‘Catalyst funding’ is a notion commonly associated with business, health care and even the not-for-profit sector. It describes investments that are made to accelerate the development of an innovation or strategy. The theory being that with such funding, desired outcomes can be achieved faster or perhaps on a larger scale.
At Newport Private Wealth, we’ve coined the term catalyst funding to describe various strategies used by families to give their children a ‘leg up’ and as a means to educate them to better manage their finances. It’s a different way to think about how you provide financial support to your children – purposefully, strategically and objectives based.
There are various forms of catalyst funding. In the simplest form, many families provide allowances to younger children making them responsible to pay for certain expenses. Some encourage their children to allocate their allowances into thirds; one each for spending, saving and giving. This teaches values like discipline, generosity and philanthropy.
Funding private school fees and education abroad is another form of catalyst funding. The hope is that an investment in education will precipitate success and joy in whatever path the child chooses. Post-secondary school offers a more direct catalyst when a child shares in the cost of tuition and other costs. Summer and part time jobs are required to pay for discretionary expenses and become the catalyst for learning how to budget and save.
The greater opportunity for catalyst funding occurs with adult children who begin to face larger financial challenges. Buying a home or starting a business requires capital. Wealthy parents are willing to help, but want their children to experience the struggle to succeed, so partially funding these initiatives becomes the catalyst without eliminating the need for children to work hard and learn to manage finances, effectively.
Loaning or gifting capital to adult children either directly or indirectly through a trust can be an excellent catalyst to a better understanding of investing in addition to saving significant taxes and fulfilling estate planning objectives. Taking responsibility for setting investment policy, learning about investment alternatives and understanding risk versus reward are skills which are vital when assets are ultimately inherited. It is better to fail and learn from a smaller mistake at a younger age than suffer a catastrophic loss from a larger one later in life when the stakes are higher and less time is available to recover.
At Newport Private Wealth, we develop and implement catalyst funding strategies for our clients to better prepare their children in multiple facets of family wealth. As a starting point, we encourage families who are interested in the concept to first think about the following questions:
What interests and abilities does your child have that you would like to encourage?
What values do you want your children to inherit and what strategies might be employed to encourage these?
How could financial support play a role in your objectives?
What level of support are you prepared to provide? What level of support can you afford?
In a future blog, we will examine various mechanisms families can use to determine a level of catalyst funding and how to measure progress and outcomes.