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Financial fitness for families in business

The California State Assembly has adopted Assembly Concurrent Resolution 6 declaring April as "Financial Literacy Month."

The resolution's purpose is to raise public awareness about the need for increased financial literacy. Further, the resolution states, "Legislators, employers, schools, service groups, community organization, libraries, financial institutions and the media are encouraged to provide opportunities for financial literacy education for all Californians through a variety of means, in order to provide outreach and education."

An important constituency to include in the resolution's language would have been "families owning businesses," as having financially literate family members greatly enhances the survival potential of any multigenerational enterprise.

In my experience as a financial adviser to families working in and owning business together, unless the family members have sound personal financial habits, continuing to grow and develop a business for future generations becomes more challenging. The financial strength of the business can be put at risk unless family members are paid a reasonable salary for solid performance, have a personal budget that remains intact, keep personal debt under control and don't use the business as a personal bank.

When interviewing members of second or third generations, I frequently ask whether they can get a job some place else. Many times the answer is, "Not at this salary! I couldn't afford to work anywhere else but here."

By probing further, I often find that the family member is struggling to manage an expensive lifestyle, plentiful vacations and costly hobbies that require them to continue to work in their family business, even if it isn't their real passion. Moreover, they are often unfulfilled by their job and the family business, and feel they have few alternatives. They feel trapped by their own financial needs, and many times the resentment comes out in inappropriate ways at board meetings, or even everyday management discussions.

A common response to another question, "Why are you employed here?" is that the family business provides financial security, time and freedom to travel, and easy work. When I hear this, I wonder what kind of real contribution they are making to the profits, and whether they are on the payroll just because they happen to have the right last name -- not a real qualification for being employed anywhere.

As family members become adults, unless they understand budgeting, taxes, investing, cash flow, spending wisely, the importance of saving for the future and how to read financial statements, they become easy marks for get-rich-quick schemes or the latest scam. If they are foolish enough to invest corporate funds or even worse, qualified plan money, in some worthless investment, they put the business at risk and also can be sued by plan participants. In addition, the family's reputation can be tarnished if a family business is known to be a participant in a Ponzi scheme or other similar embarrassing financial debacle.

During the succession planning process, the founder and spouse normally won't consider transferring their business to a family member who always needed an advance on allowance, lost milk money on the way to school or never added money to the church collection basket. Counting on a child to make the required note payments that will sustain their retirement lifestyle is based on the child being financially literate, versus a child on the family dole.

Yet the same founder and spouse may have never taught their children good money habits or discussed values around money issues. They may have taught children how to drive and dance, but not money skills. The founder and spouse often want their children to have it "easier," and thus were overly generous and free on spending limits when their children were small. But looking to these same children for their secure financial future becomes a frightening idea.

Since April is Financial Literacy Month, take heed and focus on teaching the following money skills that author and financially literacy expert Joline Godfrey shares in her book, "Raising Financially Fit Kids."

  • How to save.

  • How to keep track of money. Buy your children Quicken software and urge them to track their income and expenses, which will become the basis of their budget.

  • How to get paid what you are worth. Maybe it's time to revisit job descriptions and setting up reasonable compensation plans.

  • How to spend wisely.

  • How to talk about money.

  • How to live on a budget. Institute a "no more advances" policy with allowances or salary.

  • How to invest. Invite your child to meet with your investment adviser. Send your child to a class on investing. Start a junior investment club for your children and other children in the family.

  • How to exercise the entrepreneurial spirit. Offer to match whatever funds your child/grandchild puts into a Roth IRA from their earnings.

  • How to handle credit. If necessary, send your child to meet with a consumer credit counselor. Encourage younger children to use a credit card wisely by starting them with either a debit card or credit card with a small limit.

  • How to use money to change the world. Share your philanthropic thoughts with your children, and encourage them to choose a cause to support with their time, talent and treasure.

    Through all of the financial literacy training, remember that it's more than just money. You are teaching a child or grandchild how to become independent, how to make good decisions and how to become a contributing member of the family and the community.

    It's never too late to begin to encourage financial literacy among your family members -- in fact, creating a lasting legacy depends on it.


    Eddy, a Certified Financial Planner, is president of San Diego-based Creative Capital Management Inc. and co-founder of the Family Business Forum at USD. She can be reached at peggy.eddy@sddt.com.

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