Financially Literate?

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, I look at what families should take into consideration when it comes to money and responsibility across generations. David Harland – Executive Chairman

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 profit, balance sheet, 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 investing 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 Australian wouldn’t be able to survive a financial emergency. A 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. 

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 our many resources, you know that I like to talk about the importance of protecting your family’s capital. Tangible capital like financial 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 family special education workshops facilitated by a FINH consultant. The tailoring of the workshop is critical in ensuring it is independent (not a family member) and considers the different levels of learning styles of each of the family members.

Want to learn more about financial literacy in a Family Business setting call FINH on 07 3229 7333.

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