Estate Planning / Inheritance Tax

Tackling tough money conversations with your children

Talking about money with your children can be challenging, regardless of their age. What to discuss, when is the best time to do it, and will they even pay attention, are all valid concerns.  In this piece, Huw Wedlock, Director, looks at how to approach talking to your children about money when they are younger, as they become adults, or even when the time has come to explain your inheritance wishes, or ask for help yourself.

In times gone by the idea of openly discussing money was often frowned upon – perhaps a classic case of British reserve. Sadly the legacy of this is all too clear with three-quarters of Brits struggling with financial literacy and 90 percent of families losing inherited wealth by the time it passes to the third generation. In recent years there’s been a growing sense of the importance of developing good financial literacy in younger generations, and the role that parents play. And at the other end of the spectrum it’s clear that being open and upfront about your own financial position, and plans for your wealth, can help to reduce disputes over inheritance.

So with all that in mind, what are the financial conversations it makes sense to have with your children?

Building good habits in children

Many children have plenty of opportunity to learn about maths at school and college. But financial literacy skills – how to build savings, managing debt/credit, understanding investment options, setting up a pension and weighing up mortgages – are rarely covered. So tackling some of the financial necessities in life can fall to parents, or fall by the wayside.

Childhood offers a great opportunity to build some of these important life skills. Younger children can grasp the basics pretty quickly with the concept of earning pocket money for household tasks which they can choose how to spend (on a small toy) or save (for a bigger one). Here savings jars can offer a visual way to see growing money over time. Another approach could be to explore Practical Money Skills by VISA which is a website that aims to provide some first steps into financial education with information, games and guides aimed at children. It can be a great starting point, and offers some good opportunities for children to play to reinforce their skills. As children get older, there’s the opportunity to involve them more in household budget decisions, holiday plans and how you’re saving and investing too.

This can be a powerful opportunity to share some of the values which are important to you when it comes to finances. It might be that you choose to make regular charitable contributions or set aside some of your additional income for a ‘rainy day’ fund, or long-term investments. Explaining your reasons for making these financial decisions can be a useful lesson. As children get older and take more of an interest in their own bank account and savings options, there’s usually good opportunity for them to earn and spend themselves, to better understand the impact of their decisions.

These situations help form good habits when it comes to finance. You can also start to challenge your children by asking them to contribute to the larger items they want (think the latest bike, phone or pair of trainers) as well as saving for a holiday with friends or their first car. Other lessons which can be important include setting up a Junior ISA (JISA) for them to demonstrate the value of tax-free investing and help them decide how to build their capital – whether through ‘match-funding’ their contributions, or them choosing whether to add some of their own birthday money or earnings.

Supporting young adults

As children move into their early careers, conversations about money can shift into other aspects of finance. It will be important to tackle the importance of pensions and planning for those retirement years – although this may feel a long way ahead, starting early and getting into good habits from the outset is an important lesson to understand. Many young people can be resistant to making some of these sensible decisions, preferring to consider their salaries very much as disposable income!

Discussions about long-term savings and investments and the power of compound interest are vital at this stage as is talking about how establishing good habits now can help them achieve financial freedom in years to come. If you are looking to share practical advice which can be dipped in and out of over the years, there are some helpful books available including Happy Ever After: Financial Freedom Isn’t A Fairy Tale. It might make a useful present, especially for young adults taking some steps towards independence and who may benefit from hearing sensible financial stories from people other than mum and dad!

As they become involved in buying their own home there’s usually scope to discuss saving options for the deposit and fees, the right insurance and the value of having a Will – and regularly updating it. There are some specific investments which you can discuss with them too, including LISAs (Lifetime ISAs) which can be set up for those aged 18-40, and used for a deposit on their first home. If and when they become parents themselves you can remind them of the steps you took when they were children to establish a good financial foundation – setting up a bank account and tackling the basics about money and savings.

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Conversations with adult children

As you age you may want to begin to involve your children in helping to manage your own finances. Discussions over what you’d like to happen with the family home, or other aspects of your wealth, are important to have particularly given property can be a significant asset, and one you plan to pass on. These areas can be emotional ones to tackle – both for you and them – but again being open and straightforward can help avoid issues in years to come.

If you haven’t already, it’s a good idea to chat to your children about setting up a Lasting Power of Attorney (LPA) – there’s a specific option that allows you to appoint someone to manage your money on your behalf – either for a short time, or longer term if you become unable to look after things yourself.

Open conversations with your children about money throughout their lives may mean you feel confident that they can help here when the time comes. But you might want to choose a trusted friend instead. Explaining your reasons, such as avoiding them having to make decisions about money at what could be a sensitive time, helps. It’s also important to make your wishes for your own estate very clear to your children – if they will be inheriting, then tell them and perhaps share how you’d love for them to enjoy and protect that wealth. And if you’ve alternative plans, although often difficult, it can be wise to share these too. Disputes typically happen when plans are unclear or have not been properly discussed.

Throughout life you’ll need to talk to your children about money. At times it might feel enjoyable, as you see them grasp financial concepts, and make sensible decisions themselves. At other points it can be difficult and emotive, particularly if they make mistakes, or you need to tackle how you expect them to protect family wealth when it’s time for them to take the reins. It may make sense to work with a financial adviser to help facilitate some of these conversations along the way. Over the years we’ve worked with many families – through the generations – helping shape, build and protect wealth and create strong financial futures.

To discuss any aspect of your finances with one of our team, please contact your nearest office.