little money talk, and letting them pick one thing to buy, you can start building a good foundation with them,” says Stanny.
How well do you get along with your grandchild and other family members? Want to know if your personalities mesh?Find out here.