Get tips on how to speak to your grown children about the importance of diversifying, saving for retirement, and other critical components of financial independence.
As a parent, you want to instill in your children and grandchildren at an early age the value of a dollar to help set them on a lifetime path to financial well-being. As they grow older and become adults, you’ll also be teaching them about investing for the life they want to lead.
Here, Christina Williams, Vice President – Wealth Planner for Wells Fargo Private Bank, offers some key talking points for parents and grandparents who want to teach adult children about setting priorities, the importance of diversifying, saving for retirement, and other key ingredients to financial independence.
Talking point: Consider paying off high-interest debt before you invest
Hopefully, your child or grandchild isn’t carrying high-interest credit card debt. But if they are, Williams notes, you should explain that they should focus on paying off that debt first, because the interest on it is probably higher than what they could earn in the market. “I recommend they work on paying off that debt before they invest,” Williams says. Steps you should discuss with them include:
- Creating a detailed list of debts including amount owed, interest rates, and payoff dates
- Making a debt-reduction budget to track spending habits
- Stopping carrying balances on credit cards — pay the cards off each month, and/or pay for items using checking or savings account funds
- Identifying habits (impulse shopping, etc.) that may be causing them to overly rely on credit cards
Talking point: Help manage risk by diversifying
“An investing mistake I often see with young people is putting all their eggs in one basket,” Williams says. “They want to invest all their money in the latest and greatest stock, but that’s a very risky way of investing.”
As a parent, you can advise them to mitigate the stress of having a single stock losing value by instead investing in a portfolio with multiple stock holdings. You can also discuss diversifying by investing in different asset classes including bonds, different kinds of stock (small-cap, international, etc., and real estate. (Learn more about the potential benefits of diversification.)
Talking point: Start investing for retirement early
Williams says your children or grandchildren may think they don’t need to start investing for retirement today because their retirement date is so far in the future.
But it’s important to explain that, in fact, now is the best time to invest to take advantage of the potential power of compounding (any returns earned from investments have the potential to start earning returns, year after year).
“A person who starts saving for retirement at age 20 could end up with double or triple the money compared to someone who saves the same amount but starts at age 40,” Williams says.
Talking point: Participate in workplace retirement plans
Williams says you should encourage your child or grandchild to participate in an employer-sponsored retirement plan such as a 401(k). If an employer offers matching contributions, advise them to contribute at least enough to get the full match.
“Explain to your children that this is essentially free money they don’t want to pass up,” recommends Williams. Because the funds are automatically deducted from each paycheck, workplace plans can also help deter investors from the temptation to spend all their take-home pay.
Talking point: Choose a trusted wealth specialist
A wealth specialist can help your adult child or grandchild set short-term and long-term goals and build a wealth plan to help them work toward those goals, Williams says.
Even if they are comfortable making investing decisions, a wealth specialist can help them develop a cash flow plan, keep their portfolio balanced, and help factor in other important aspects of their finances, from insurance to tax planning. They may also bring together additional specialists who can add their specialized experience to fit your child’s needs.
Wells Fargo & Company and its affiliates do not provide legal or tax advice. Wells Fargo Advisors is not a legal or tax advisor. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.