Passing down values related to family wealth is one of the most crucial, yet challenging, tasks for parents today. Children’s experiences with money during their formative years can shape how they save, spend and give for the rest of their lives.
What’s more, taking the right approach can ensure a family’s wealth is preserved through future generations. One recent study found that 70% of wealthy families lose control of their assets by the second generation, and 90% by the third. That’s a frightening prospect, especially when previous generations have taken so many steps to grow and maintain their wealth.
By setting a positive example and having meaningful conversations with their children, parents can teach three key lessons about money management.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
No. 1: Teach them how to save
Helping children think beyond current wants and desires is no easy feat, which is why demonstrating the value of saving up for something is best accomplished through concrete examples and exercises.
Here’s one example. Plan an exciting family vacation a few months out. Establish that in order to save enough money for the trip, the family will need to limit the number of times they go out to dinner between now and then. This small compromise increases the perceived value of the vacation when it finally arrives.
Of course, there are many other examples and exercises to teach children the value of a dollar saved, such as using coupons at the grocery store or having a loose change jar in the kitchen. The key is to explain these concepts along the way, so children both hear and see best practices in action.
Many families also expose their children to long-term savings by bringing them to appointments with their financial adviser. Most children simply sit in the waiting room. However, this trip gives parents an opportunity to explain that they are saving for retirement, planning for tax season or putting away money in a college fund. They can demonstrate that proper financial planning is important, complex and the reason they can provide a great lifestyle for their family.
No. 2: Teach them how to spend
Parents often debate the value of giving their children an allowance. When done in a disciplined way, an allowance can instill simple money management skills that children will carry with them for years.
For example, a colleague at Wescott Financial instituted an allowance program for her children when they were about 9 years old. She gave them enough lunch money for Monday through Wednesday each week, and instructed them to spend responsibly. If they splurged for an ice cream cone on Monday, they would not have enough to get their regular sandwich on Wednesday. As her children got older, she expanded this to a lump sum every week, and eventually it included an additional clothing allowance. In this way, she quickly helped her children differentiate between “need” and “want.”
As children grow up and their financial tendencies and spending behaviors become more apparent, parents may believe their kids would benefit from a more structured gifting plan, such as a trust. This can protect the estate in the event of a divorce or bankruptcy, but may be met with resistance from children. It’s best to have an honest family discussion about how and when the family’s wealth will be transferred.
No. 3: Teach them how to give
Many philanthropic families believe it’s important to instill a sense of generosity in their children. While sending a charitable contribution in the mail each month can have profound impacts on an organization parents are giving to, it may not have the same effect on their kids. Children often benefit most from seeing, understanding and becoming actively involved from a young age.
Parents who donate their time to volunteer efforts can bring their children along, when appropriate. If a parent serves on a nonprofit board or committee, they can invite their children to attend a fundraiser or meeting. Families that have a foundation can make their children aware of it, and encourage involvement as they grow and mature. The key is to ensure their kids understand the impact of their work or donation.
Oftentimes, children don’t see the years of hard work and financial planning that led to their family’s wealth. But by teaching their children that wealth needs to be earned, saved and shared responsibly, parents stand a better chance of preserving their legacy for years to come.
-
Will President Trump's Medicare Executive Order Raise Drug Prices?President Trump rescinded a Biden-era Executive Order that would have lowered the copays for some drugs to $2 for Medicare enrollees.
-
Stock Market Today: Dow Adds 538 Points on First Trading Day of Second Trump AdministrationStocks rise while the White House issues a historic series of executive orders.
-
Getting Divorced? Beware of Hidden Tax Traps as You Divide AssetsDividing assets fairly in a divorce means looking beyond their current values and asking whether they'll create tax liabilities — or tax breaks — in the future.
-
All-You-Can-Eat Buffets: Can You Get Kicked Out for Eating Too Much?Don't plan on practicing your competitive-eating skills at an all-you-can-eat buffet. You can definitely get kicked out. Plus, don't be a jerk.
-
A Social Security Storm Is Gathering: Here's Your Safety PlanIf Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
-
What a Second Trump Term Means for Investing in Water SafetyA new administration focused on deregulation could change the scope of today's water protections. So, what does that mean for the investors who support them?
-
How to Avoid These 10 Retirement Planning MistakesMany retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
-
Before the Next Time Markets Sink, Do Your Lifeboat DrillsAn eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
-
This Late-in-Life Roth Conversion Opportunity Spares Your HeirsExpensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
-
Women, What Is Your Net Worth?Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
