Financial Skills for Money Management

Htown Harry

Thinks s/he gets paid by the post
May 13, 2007
Scanning this month's Journal of Financial Planning after reading a thread on updates to the Trinity Study, I was curious about this article:

Not Your Typical Incentive Trust: The ROTE and FST, Part 2

It was written by a lawyer and two psychologists. They have a specialized practice dealing with rich folks passing family wealth from generation to generation, often through trusts.

I'm not familiar with trusts in general and, based on my portfolio and family situation, it is unlikely I will have a need to learn the ins and outs of these kinds of trusts. I did find the article interesting, however. I learned that trusts are often set up with fixed disbursement guidelines (say 10% per year or the beneficiary attaining a certain age) or incentive-based objectives (such as graduating from college or maintaining full-time employment.)

The authors propose an alternative that attempts to quantify another set of measures for a "financial skills trust". Each of these measures are elements of the advice and wisdom frequently seen in bits and pieces here on

The eight benchmarks the authors suggest as trust disbursement criteria seem worthy of a post here in the Young Dreamers forum. Except for #6, these objectives are worthy measures of financial literacy and financial responsibility even if one is not a trust fund baby (edited for brevity):
Financial Skills for Prudent Money Management

Based on the literature about financial literacy skills and our collective experience as wealth counselors and advisers, we have found there is a core set of six interrelated, primary financial skills fundamental to prudent money management, along with a secondary list of two skills that are commendable but not crucial.

1. The ability to live within one’s means; in other words, not spending more than one’s income.
Expenses cannot exceed income for any reasonable period, but for special situations there could be exceptions (for example, starting a business, allowing expenses to exceed income by 10 percent for up to two years, etc.) (One of the later skills deals with credit behavior, to avoid gaming this guideline by using credit cards or debt.)

2. The ability to manage spending in order to save a portion of one’s income, as needed.
The beneficiary would establish this skill by demonstrating the ability to create a reserve, delay immediate gratification, and resist spending the reserve.

3. The ability to understand and manage credit and debt, thereby avoiding excessive debt. This skill relates to “closing the back door on an easy way to overspend.”

4. The ability to maintain reasonable accounting of one’s financial resources. Can the beneficiary keep a budget that has any relation to reality and that keeps the beneficiary from constantly coming back to the trustee for extraordinary distributions? This skill relates not so much to being able to make a budget as being able to follow a budget.

5. The ability to understand and manage one’s personal assets, either using basic investment procedures and principles oneself or delegating these actions responsibly to appropriate advisers. If the beneficiary is doing an effective job with guidelines 1 through 4, the beneficiary will build a reserve that will need to be managed. The beneficiary should understand the basics of sound investment principles.

6. The ability to generate additional income through employment if funds in addition to trust distributions are either required or desired.
The beneficiary must be able to get and keep a job if the beneficiary wants more money than just the trust distributions. That involves specific skill sets, such as showing up on time, getting along with co-workers, etc.

The following two skills are advisable though not crucial. These last two skills are subjective, and it is much harder to come up with specific standards.

7. The ability to use a portion of one’s income and/or financial resources to support charitable activities of one’s choosing.

8. The ability to show initiative, engage in entrepreneurship, and demonstrate purpose in paid or unpaid work.

I like this list. A lot. I plan to use it as a guideline in advising my 21-year-old as she graduates from college, gets a job and plans for graduate school.
I think my trust will instruct full disbersement once the beneficiary has passed all 3 levels of the CFA test.
I think my trust will instruct full disbersement once the beneficiary has passed all 3 levels of the CFA test.

Holy moly! Yeah, that would do it. :D Boss taking #2 again, maybe. :cool:

I've left the unenviable task of determining HEMS qualifiers to my BIL for the two trusts (one for he and my sister's kids, other for my brother's kids). Instructions are disbursement at youngest's 35th birthday of anything left, in equal shares.

If it were our own kids, I think I'd be even more interested in the financial literacy list, but with these being my niece and nephews, all I can hope is that I live long enough to possibly influence their financial choices.

Thanks for posting the list--it is a good goals list if they aren't going for the CFA! :D
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