Capacity is defined as “sufficient understanding and memory to comprehend in a general way the situation in which one finds oneself and the nature, purpose and consequence of any act or transaction into which one proposes to enter.” In practical terms, capacity means the ability to understand and retain information, weigh options, and communicate the decision made.

Often the first type of capacity to be lost is the ability to manage one’s finances. Managing one’s finances requires many different activities, a clear understanding of time frames, and a broad range of cognitive abilities and processes. Skills include identifying and counting money, understanding debt and loans, paying bills, acting prudently, avoiding exploitation, and understanding investment options.

This has important implications and urgency for older adults. Americans 65 and older make up 13% of the population, but hold 34% of the nation’s wealth. That translates to $18.1 trillion dollars, creating a “financial capacity problem” that is significant.

In legal terms, financial capacity is “the capacity to manage money and financial assets in ways that meet a person’s needs and which are consistent with one’s values and self-interest.” Financial capacity, along with driving, mobility, and medical decision-making, is a bedrock of individual autonomy in our society, and it is very difficult for older adults to admit to needing help in this area.

As noted earlier, financial capacity is one of the first abilities to decline. Recent studies have demonstrated that financial skills are highly vulnerable to early cognitive changes in mild cognitive impairment and early Alzheimer’s disease. Declines in financial skills are often the very first functional changes to be identified in incipient dementia.

Older people and their families are often unaware that this decline is occurring. The mean age at which financial mistakes are minimized is 53.3 years. A 2011 study estimated that older victims of financial predators lose $2.9 billion annually.

So what are the warning signs of diminished financial capacity?

  • Memory lapses – bills late repeatedly or not paid at all
  • Disorganization – misplaced documents, missing deadlines (taxes)
  • Declines in checkbook management – incorrect check completion
  • Math errors – can’t make change, calculate tips
  • Impaired judgment – use of money, appropriate investing declines

If you see any of these signs in your loved ones, it is time to take action. Often you will find the person welcomes your help – perhaps not at first, but it’s very possible that he or she is also concerned about finances but doesn’t want to ask for help. A good first step might be to ask if your loved one wants to just put all the bills aside when they arrive and go through them with you once a week. This will give you good insight into her financial capacity.

Financial power of attorney is often given to adult children so they can pay bills and manage their parents’ banking and investments. This can be arranged easily with the help of a lawyer. Remember, the most important thing is to make sure your loved ones finances are managed appropriately so they can live the life they want to live.

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