Laying the foundation now can pave the way for the next generation.
All parents must contend with how to prepare their children to make wise decisions about money. But for affluent families, there is an added pressure to ensure that while their children enjoy their financial privilege, they also act responsibly.
“Parents need to take ownership of this preparation,” says Claudia Sangster, Northern Trust’s director of Family Education and Governance. “The last thing you want to do is put money in a child’s hands when they’re not prepared to handle it.”
Lessons at every stage
There is no be-all, end-all wealth discussion, say Sangster and her colleague Emily Rustemeyer, wealth planning associate. It’s an ongoing conversation that starts at a very young age about simple money concepts, and over time the conversation builds in terms of complexity in age-appropriate ways.
But in today’s digital era, there is nothing “simple” about simple money concepts. In a time when credit cards and smartphone payments are the norm, children don’t often see currency used in financial transactions. Because young children are often concrete rather than abstract thinkers, it is more difficult for them to connect the concepts of cost and money when the money is largely invisible. To make up for this comprehension gap, it is a good practice to start talking about money and value early, helping them understand that behind every purchase is work and sacrifice.
“There really is no ‘too young’ in teaching your children about wealth,” says Rustemeyer. What methods you use to teach your child about your family’s wealth and financial responsibility depend on a child’s age and maturity, she says.
Early on, use day-to-day activities such as grocery shopping to show children the value of money. Explain your reasoning for choosing one item over another. Was it price that led you to buy it, or did quality drive the decision? Why did you decide to make dinner at home rather than go out to a restaurant, or to choose one restaurant over another?
Later, an allowance lets children start to make spending decisions. Sangster recommends dividing up the allowance into three jars or envelopes — one each for spending, saving and giving — so they understand that money can fund different goals.
As children grow, challenge them with more complicated money tasks such as budgeting. Sangster suggests asking a teen to plan a family outing and giving them a budget. As a child prepares to enter college, sit with them to co-create a budget for college expenses and use such processes to practice living within a budget at a time when failure to follow a budget does not result in significant financial problems.
Honesty about wealth
Even the most candid parent may be caught off guard by the simple question, “Are we rich?” That’s not a question that can be easily brushed off, and high-net-worth families must delicately balance candor with sensitivity.
“Children are intelligent and perceptive. They understand much more than we realize,” says Sangster. “They see the car you drive. They see the house you live in and the school they go to.”
Rustemeyer suggests answering the question with a question. "‘Well, what do you think?’ is a good place to start,” she says. This way, you can gauge what your child has observed and understand what precipitated the question.
It’s OK to divulge information in parts. “You don’t have to reveal everything all at once, but it is important to reveal the wealth as a child matures and is able to grasp the implications of what the wealth means and does not mean in your family,” says Sangster.
Complete secrecy can have a negative effect over time, so avoiding the topic won’t work. Children will find out eventually, and then you risk breaking their trust — the message you may inadvertently send is that you do not trust them with the information or that they are not capable of using the funds wisely. Transparency — provided over time — is ultimately the best policy.
“You maintain control of the initial messages they receive about entitlement, the family’s values, and the overall purpose of the financial wealth,” Rustemeyer says. “You don’t want them to find out about the family’s wealth by Googling the family name and getting misleading information.”
Make them part of the story
Often, your family’s wealth was established within your generation or the one preceding it, and a personal narrative of how the wealth was attained can still be recalled and shared. When the wealth has already been in the family for decades, the story of your family’s success, including the struggles and challenges, can be lost. It’s important to memorialize and share the story of the founding of a business, its expansion and the founder’s vision for how the wealth should be used in each subsequent generation, says Sangster.
“Telling the stories of wealth creation can help succeeding generations understand that wealth is not easy to create or sustain, that the use of the wealth is not limited to consumption by one person or generation, and that there are responsibilities that come with having access to wealth,” Sangster says.
Share the vision
In addition to telling the story, you should share the family’s vision for the use or purpose of the collective assets.
For example: some families strongly favor giving back to their communities and therefore determine that a portion of the wealth is to be set aside for philanthropic purposes. Others are focused on making their wealth last for subsequent generations and decide to limit the use of the family’s wealth to fund education expenses. By focusing on education, such families believe they are creating opportunities for each family member to chart their individual path to financial independence. Still others believe in providing opportunities for family members to explore their talents and interests, including entrepreneurial efforts like starting a business or supplementing income for a child who chooses to go into a less lucrative profession that speaks to their personal passions.
No matter your family’s philosophy, bring your children into that discussion so they are aware of the expectations and can plan more strategically for their own future. Through having frequent, ongoing conversations beginning at a young age and setting a good example of how to be responsible with the wealth, you can prepare your children to be trustworthy stewards themselves, giving them confidence to manage their financial lives well for many years to come.