Passing on wealth to the next generation can be a source of pride and accomplishment for parents, but the most valuable inheritance children receive may be the ability to manage its benefits and burdens. While a child may effortlessly inherit their mother’s eyes or their father’s smile, wealth management can lapse without proper instruction.
As a set of learned behaviors, the stewardship of wealth is not just a matter of saving and spending wisely—it encompasses investment, risk, philanthropy and the proper use of debt. What is learned can either be left to chance or guided by parents. While true for all children, those set to inherit significant wealth are in particular need of the financial knowledge and sense required to make the decisions that inevitably accompany an inheritance.
- It’s never too early to teach your children about money. Once you’re confident about your values and attitudes toward money, you’re ready to start the conversation.
- Parents who delay wealth education may find it more difficult later on, especially in this digital age, when children face more distractions, experience temptation and absorb potentially negative learned behaviors. However, it’s never too late to start.
- An allowance is one of the most common and effective ways to teach children about money management. Encouraging your child to divide their allowance into jars for saving, spending and giving can impart the basics of budgeting.
Never too late—or early—to teach children about money
All parents wrestle with instilling children with the appropriate values, which underpin our attitudes toward wealth management. And raising the topic can be awkward for anyone.
You might ask yourself: When should I teach my child about money? How can I foster shared values? Is it already too late?
These are all questions that seem to haunt parents, many of whom feel more at ease warning their children about the dangers of drugs than teaching them about the management of wealth.
While children mature at different ages, the best time to talk to your kids about money is as soon as you are ready and as soon as you think they are mature enough to have the conversation.
But readiness is no small feat. If you’re like many parents, you may not have fully formed ideas about money. It’s therefore important to prepare before engaging in conversations with your children.
Working with a financial advisor can help you determine and document your values. Be sure to discuss your attitudes toward productivity, philanthropy, spending, saving and borrowing. Finally, record a family mission statement for clarity and quick reference.
“It’s less jarring for everyone to have that conversation about money if you’ve already had conversations about what are we going to give to our community? How are we going to impact the world? What are our family goals?” said Judy Spalthoff, head of Family Advisory and Philanthropy Services at UBS.
While parents are their children’s first reference points in virtually all matters, emotional and technical support from other relatives or close friends can also be valuable. As children mature, external professionals, such as financial advisors, accountants or personal attorneys, can be brought in to contribute their observations and experiences.
Parents who delay wealth education may find it more difficult later on, especially in this digital age, when their children face more distractions, experience temptation and absorb potentially negative learned behaviors. However, it’s never too late to start.
Allowance as a learning tool
An allowance is one of the most common and effective ways of teaching children about money—both the good and the bad. It is most effective when employed as a learning tool rather than a budget for careless spending.
In a digital world in which cash is fast disappearing, money may seem more abstract than ever to children who may be used to getting what they want instantly with a card or phone. So, there is virtue in providing tangible reminders.
Children given cash to pick up family groceries and trusted to handle the change can steadily build a sense of value.
Allowance paid in cash and divided into jars for saving, spending and giving (or other purposes) can also impart the basics of budgeting.
Be sure to provide guidelines about what the allowance should cover, and then give your kids some room to learn for themselves. It is quite normal for kids to make imprudent purchases, but don’t rush to replenish their funds. These learning experiences may help children become more savvy consumers.
Allowing room for failure, however small and seemingly inconsequential, can reap huge benefits in the long run.
“It is important for families to teach their kids how to experience failure when the stakes are low, so when the stakes are high when they’re older, they understand what it feels like to be responsible,” said Spalthoff.
Providing a sense of purpose through work
Children will naturally want more money as they grow older. Consider offering them paid jobs around the house in addition to their regular chores. Nothing teaches the value of a dollar like the “sweat equity” given to earn it.
Earning outside of the home for age-appropriate work that doesn’t interfere with school can also instill a sense of achievement and pride. Such gains are not restricted to paid employment. Volunteer work and summer internships can teach responsibility, cooperation and independence.
Children from wealthy households may be more prone to have a more difficult time developing valuable life skills if they never have the opportunity to work.
Communication is key
Parents are often reluctant to tell their children about the family wealth, for fear it might embed a sense of entitlement. However, consistent communication is key to letting them know how fortunate they are and how that wealth was built by hard work.
Stories about the struggles of their parents or grandparents to secure financial security can be shared with younger children. Older children can be reminded that they not only have options but also the good fortune to pursue their passion, rather than focusing on the earning potential of different career paths. They may not have to worry about earning enough income, but they will face other challenges, including potential doubts about their personal abilities, relationships and the fear of financial mistakes.
Such concerns can weigh heavily on children if they are unprepared or lack support. Therefore, teaching children the skills to deal with the benefits and burdens of wealth may be the most valuable inheritance you provide.