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Unprepared heirs can be susceptible to all sorts of challenges, including excessive spending or lending, poor investment decision-making, loss of identity and even guilt over receiving money they did not earn. Adding to the challenge is that inheritance most often comes when there is an estate event—the death of a family member. Along with the wealth transfer comes a slew of emotions and often heightened family dynamics, which add to the complexity of financial decision-making.
Naturally, greater preparedness leads to greater confidence among parents that their children are equipped to overcome these challenges and sustain and grow the family’s fortune. So how does a family prepare its rising generations to be good stewards of wealth? Communication, transparency, and the intentional and continuous development of financial literacy skills throughout their children’s growth stages.
Start early with small children
Even small children can learn the basics early on as a foundation. This could include teaching financial concepts such as: saving money by shopping for items that are “on sale; understanding how a debit and credit card work—that it’s not a “magic” card but a tool of convenience that needs to be used and managed responsibly; the mechanics of a bank account for savings purposes; and how compound interest works.
A common strategy with young children is to pay the child an allowance that is age-appropriate, and to teach them to use the allowance allotted to them. You do not need to tie this allowance to completing specific chores, as the reality is that the child will inherit some wealth without directly having to work for it.
Another strategy is to open a bank account for the child and have them contribute to it (birthday money or saved allowances). To provide an incentive for saving and an opportunity for the child to see the funds grow over time, consider matching contributions on a dollar-for-dollar basis or at any rate you think is suitable.
The tween and early teen years
This is the ideal time for the child to learn about budgeting and make wise financial choices. The objective should focus on “needs versus wants” and the child’s ability to identify the difference accurately.
Explain concepts such as: good versus bad credit; buying versus leasing; buying equity building versus depreciating assets (like the benefits of buying a house as opposed to buying a car); and the hidden consequences of a “Zero Down, Zero Interest” sales advertisement.
Having the child pay for the item themself also teaches the lesson of delayed self-gratification as the child will appreciate and take better care of the desired item if they save and pay for it with their money.
For older teens and young adults
By this stage of their development, the child should have a good understanding of simple financial concepts – this is the ideal time to introduce them to the basics of investments, insurance, and taxes.
Describe the types of investments available — stocks, bonds, mutual funds, and the related risk and return factors along with the overall benefits of diversification. A helpful learning practice would be to have the child involved in managing a small portfolio of investment assets to ‘get their feet wet’ and help build a basic understanding of related investment income, market fluctuations and how domestic and international financial markets perform.
Explain the overall benefits of insurance to help mitigate the risk of loss or damage or to create liquidity in the event of death to help fund lifestyle needs.
Introduce the concept of income taxes and different types of taxable income (employment, dividend, and capital gains), along with the notion that tax impacts net returns and overall net income. The child may need to file income tax returns by this age. Encourage them to attempt to prepare their tax return. Tax return software is relatively inexpensive, and assuming no unusual complexity, it should be a manageable task.
If the child is going away to university, a very common strategy is to give the teen a prepaid credit card with an appropriate monthly balance so that they learn how to manage spending and live within a budget effectively.
Emphasize family values
Important during all phases of the child’s life are discussions about how to use money intentionally—in a way that is aligned with family values and individual as well as family goals. Conversations about family history, culture, and stories of the challenges that ancestors faced and the sacrifices that they made help illuminate the values that shaped the family and contributed to the family’s current success.
Family meetings are the ideal environment for family members to learn more about one another, discuss issues, explore their views and come to an agreement on certain topics.
Philanthropy and the charitable giving factor
Philanthropy can be an effective training ground for the entire family, including children, to come together and collaborate for a common goal.
Consider volunteering together during the early stages. It helps to bring the family closer. In addition, the experience allows your child to contribute to society, help those less fortunate and recognize what a difference their direct effort can make.
A family foundation can be an effective financial training ground for children. Involving the children in annual meetings educates them about the benefits of good governance, business principles, and investment strategy. It can also provide them with direct involvement in determining which charities receive funding by allowing them to suggest causes that resonate with them and align with their values.
Other considerations
As children grow into adults, financial literacy may broaden to include family law and other considerations. For example, adult children can benefit from discussions around prenuptial agreements or cohabitation agreements that may be recommended to protect business interests and keep wealth in the family. In addition, introducing children to key professional advisors, including investment advisors, accountants, and legal experts, will help them learn how to use these professionals as resources and gain comfort and confidence in seeking professional advice.
Communication is essential in teaching children to be good stewards of family wealth. Family wealth tends not to disappear because families communicate too much; it often vanishes because of a lack of communication in families. Engage in conversation frequently. Determine how much information about the family’s financial situation will be disclosed and when it is most suitable to disclose it.
Conclusion
The probability of family wealth sustainability and preservation increases substantially when planned carefully and intentionally. Furthermore, the repeated emphasis on family values and financial literacy better equips the rising generation to make well-informed and responsible financial choices in the future.
I hope this blog helps you get conversations with your children started and helps them learn about managing money.
Related: The Steps To Take Immediately After the Death of a Spouse or Partner