The long term success and failure of a Family Firm and its members are directly related to how financially knowledgable its members are. In this article for Bauer media, I look at what families should take into consideration when it comes to fiscal education. David Harland – Managing Director
If you took a moment to think about it, how financially literate are the members of your family? Another way to think about it is this: are your family members prepared to be good stewards of your family’s current and future wealth?
Financial literacy is the ability to understand financial concepts like saving, budgeting, debt management, investing, goal-setting, and to make plans and decisions based on that knowledge. In today’s fast-paced financial and business world, these financial skills are vital to long-term financial and life success.
In a family business, the consequences of poor financial literacy can be profound: one of the leading causes of the financial failure of families and family businesses is a lack of knowledge of how to handle money inside and outside the business and invest family wealth. A lack of financial savvy can also greatly undermine your family’s ability to handle business issues and navigate critical financial transitions. One small-scale study of business owners in the US found a strong correlation between the financial success of a business and business owners’ financial “habits of mind.”
Research suggests that many Australians struggle with basic and advanced financial literacy. One study commissioned by the Australian Securities and Investments Commission (ASIC) studied six important types of financial skills and found that while many adults feel confident about their skills, their actions show a different picture. For example, 90% of adults felt confident about their ability to budget, but only 52% do so regularly; nearly one in five Australians wouldn’t be able to survive a financial emergency.
A different study found that young Australians under 35 are more likely to find managing money stressful, buy things on impulse, and struggle to understand financial matters like superannuation and risk/return tradeoffs. These problems can be greatly complicated by family wealth; young people can easily get themselves in over their heads with easy access to debt and money. In an effort to help, parents and grandparents can exacerbate the issue by failing to let young people learn from their mistakes.
Historically, most financially astute Australians got their financial knowledge from earlier generations. This intergenerational learning passes on not just valuable financial skills, but the values, culture, and attitudes about wealth that make up a family’s intangible capital. When the transmission of knowledge doesn’t happen, young people are left without a critical foundation for their financial literacy, frequently leading to costly mistakes with debt and savings.
If you read this column regularly, you know that I like to talk about the importance of protecting your family’s capital. Tangible capital like wealth is supported by the human, social, and spiritual capital of your family. Part of being a steward of your family’s wealth is knowing how to nurture the other forms of capital within your family and within the rising generation.
Fortunately, if you’re concerned about the financial literacy of your family members, there are quite a few things that you can do. We recommend by starting with a review of basic financial skills. The OECD offers an excellent interactive online Financial Literacy Test that you and your family can take to gauge your financial savvy and give you a starting point for family discussions.
I strongly believe in starting the process as early as possible with young children. The earlier you begin to develop financial literacy skills, the better off your children will be. Mary Hunt, the author of Raising Financially Confident Kids recommends using everyday activities as an opportunity to talk about how your family manages money and model healthy financial behaviours. She also suggests:
- Teaching and reinforcing the difference between wants and needs.
- Using shopping trips to teach purposeful spending and the concept of a good value for money.
- Giving an allowance in exchange for household responsibility to instill a good work ethic and teach important money management skills like saving for the future.
- Letting kids make financial mistakes early and allowing them to live with the consequences.
Want to learn more about financial literacy in a Family Business setting call FINH on 07 3229 7333.