Discussing Wealth With Your Children
"The more you learn, the more you earn." —Warren Buffett
As parents, we always want the best for our children. From giving them the best in early learning, equipment, books, education opportunities, sporting gear and the like, we try to nurture them into better versions of ourselves. As they continue their journey to independence, you still want them to make the best decisions possible for their lives. Eventually, you want them to have the power to manage their own finances properly. Some of us would also want them to be able to manage our own finances when we enter into inevitable cognitive decline in our later years.
Many parents want their children to learn financial responsibility. However, discussing family wealth is not always the easiest thing to do. Parents may be afraid that being too transparent and revealing everything could lead to undesired outcomes – such as their children becoming lazy and not wanting to work because they know their parents have enough money to support them. However, there is a way to keep things simple. Speaking about financial topics targeted at their age-level will be more fulfilling and lead to better understanding.
From research about generational wealth transfer and our own experience dealing with families, it is always preferable to start earlier rather than later. How you go about this discussion would also depend on your relationship with family members and the current circumstances your family is in. Here are some suggested steps to get you started.
Learning About Basic Finance (primary to secondary school age): Teach them the concept of 1/3, 1/3, 1/3. Spend one third of your allowance, save one third of your allowance, and donate one third of your allowance. You can also assign them chores around the house and remunerate them upon completion to teach them that money is not an easy thing to come by.
Conceptual Understanding (junior college to university age): Give them examples of a personal balance sheet – something that shows what you own and what you owe. The key takeaway is not to owe more than you own! You can now go into more detail about budgeting and saving, using your household expenditure as an example. Simple investment principles like diversification (not holding all your eggs in one basket), buy-and-hold and monthly investment contributions (regular savings plans) can be introduced.
Big Picture (20s to 30s): It is now appropriate to teach your children about the family business (if any), real estate, wills, and trusts. You can hold family meetings to discuss these topics, and to explain how the family's personal wealth is structured and which financial institutions are involved in the process. You can also teach them about charitable giving and the possible ways to create a legacy through donation.
Generational Transfer (late 30s onwards): This would be an appropriate time to discuss estate planning and wealth transfer – especially your plans and wishes for the future generations, particularly if you have grandkids. You should discuss your intentions for how assets will be divided and distributed, so as to prevent future squabbles over the division of assets when you are gone. An understanding of the purpose and goals you have for the wealth you have generated over the years will be extremely useful, so that your family understands that money isn't just meant to be spent wastefully!
I have friends who use family holidays as a way to teach their teenage to young adult children about budgeting and understanding value. They get their children to plan a family vacation with a pre-determined budget and some simple guidelines. The children get to select where they want to visit, which type of accommodation they would like to stay in, where and what they would like to eat, and so on, but the overall cost must remain within the set budget. By doing this, they get to learn how to choose the options that provide the most value and also explore cost-saving alternatives so that they get to do more with less.
Most local universities offer overseas exchange programmes with foreign universities that span several months, or overseas internship programmes. These are all good ways for your children to learn independence and figure how to live within a given monthly allowance in a foreign country.
As for teaching about investing, some parents set up a joint account with each of their children and start a monthly savings plan buying into a portfolio of funds. They would share the monthly statement of the investment account with their children and let them see how the value can go up as well as down. This is done with the hope that their children would eventually take a more active interest in the investments.
At the end of the day, all these lessons will help you inculcate important values in your children and help them understand what money means to them. The earlier you start having these open discussions, the easier it will be to have everyone aligned in the same way of thinking. This shared journey and ideals will not only help to preserve the family wealth, but also keep your family together for generations to come.
