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Today on the podcast, we welcome back Mark Berg. Mark is the founder of and lead advisor at Timothy Financial Counsel, which is an hourly financial planning firm that he started in 2000. Prior to launching Timothy Financial, Mark served as a client manager at a fee-only financial planning firm, and he has provided fee-only financial guidance since 1995. He holds a bachelor’s degree in economics from Wheaton College and is a certified financial planner practitioner and NAPFA-registered financial advisor. He served on the national board of directors for the National Association of Personal Financial Advisors from 2008 through 2011. In the spirit of full disclosure, Timothy Financial is the firm that my husband and I use for financial planning. I have no financial relationship with the firm other than that we pay them for their services.
Background
Bio
Timothy Financial Counsel
“Mark Berg: Hourly Financial Planning Is ‘A Vast Blue Ocean,’” The Long View podcast, Morningstar.com, March 28, 2023.
Funding for College
“529 Plan Tips for Grandparents to Save for College,” by Emma Kerr, usnews.com, Sept. 7, 2021.
“How to Allocate Assets for College Savings,” by Christine Benz, Morningstar.com, Jan. 19, 2022.
“Morningstar 529 Ratings: The Best Plans of 2024,” by Hyunmin Kim, Morningstar.com, Oct. 29, 2024.
“What to Do With Extra Money in Your 529 Plan,” by Amy Arnott, Morningstar.com, June 30, 2022.
“The Best Way to Save for College,” by Christine Benz and Susan Dziubinski, Morningstar.com, Oct. 11, 2022.
Transcript
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Christine Benz: Hi and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Amy Arnott: And I’m Amy Arnott, portfolio strategist with Morningstar.
Benz: Today on the podcast, we welcome back Mark Berg. Mark is the founder of and lead advisor at Timothy Financial Counsel, which is an hourly financial planning firm that he started in 2000. Prior to launching Timothy Financial, Mark served as a client manager at a fee-only financial planning firm, and he has provided fee-only financial guidance since 1995. He holds a bachelor’s degree in economics from Wheaton College and is a certified financial planner practitioner and NAPFA-registered financial advisor. He served on the national board of directors for the National Association of Personal Financial Advisors from 2008 through 2011. In the spirit of full disclosure, Timothy Financial is the firm that my husband and I use for financial planning. I have no financial relationship with the firm other than that we pay them for their services.
Mark, welcome back to The Long View.
Mark Berg: Thank you. I’m looking forward to it.
Benz: Well, we’re looking forward to it as well. We want to talk to you today about how parents can help their kids financially without ruining them, which you’ve indicated is something that comes up a lot in your work, a conversation that you frequently have with clients. So, I’m curious, do clients frequently tell you that this is one of their goals or do you initiate that conversation with them?
Berg: That’s a great question. And it’s actually a little bit of both. Sometimes clients do initiate, especially if there is some unhealthy history there—there’s a little bit of shame to bring those things up. But we as a firm, and I think most financial planning firms do this, really try to lean in and be proactive because that’s our job, our responsibility. And so, we feel that this is a critical conversation to have a healthy transition of wealth from one generation to the next.
Arnott: And do you find that these conversations tend to surface at specific life stages or inflection points for the children, or is it kind of all over the map?
Berg: It really is all over the map. Sometimes it’s just when the client starts engaging us. I just had a conversation last week with some clients in their early 40s and they have younger children, and they’re looking for resources to start building some good financial education habits even at a younger age. But we also have clients who have kids that are well in their adulthood, and we have different issues that we deal with, but they’re all around the same topic, absolutely.
Benz: So, we want to talk about helping kids or maybe not helping them at various life stages. And we will take this life stage by life stage starting with really little kids who are wholly dependent and then moving into those older adults that you just referenced. But before we get into that, what are some general principles for helping kids financially without creating a sense of entitlement in them?
Berg: Yes, it’s a very difficult topic because one of the core understandings on this issue is there is not a one-size-fits-all topic. This is not that kind of topic. There are not those types of books. You really have to go into their family circumstance to get a better understanding on what are the dynamics that they grew up with, that they’ve raised their kids under. And so that’s one of those things that each client has to wrestle with their specific circumstance that they’re dealing with. So that would be a general overall principle to understand: This is not a one-size-fits-all.
Another few things that I would mention as far as coming to those general principles, another is smaller is better at the earlier stages and then ramping up over time as they age and mature tends to be the most successful. What I mean by that is whether it’s financial assistance or gifts or interacting with the children, I look at it as more of a journey, it’s not an event. And when they’re younger, they have less understanding or ability to understand, but as they grow older, you can build on things. And that’s, I think, true also in dollar gifts. So that’s another principle.
And the last overarching principle is just this overall concept of stewardship. I think it’s an important mindset. Stewardship is defined as the careful and responsible management of something entrusted to one’s care. And that concept of stewardship can be very powerful to help have a healthy relationship with money.
Arnott: So, if we start at the earliest ages, newborn or up to school age, when kids are definitely financially dependent on their parents, when do you think parents should start talking to their children about money issues? And what should those conversations consist of initially? Are there any best practices that you recommend for talking about money with young children?
Berg: That’s a great question. I think there’s certainly an age where the conversations can start to be had. They can be as early as six, seven, eight years old, where you can start talking about really the basics of money, because they really don’t have a lot of concepts related to that. Some potential best practices or hands-on, I think actually using physical cash is really important with young children. It’s visual, they can see it, they can spend it or receive it back. So that use of actual physical currency really helps them understand the true cost and the trade-off between money, whether it’s buying ice cream or going to the store to buy a toy. So, I think just seeing visual cash, which is not as common these days, but is a real powerful tool still to this day for children.
Other things, as we’ve worked with clients and they’ve asked these questions about young children, we like to see kids do something where there’s a bit of delayed gratification, where they express a desire. And so, the conversation then turns to, well, how can you work toward achieving that desire, rather than getting that instant gratification? So, I think these are some of the just basic foundational principles that you can start at a pretty young age to build for good healthy interaction with money in the future.
Benz: Building off of that, Mark, I wanted to ask about when and how to send the message that money is finite in the household, that I’m not an ATM, that we do need to set our priorities. And it seems like you’d want to do that without scaring kids or having them worry that you’ll run out. But how do you recommend that parents get into that idea that, for lack of a better term, money doesn’t grow on trees?
Berg: There’s a couple of different ways that a family can tackle this. Some take the allowance route and say this amount that I am giving you is finite, and it’s for these specific purposes. So, it creates that sense of scarcity because there are certain amount of dollars, and it allows for them to say, “Well, I want x, and my allowance doesn’t equal x. So, I may have to save several of those in order to get to that point.” So, it just creates some of those foundational principles. So that’s one way of doing it.
Another is really this concept of work. I would say in the current environment, getting a job used to be more of a rule than exception, now it’s the flip. There are just younger individuals are not working like they used to, whether it’s paper routes or mowing laws or helping a neighbor in doing housework and receiving compensation through that. But that is another great way because they’re seeing the return on their investment by the work that they do. And then within that, one client, what they do is their kids work, and they have a 10-40-50 rule. And the 10 is you have to give away $0.10, you can spend $0.40, and then the last $0.50 goes toward your future college. So that’s a way that they have created more of a structure to money and help them see the finiteness of it relative to the desires that they may want to spend.
Arnott: How do you think parents should deal with peer pressure if the family is growing up in a relatively affluent area and they see a lot of their friends have the latest iPhone or sneakers that are in style or clothing or whatever? Do you think that parents should set some limits around expensive purchases like that, even if they could afford them?
Berg: That’s a great question, and it is a family-by-family conversation. I think that really playing off one of your earlier questions, having that either delayed gratification working toward that special purchase of a pair of shoes or whatever that’s more expensive than traditional, I think that’s a very healthy practice. And I think that it’s also healthy to say, no. And what we often hear from the kids of parents down the road is at the time they did not appreciate not getting that instant gratification, but later on they came to the understanding that was actually very healthy. And so, I believe that it would be beneficial for family to not just always give, even if you have the means to do it, because that’s not reality, that is not life. And we’ll talk about this in later stages, but one of the challenges that new graduates have from, say, college is their mindset of success or what is normal is what it took their parents 30 years to create. And so, there needs to be some balance between that perception and their current reality.
Benz: I want to follow-up on that, Mark, but I wanted to ask about this whole idea of indulging kids in expensive stuff. Do you think, though, sometimes that can actually be beneficial for the child if it helps them fit in a little bit? I mean, within reason, but if they feel like they are similar to their peers in some of these respects, does that help the kid in a way?
Berg: Boy, now you’re getting beyond the financial and into the psychology.
Benz: Yeah.
Berg: And so, it really does become more of a case-by-case basis. I have three sons, and my hope for my sons when they were younger was that their peers would appreciate them for who they are, their character, not the wrapping around them, meaning what they wear or how they spend money or drive what they drive or whatnot. And so that was really our focus. And I will say boys are very different from girls when it comes to desire to latest fashion and all that. So, I’m a little ignorant in that regard.
So, I would say there just needs to be balance to that. I think it can be taken too far to the extreme. And so having some balance where some of these special purchases really retain their specialness because of their rarity as opposed to always indulging, always buying the latest. And it really creates an expectation that actually isn’t sustainable when that child becomes independent because they’re not going to immediately be in the circumstance that they can continue that lifestyle.
Arnott: I remember back when I was in middle school and high school getting ready to go back to school in the fall, my mom would give me kind of a budget for clothing. And I think she actually did some coordination in the background with my friend’s mother, so we were all in a similar range. But I think that was helpful because it gave me some choice within limits. And if I wanted one pair of designer jeans, I could do that. Or if I wanted to buy more pieces of clothing, I had that option as well.
Berg: Absolutely. I think that was very wise of your mom. I actually even like the collusion and collaboration because that helps with that peer pressure issue that everybody faces in that stage of life.
Arnott: This is kind of a side topic, but what do you think about personal finance and investing being taught in schools? Do you think that that is helpful? Or we’ve also heard the criticism that sometimes that knowledge doesn’t really stick until people are old enough that they are actually paying their own bills and have to balance the budget and things like that?
Berg: Yeah, I’m of the opinion that it takes several hearings often from different sources for anything to stick, especially for a younger individual. So, I would certainly not discourage it. I would agree that it’s not likely going to fully stick. But there may be even just one experience or one example that sticks with that child that really helps carry them. For example, my brother-in-law used to teach business economics, so he went through that. And the concept of compounding is so powerful when you actually play it out. That was, seemed to be a real sticking point, the value of time on investments or whatnot. And that seemed to be one of those few principles that really stuck with people over time. So, I think that it is valuable, and the earlier, the better to start building some of these key principles. So, I would encourage schools to continue to offer that.
Benz: We wanted to talk about funding college, which is a big financial goal, obviously, in many households with children. How should that conversation go? I’ve heard that it’s a good idea for parents to set expectations about how they intend to pay for college, how much they want the child involved in paying for college. Do you think that’s a good practice to set parameters about here’s what we can do for you, here’s what we expect you to do, and so on?
Berg: Absolutely. I think it’s very, very important. It’s such a significant cost investment for the family. And so, as you’re broaching that topic, we would suggest early and often from a conversation standpoint, as soon as they are able to work, and this is back to that example that I mentioned, where a certain percentage of, let’s say, earnings was set aside for their participation in schooling. So, I think there are so many things that interconnect as it relates to planning for college. So, I’ll tell you an example or two: A client that I’ve worked with for many years of modest means, and when we went through their process, we determined without sacrificing your own financial future, you could afford this amount per year. And so, what they did was they sat down with each of their kids, and they said, this is what we can afford, this is what you can count on, but everything above that, it’s on you.
And the amazing thing, and it feels near miraculous, it was not a big number that they could contribute. All three of their children graduated debt-free because they each took a different path as far as how they approached it, whether it’s two years of community college and then transfer and finish at a traditional four-year school, or graduating early, or applying for scholarships and grants. There are so many different ways that you can go about it, as well as just earning and saving, because it is a significant expense, it’s important to have those conversations set those guidelines, and stick to them.
Arnott: So, in working with your clients, I’m wondering, do you often see people oversaving for their children’s education, or assuming that the kids are going to go to medical school or law school, something like that? I remember when I was working as a financial advisor a few years ago, that’s something that we ran into, especially with clients who were very successful themselves, who were physicians or attorneys, and had the expectation that all of their children would follow a similar path.
Berg: Yeah, it’s a great question. And the answer is, yes, in some cases, that was definitely the case. And they were planning not only for a four-year undergrad, but also for grad school, or medical school, or law school, that sort of thing. And the 529 plan is a very attractive plan because of the tax benefits associated. It’s like a Roth IRA in the sense that it grows tax-free, withdrawal tax-free. But what we typically do in our recommendations is, say, when they’re young target about 80%, about three years of a traditional school, and then we fine-tune as we get closer. But for those that, before they came to us, came with large balances, we just have to plan accordingly. One of the benefits of 529 plans is you can change the beneficiary. And so, we can even eventually go out and set money aside for future grandkids or whatever. So, there is some degree of flexibility with that.
But we would not recommend oversaving. We don’t feel like that’s the best way. The 529 set up for current schooling for a current child. And so, we try to hit it as close as we can to actual cost.
Benz: I want to ask a related question about parents’ tendency to overextend themselves with respect to college funding. So, if their retirement funds aren’t really where they should be, they might still be inclined to prioritize the college fund. Do you encounter that? And what do you say to clients who are inclined in that direction, where that’s the key priority, and you’re looking at the retirement fund, and a little bit worried that that might not be what it should be?
Berg: Yeah, it does happen from time to time. I think any parent wants what’s best, whatever they define as best for their kids in college education is often considered one of those top gifts that you can give to your children. But it has become increasingly, well, for sure, expensive and to many unaffordable. And so, yes, there sometimes is that unhealthy balance, we would say. And what we try to do is answer that question not by convincing them, but just by showing them their own numbers. And that’s with planning. I’m sure those of your listeners who do financial planning, or I’d imagine a lot of your listeners have a financial planner, can help them walk that journey of saying, OK, here is your picture excluding college—let’s layer college in, let’s layer saving for college at different levels, and what would be the impact on your financial picture. And so, oftentimes we are recommending tapping it down and setting limits, partly because when those preconversations weren’t had about college and creating boundaries with them, the decision-making for the student may be in a completely different direction. Oh, I want to go to a school on the coast, or be by the ocean, or this is a really pretty campus, or they’ve got a great Greek system or whatever. And not seeing that, well, there’s a $70,000-a-year decision associated with that. And so, they need to understand the financial part of it. And this is part of training up our kids in financial responsibility and showing our kids that we do that ourselves in big decisions like this. That’s a very important learning tool.
Arnott: I remember one thing I did with my two sons when they were in high school and looking at the college decision is I actually sat down with them, and we filled out the FAFSA together. And it’s a very time-consuming process, but I think it was probably helpful for them just to kind of open the kimono a bit on, what are the assets that we have, where do we have these various accounts and how much of that would we be able to use for college funding?
Berg: Yeah, I think that’s a great part of their education. You obviously have to be careful in that. It’s a case-by-case circumstance on which children are ready for that. But I think that if they are ready, it’s excellent.
Arnott: So, you touched on this earlier, but I was wanted to get a little bit more about your take on kids working when they’re in high school or college. I’ve talked to some people who are very adamant that working builds valuable life skills and helps keep kids on track. But other parents seem to have equally strong opinions that they just want their kids focusing on school and extracurricular activities instead of spending a lot of time on part-time jobs?
Berg: Yeah, and that’s going to be a family-by-family decision. I’m happy to share how we approached it in our family. As I mentioned, we have three sons and from an early age, they did little jobs outside of the home with neighbors or even teach them lessons and then worked. There are certain jobs you can do even younger than 16 within a certain hour range that are acceptable. And we adopted that same approach I mentioned earlier of setting money aside for college and for their own spending and for giving. And they really embraced that and were able to enjoy a pretty nice lifestyle. But what I would say to the point about extracurricular and studies, I found with my kids that having the work that they did throughout the year, especially in the summer, actually improved their habits because there was more of a scarcity of time and so they had to be more efficient in their studies academically. And we’re thankful that all three actually just graduated, our last son from college in May. And none of them suffered from an academic standpoint as a result of their work. And we believe it built some great character in all three, the fact that they had to work and got to enjoy the fruits of those labors.
So, we think that it was a great building block for our family. They still did sports, swimming, tennis, that sort of thing. In high school they did intramurals. In college they did some of the academic but not over the top from academic clubs and that sort of thing. But we’ve been just really grateful for how they turned out. And I feel that their working was really a good part of that.
Benz: That was certainly my experience too growing up starting with babysitting and then on through college. It really was such a valuable way to learn time management, which is one of the best life skills that any of us have. Mark, I wanted to ask about when kids go off to college that’s usually the time when you get your first checking account. You’re in charge of your finances to some extent at that life stage. So, can you talk about that? Talk about tools that parents would want to be introducing to their children? When is the best time to get your first credit card, for example? Can you talk about that?
Berg: Absolutely. So, we opened up checking accounts that were under our accounts for each of our sons very early. We recommend that for our clients as well. That gives not only visibility to what’s coming in and what’s going out, but it also helps build a little bit of history. From that, especially once they start getting some type of W-2 type of job, at that point you could actually start applying for a credit card. We encouraged our sons to apply for a credit card as soon as they would be accepted. Yet at the same time, this is the beauty of technology, we encouraged our sons, use your credit card for your expenses, but pay them off literally as you go. So, not wait for a month and for that month. So, not only did they not have a monthly balance, they really didn’t even have a weekly balance. That kept what they really had available to them visible real time for them. So, they knew always there was no surprises about, oh, I have this credit card bill and it’s beyond my means because that just wasn’t part of the equation. And then what that does is that starts building that credit history so that I look ahead to when they’re out of college. If you wait until out of college, the credit limit is so low that it’s almost not helpful.
And so, we have found that that is value, but it’s balancing the responsibility of a credit card with the benefits that can come with that credit card. That’s why we always encourage them. They do this still to this day. They just pay off their credit cards very regularly. It’s very, very easy to do with technology.
Arnott: If we look at the next life stage, the postcollege years, maybe spanning the early 20s to mid-30s, this is a period when most young adults are very busy and have a lot of different things going on. They’re starting their careers, getting their own apartments, maybe getting married or being in a serious relationship. You say this is a stage when parents can make some of their biggest mistakes. Can you expand on that a little bit or give some examples of what types of mistakes people might run into?
Berg: Sure. When people graduate from college, they are moving from dependence to independence. It’s almost a semi-independence, depending on the circumstance. But we as parents, again, want our kids to launch well. We can potentially make decisions that really aren’t long-term for their benefit, because as you had mentioned in an earlier topic, kids need to understand that there are unlimited options for finite resources. And so, what we suggest with our clients, and I’ve done with my own sons, is when they get their first paycheck, we work through what’s going to be after taxes, which is a new concept for them. We talk about 401(k) and all that, but what’s going to come in each month? And then we work through what they can afford from a rent perspective, from clothing or travel, whatever their budgetary topics are concerned.
A lot of people, though, a lot of parents want to help their kids by supplementing and moving them into a lifestyle that’s really not sustainable according to their actual means. Or they continue to I’ll pay your car insurance, or I’ll continue to pick up your phone or we’ve got that family credit card. Don’t worry about it. It’s really not allowing them to adult, to really own that themselves. So, that’s creating that semi-dependence on parents at that earlier stage, I think, it really doesn’t set them up well for the future. So, it’s really helping them, working with them, and doing things that help without creating that dependence.
Benz: I wanted to ask about lifestyle considerations a little bit. You referenced earlier that it’s common for young people just starting out to adopt the creature comforts of their parents as their own. They might have gotten accustomed to a certain quality level for hotels, cars, furniture, whatever. It seems like that could be a problem for young people just starting out, especially given the Instagram culture that we live in that’s really fueling consumer culture. Can you talk about that? How parents can help their children make healthy consumer decisions?
Berg: Yeah, that’s a great question. And I think it does go back to what are your goals, their goals, meaning these people in their early 20s, what are their goals, and then what are their resources toward those goals, and understanding that there’s going to be a delay in just about any circumstance relative to the goals that they have. And so, building that healthy foundation is important. Part of that building of the healthy foundation is, again, living within your means. And so, there’s a lot of different examples, a lot of different paths we could go with this—an apartment. Are they going to live at apartment or are they going to live at home? That’s a tricky area that I’ve had a lot of conversations with. The best approach that I have seen to this is someone who, their rule for their kids—and they let them know while they’re still in college—when you graduate, you are welcome to live with us. And the first six months is free. And after six months, that’ll help you get established, get some savings for a security deposit for an apartment. But if you choose to continue to live at home, it’s $400 a month for six months, and then that number will double every six months indefinitely.
I know one of their kids was just about at the, I think it was $3,200 a month, he was going to get to that point when they said, “OK, I give!” And they moved out. But I love having that type of thing that really helps with the transition and helps create a launching point. I think that’s a healthy way to help. I think in the other areas, like I mentioned earlier—cellphone, car insurance, medical insurance that traditionally had been picked up by the parents—we recommend to our clients, they need to own those. They either need to take on their own car insurance, for example, and they’re on their own, or they need to pay their proportion on your policy and make Venmo or Zelle you each month, quarterly, and it’s their choice. So, then they have to do the research, am I better at Geico versus your policy or whatever the case may be. But they need to own their expenses so they can make their decisions.
And they may come to the decision on some of these things, you know what? It was a high priority when you were paying for it, but it’s not a high priority when I need to pay for it. And that’s good, that’s healthy.
Arnott: I think that one thing that has changed since the three of us were growing up is that it seems like more young adults are taking their time to get fully launched. Maybe they are living at home until well into their 20s, driving their parents’ cars, taking vacations with their parents. A lot of this seems really healthy and happy in a way to have the family still together after that point. But how do you think parents know when it’s time to give their kids a nudge and encourage them to move out of the nest and become more independent?
Berg: It is, again, a case-by-case circumstance. But my encouragement would be consistent with what I said earlier, which is the sooner you can get them to true independence, where they are owning their expenses and it’s within their means, the better. And that is really the healthiest approach. And some people can say, well, if they’re living at home, it’s not really that much extra cost for us and it’s helping them save. Well, a lot of times though, they’re not saving. It just creates an increased capacity to be able to spend. And they haven’t set aside that money. And in fact, in the case I mentioned before, there are parents that I’ve seen who have done the rent and unbeknownst to the child, when the child finally says, “OK, enough, I’m moving out,” they actually give them their accumulated rent back as kind of like a deposit for them.
So, it’s not known, it’s not expected, it’s just a gift back to help them with that launch. But, yeah, my encouragement is if they are to be considered truly independent, they need to be independent of their parents’ lifestyle and creature comforts and need to work through those hard decisions from an early age of the trade-offs of spending versus saving. And probably the one exception that I am OK with is actually family vacations. Those to me are more kind of one-off items. And family and family time, I place a pretty high premium on. So, helping with that or covering that, it’s probably my soft spot. But beyond that, I think the day-to-day expenses, car payments, all that really need to be owned by the adult child.
Benz: Well, the data certainly point to spending on experiences as being some of the most impactful ways that we spend money. I wanted to ask a related question mark, which is something I heard about through a neighbor. This idea of, friends of theirs call it a “ski” trip, spending kids’ inheritance. And the idea is that they take these incredible trips with their kids. But the idea is we’re doing this during your lifetime, during our lifetime, to enjoy this time together. What do you think of that idea?
Berg: I’m not opposed to that. As I just mentioned, I really think that family time, especially with aging parents and even grandparents, if they’re still living, is really a great investment in the family dynamics. So, I think there’s a lot of health to that. I guess there are limits to what these experiences could be. And there’s just going to be natural limits anyway, just given that most people have like two weeks of vacation in their first five years of employment anyway. But again, creating those opportunities for family time, I see there being value to that. But again, that’s more of the exception. And it’s an isolated, it’s a compartmentalized expense, as opposed to the day-to-day covering of expenses. So, I’d generally be fine with that.
Arnott: Another big-ticket expense at this life stage is often paying for a wedding. Do you have any suggestions for how parents can balance paying for a beautiful event that is going to be memorable and something that the kids really enjoy versus being financially responsible?
Berg: Yeah, weddings are a hard one because there’s a lot of emotion tied to weddings. But it is something that, given the variability of cost, I think that it’s something that they have to lean in on quickly. Meaning once an engagement is announced or whatnot, a budget needs to be established, and it needs to be stuck to.
And again, this is part of the continuing training up your kids, even as adults, in trade-offs. And I want this really, really nice dress. Well, that’s going to affect the venue choice or vice versa. So, people can do very, very inexpensive weddings and people can do amazing, incredible weddings. And you can spend at all levels. But again, I feel like if the parent is the one that’s going to be footing the bill, they really need to be able to have input on how much is going to be spent. And obviously, if the child and their fiancé wants to do above and beyond that on their own, that’s their choice. But creating those parameters is important.
Benz: I’m curious from a planning perspective, is it sometimes difficult to set aside your own view of what’s reasonable to spend on a big event like a wedding and really listen to the clients about what their cultural affinities are and the other things that might be feeding into their desire to have a really big-ticket wedding? How do you separate those two things?
Berg: It’s nearly impossible to be honest. We all have our leanings and our personal priorities the way we would handle things. So, it’s very difficult to not let that influence even the best of advisors. But at the same time, what I try to do, what I’m sure a lot of advisors do is, one, help them again understand that decision in the context of the rest of their goals. And would it have an impact on the rest of their goals? We’ll talk about, again, the training aspect that’s important for the child. There being some kind of limits or trade-offs that the child needs to think through. So, there’s different elements. But we can also bring in stories related to other clients, both wins and losses in this regard, and hope that those stories will help them come to a good ultimate conclusion on the topic.
Arnott: For adult children who are little bit older, another big milestone is purchasing a first home. How do you think parents can decide how much help, if any, they want to provide to their adult children for helping out with a home purchase either by helping them with a down payment or helping purchase furniture or things like that?
Berg: That’s a varied answer. And depending on the circumstance, part of it is the timing of it. Are you helping them get a home right after they’ve graduated from college? Is this 10 years in? Are they married? Are there grandkids involved? There’s a lot of factors that come into play. But I’d say some general principles.
I’d say the number one principle is don’t create a circumstance where your help creates a hurt. And what I mean by that is you’re putting them either in a financial circumstance—for example, you’re buying the home or you’re creating such a down payment that they can get to a next-level home that they wouldn’t have been able to afford on their own. And now all the upkeep, property taxes, keeping up with the Joneses, all of that becomes a burden and you really lose the joy. So, I think understanding those trade-offs with relation to helping with a down payment or not or even paying for a house is important.
Another aspect, sometimes we have clients who are willing to be the mortgage. They’re willing to carry it as opposed to the bank, provides more flexibility, less fees, and so on. That’s another way to do that. And again, they just need to treat it like a loan. The adult child needs to understand this is an obligation that it’s not, oh, I don’t have enough to make the payment this month. I’ll try to catch up next month. They need to look at it as a true obligation. So, I think it can be done healthily, but it needs to be done within that specific child’s needs. And they need to be able to show that they can support not just the initial cost, but also all that goes with it. It’s like buying a car that needs premium gas and you’re worried about paying for the premium gas. If you’re worried about the gas, you shouldn’t have bought the car in the first place. So, you just need to look at these decisions wholistically.
Benz: I wanted to ask a very big-picture question, which is how parents should balance lifetime giving, whether for home down-payments or anything else, with leaving money for their kids and their grandkids via inheritance. I’m suspecting this is a big topic of conversation with your clients. And I’d like to hear how you help them balance those two sets of goals.
Berg: It is a great question. And we do recommend gifting. In fact, we feel like families who are going to be leaving inheritance to their children that leaving it all at the end is not as healthy as doing it over time. And so back to one of those general principles that I mentioned at the beginning of that upward slope, we use language I often use with my clients is start in the shallow end and work toward the deep end with your kids. And so that can be as simple as when your kids are younger and they’re earning money for a summer job and they got a W-2 and let’s say they earned $2,300 over the course of the summer, contribute $2,300 to a Roth IRA on their benefit. And so, it’s basically tying: you work, here’s a benefit—it also leads to opportunities to talk about investing.
I think it’s a very healthy way of doing things. Sometimes people will do, especially when kids are a little bit older, maybe married, maybe starting to have children and they’re thinking ahead to things like college, maybe it’s a matching program. You put in a dollar, into a 529, I’ll put in $5—up to some limit to help incent them but also help them. And it’s working toward very specific goals, retirement, saving for college as opposed to just giving them a check, like the exemption, annual exemption this year is 18,000 per person per year. So, they could do that and that can make a lot of estate sense, but it may not be all that healthy for that child because that could just become an expectation and part of their lifestyle. So, at those earlier ages, I like being more targeted toward helping with education or helping with retirement. If the dollars are sufficient, they could look at helping max out the 401(k) beyond the match. Maybe they were just doing the match, but there’s a lot more above that and really helping bridge that gap.
So, there’s some creative ways that you can give without hurting. And then I also encourage clients as they get older, and older is all relative as it relates to child’s maturity and stage in life, but I think periodic gifting of a lump gift that is enough to warrant important thoughts, but not enough to really change their lives. And what this does is it really gives you a snapshot, a small example of what their decision-thinking will be like when they eventually potentially receive that much, much larger number of an inheritance down the road. And it gives an opportunity not for the parent to micromanage, but the parent to observe the decisions that they make, be available to have conversations, but really help guide and it be there on the journey, on the path to help them make good financial decisions, again, back to that stewardship concept.
So, I think there are good and healthy ways to start giving money over time, but there are equally ways that could be detrimental and create even a dependency, which is really the worst-case scenario.
Arnott: When people are thinking about estate planning and inherited wealth, do you agree with Warren Buffett’s take on that? He’s been quoted as saying, “You should leave your children enough so that they can do anything, but not enough so they can do nothing.”
Berg: Yeah, it’s a nice quote. It actually conflicts with itself in the sense that if you can do anything, then it almost implies that you could do nothing.
Arnott: Right. You could do something really frivolous.
Berg: Yeah, exactly. I think the general principle behind that is you don’t want to remove the incentive for those adult children to be productive in society, a productive member of society. So, leaving large amounts at a young age to a child where they have unfettered access, what I try to do with clients is number it up for them. So, let’s say they have one child, and they have a $4 million estate and what I’ll say, “Well, OK, if you have $4 million and you put that in an interest-bearing money market, and let’s say it’s at 5%, they’re going to be getting a passive income stream of $200,000 per year without having to do anything. Would that accomplish that second part of Warren’s quote enough so they can do nothing? And are you OK with that? And I find that those types of questions really elicit great conversations and then lead to, again, what I referenced earlier, thinking differently than, well, they can worry about it on their own after we’ve died, to what do we need to do even now to really build a healthy transition for this wealth.
Benz: Well, Mark, you’ve shared so much great food for thought with us today. We really appreciate you taking the time out of your schedule to be with us.
Berg: It’s my pleasure. Thanks so much.
Arnott: Thanks, Mark.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.
Arnott: And at Amy Arnott on LinkedIn.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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