Leaving a Legacy That Lasts is More than Money

February 14, 2024

Someday, your physical life on this Earth will come to an end. You’ll leave behind your legacy. Certainly, you will likely leave money and property. You can also leave a positive, memorable impact on others- family, friends, colleagues, and even strangers- that is not measured in money. Perhaps you had a teacher, now deceased, who had a big impact on your life. A coach? A grandparent? Each might have mentored you in a very positive way and, in so doing, may still live in your memories.

Today we are going to talk about a very important topic that could have a life-long lasting impact on young adults- how to deal with money properly for the rest of their lives. The earlier they know how money works and how they can make it work, the faster they can achieve financial independence. (Again, financial independence is having enough personal wealth and passive income to cover your living expenses for the rest of your life.) We will first review some money management tips for young adults and let’s then illustrate some ways that we at DWM have helped client families to assist their young adults to accomplish these tips and create a lifetime of excellent money management.

Forbes’s recent list of money management tips for young adults:

  1. Learn how to budget. Allocate reasonable amounts to your needs (daily essentials), wants(discretionary) and savings. Monitor it and stick to it.

  2. Use the 50/30/20 Rule. Using your net after-tax income from work, put 50% into needs, 30% in wants, and 20% into savings. You may need to start with 10% in savings and move the percentage up every time you get a raise until you hit 20%.

     

  3. Set short-term goals for yourself. Perhaps saving $50 per paycheck or $2,500 per year. Set realistic goals you can achieve and then meet them.

  4. Create an emergency fund. There are always surprises. Put or accumulate 3 months of living expenses in an interest-bearing money market fund.

  5. Use cash instead of credit. Only use a credit card if you can pay the full balance when the bill comes, without incurring interest. Certainly, cars and houses can be financed. Pay off your debt.

  6. Educate yourself. Read books. Listen to podcasts. Talk with and listen to people who manage their money well.

  7. Invest for the long-term, allowing your investments to multiply with compound interest over time. $1,000 invested at age 20 that earns 7% annually would grow to $21,000 in 45 years.

  8. Get up to speed on taxes. You’ll be paying income taxes for the rest of your life. You could spend thousands or even millions of dollars over time. You need to be as “tax efficient” as possible. Consider investing early in Roth accounts which are tax-free forever.

  9. Understand your employer benefit programs and make use of them. Companies often match a portion of your retirement contributions and help provide health, life and disability insurance. These benefits are often tax-free or tax deferred.

  10. Try to find a mentor. This could be a family member, friend, or a business professional to help you accomplish these important activities.

Now, let’s review real life examples of how some families, with assistance from DWM, have helped their young adults learn money management, create and develop good financial habits, and get them moving in the right direction to financial independence. 

  • Provide annual payments to Roth accounts which can be made up to the level of the young adult’s earned income with a current cap of $7,000 per year. These amounts are tax-free forever. 7 years of $7,000 payments from age 18-24 earning a 7% annual return could grow to $1.1 million at age 65.

  • Provide matching amounts for young adults who contribute to company retirement plans, or their own plans. If a young adult contributed $2,500 to a retirement plan for 40 years that was matched ($2,500) by a parent or grandparent, in 15 years at a 7% return, the value would be $134,000.

  • Provide an opportunity to own a part of a piece of real estate by lending the young adult the money to buy it and then forgiving the annual payments using the annual gift tax exclusion (currently $18,000 per year). For example, you could use an LLC and sell 10% of the property valued at $100,000 (using discounts) and then establish a 10 year note at 5% interest with annual payments of $12,333 and forgive the note annually. The income and appreciation of the property will go in part to the young adult.

  • Put up the money to buy a house, let’s say $250k, for cash for a young couple. Establish a note over 30 years, e.g., with a rate of 5% per annum. Annual payments would be $16,000. But in this case, the parents tell the couple that if the couple together contribute $16,000 per year to retirement plans (company or personal) then the parents will forgive the note payment annually. In 30 years, the young couple owns the house and their retirement savings at 7% growth are $1.6 million, not even counting potential company matches.

  • Provide financial training to the young adults without cost to the young adults. At DWM, we do our job to support the family’s goal of excellent money management for the entire family. We provide a proprietary program for young adults, either children or grandchildren of our clients which we call “Emerging Investors.” It focuses on investment management and financial education. We want these young adults to start investing early and wisely and get on their way to financial independence. There is no charge to them or their parents for this service for accounts for the young adults up to $100,000 per individual.

As you can see, each of these examples is a way for parents and grandparents to have a real impact on young adults. At that same time, the young adult needs to take accountability for their part in the programs. In each case, the young adult has to perform, i.e. make money, save money and/or get educated in order to get the benefit from their parent(s) or grandparent(s).

Conclusion:  Many of us are familiar with the Bible passage and Chinese proverb: “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” From our perspective it’s the same with excellent money management. In other words: “Give a young adult money and, without money management skills, that money may not last long. Teach a young adult to understand and build excellent money management habits and discipline and the young adult reaches financial independence not only earlier, but with a sense of personal satisfaction.” One of the most important tasks here at DWM is to help our clients identify and leave legacies that have a positive impact on their family and others. Not all legacies are money and property. Some of the best legacies are mentoring positive long-term behaviors. Many of you are already doing that. Congratulations. Happy to chat about this important subject anytime. Please give us a call.



Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page