Today, consumers have better access to financial services than any previous generation. Up until the 1960s, the cost of essential services such as housing and education were much lower than today. Combined with a smaller income gap and booming industrial sector, financing large expenses was not as essential as it is today. In 1971, Richard Nixon abolished the gold standard and reduced international currency exchange controls. The financial implications of a floating currency created global opportunities for investment. These changes caused explosive growth in the financial industry, and lead to the widespread adoption of personal finance we have today.
The economic crash of 2008 illustrated just how important it is that consumers understand the implications of the financial decisions they make using borrowed money. Whether you are a financial professional soliciting your services to an elderly client, or simply assisting a family member with personal matters, your role is important. You have a fiduciary duty to help them understand the implications of their financial options. Following these simple guidelines will make even the most complex financial decisions simple for the older generation to understand.
Identify Clear Goals
In order to make healthy financial decisions, goals need to be clear and concise. Knowing these goals will help you answer the most important question. What is the exact monthly financial outlay required? When is the money needed? Make sure there is enough set aside for future expenses: Household expenses, travelling, medical care. You’ll be able to determine how much money can be accessed immediately, and help them schedule transactions to meet their immediate needs.
Establish the Future Value of Money
“In the old days, I could buy that for a nickel!” – everyone has heard an elderly person utter a similar phrase. The drastic price difference between basic household goods over a period of time is the best example of inflation. Money loses its value over time. This is exactly why it’s important to invest your savings somewhere that pays interest. The reduced buying power of a dollar over time helps the elderly understand the importance of investing their savings. The role of interest charged on borrowed money is defined by this concept.
Inflation is not the only factor in the future value of money, income and expenses also needs to be taken into consideration. Someone who is currently working may have a much higher income than what they will receive while on a pension. In this situation, money holds more personal value in the future. If you already earn enough to pay your basic living expenses, an extra $200 would only provide a small improvement to your quality of life. If your income is low, that same $200 will be more effective at improving their standard of living. Understanding where this person falls on the scale will help you determine when to borrow money. Debt should be incurred when the personal value of money is high, and paid off when the personal value of money is low.
Find Efficient Ways to Access Equity
Having spent many years paying into a mortgage, 401k, or pension means that elderly consumers may have built up significant assets over time. Unlike a bank account, you cannot simply go up to an ATM and make withdrawalsfrom these assets. The amount of money that can be pulled from equities depends on the individual’s income, the amount of money needed, and the time that the transaction takes place. Be sure to clearly explain what the elderly consumer would lose by cashing these assets out, and help them balance present financial need with potential future returns.
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Taking advantage of financial instruments such as reverse mortgages can allow an elderly individual to access home equity and reduce their expenses. What is a reverse mortgage? While they are a powerful way to leverage the value of home equity, the pros and cons of reverse mortgages should be clearly explained. Helping elderly clients understand the different ways they can access their equity and the implication of each allows for them to efficiently use their resources.