5 Strategies for Raising Financially Savvy Kids
The affluent family's guide to helping your offspring be independent and resilient
While it's true that family wealth can make life easier at times, it poses its own set of challenges when it comes to raising children. Affluent parents want the next generation to grow up to be self-sufficient, responsible, and driven. Many fear, however, that their wealth will do the exact opposite, causing potential negative effects, including entitlement and a lack of motivation and accountability.
"This is certainly something parents worry about," says Shawn DuBurg, Director and Private Wealth Advisor for The Private Bank at Union Bank. "They've seen the effects that wealth has had on friends or neighbors, and they don't want their children to go down that path."
Nevertheless, a negative outcome isn't inevitable. When handled properly, family wealth can be a gift, not a burden. With care and consideration, children can grow up to be money-wise—that is, thoughtful about the way money functions in their lives and responsible about how they use it. By having frank conversations, being clear about their own values, and allowing space for children to make mistakes, affluent families can raise independent, resilient children—and form stronger relationships along the way.
1. Break the Silence
The first crucial step in raising money-wise children is sometimes the hardest one: talking to your children about money. Many affluent parents avoid such conversations, fearing that if they are open about their financial circumstances, their children won't be motivated to succeed on their own terms. Making matters worse is the fact that money is an uncomfortable subject for many people, since it's often tied up with emotions and judgments.
"For the majority of clients, this is a very difficult conversation," says DuBurg. "They don't know where to start, and don't want to open up their entire financial picture to their kids. Meanwhile, they're afraid of the effects that a sudden burst of wealth will have on their kids."
But DuBurg notes that keeping younger generations in the dark comes at a price. Children may make incorrect assumptions about family wealth and act accordingly—perhaps assuming that family funds are infinite. Conversely, children may make important life decisions, like what to choose as a career or when to marry, that could have been different if they knew they had financial resources that would allow them to make different choices. Shying away from conversations about money can result in some of the same problems as avoiding talking about the birds and the bees. Put simply: if you're not teaching your kids, they're going to get their information elsewhere—and there's a lot of bad information you want to protect them from.
That's why the first and most important step parents can take to raise money-wise children is to break the silence. While initial conversations may be awkward or uncomfortable, remember that an imperfect conversation is far better than no conversation at all. Parents who are particularly reluctant to broach these subjects shouldn't feel like they're on their own; recruiting an independent third-party, such as a financial advisor, to serve as a facilitator for a family meeting can help make the process easier (see page 4: "How to have effective family meetings").
DuBurg suggests starting those conversations as early as possible. One benefit with young kids is that parents don't have to explain their family's finances right away. Instead, these discussions can start small, with a simple conversation about how a child can handle his or her first allowance. "For younger children, this can help give them guidance on how to be good stewards of their own money and how to live within their means," he says.
2. Define your values, goals and expectations
The best conversations about money don't stop with dollars and cents; they engage deeper subjects too. Parents can use discussions about family finances as an opportunity to share their own values, while allowing children to reveal their own hopes and fears for the future—in short, they can be a chance for the whole family to become closer.
For these conversations to go as well as possible, parents might need to do a bit of homework in advance. People who know more about their own values, goals, and expectations around money will be more clear and confident in the conversations they have with other family members. "It all comes down to understanding their expectations for their family's wealth," says DuBurg. "What do they want this money to accomplish?"
Here are some questions parents can ask themselves to start to gain clarity on their own attitudes and beliefs about money:
Setting aside some time to brainstorm about your own values, goals, and expectations around money can serve as a starting point for a broader family conversation. Your children will follow your example, so make sure you're honest with yourself about the messages you're consciously or unconsciously passing along. It's important that you're living out the values that you want your children to embody; make sure you're walking the walk, not just talking the talk.
Looking at where your money goes is a good way to get a concrete sense of what matters most to you as an individual and as a family unit. Some families put a premium on education, travel, or lifestyle upgrades while others emphasize charitable giving or investing in new opportunities. Does your spending align with your stated values? If not, why?
Ask yourself what you consider the key components of a successful life, both financially and otherwise. Does stability matter more than taking chances? How does financial achievement fit in? What about community service, or family relationships, or educational achievement? Having a well-thought out, multi-faceted definition of success can help you encourage your children to think of financial success as one part of a much bigger puzzle.
Thinking beyond the present can help you gain perspective on your financial decisions—and help your children better understand in an age-appropriate way. Encourage your children to think of themselves as stewards for the family wealth, rather than its recipients. Remind them that, used properly, family funds could be used well into the future to support younger generations, keep the family business going, or promote good in the world through a family foundation.
If you're going to encourage your children to be responsible with money, you should first have a good grasp on what responsibility means to you. That may mean that you want your children to understand the basic building blocks of personal finance, to be accountable for their spending, to be able to distinguish between needs and wants, or to avoid debt. Be clear and transparent—and realistic—when spelling out your expectations.
3. Set the tone for an open, respectful conversation
Once you've got a clear sense of your own values, goals and expectations around money, you'll be in a much better position to broach the subject with your children. The length and depth of these conversations will necessarily vary depending on their age and level of sophistication. But however old they are, it helps to think of these money talks as conversations, rather than lectures.
One way to set the right tone is to share your own money story with your children, focusing not just on your successes, but also on your failures. Tell your kids about how hard you worked to get your business off the ground, or how you bounced back from an early investment mistake.
Children can sometimes have the tendency to see their parents as all-powerful; this can make it difficult for them to imagine what a path to achieving success might look like. Opening up about the choices you've made and how you've arrived where you are today can help your children understand you better—and also provide guidance as they begin to write their own financial narratives.
When bringing younger generations into the conversation, rather than framing things in negative terms ("We're not going to buy you a new car because we don't want you to get spoiled."), keep the language positive ("We want you to feel independent and proud of your own accomplishments."). Focusing on your values and goals, not your fears and anxieties, will go a long way toward reminding your children that you're all on the same team.
4. Learn to embrace boundaries, limits and failure
Many parents facing the task of raising money-wise children did not come from wealthy backgrounds themselves, and even those who did have likely faced challenges and setbacks along the way. It can be tempting for affluent parents to want to protect their children from having to endure the same struggles that they went through. However, encouraging an attitude of self-reliance—rather than entitlement or dependence—means allowing children to make mistakes along the way. While doing so may be difficult in the short term, it will help the next generation to develop the practical and emotional skills that will benefit them in the long run. The specific strategies and techniques that work best will vary depending on the age of your children, but here are some ideas to get you started:
SET GUIDELINES ABOUT MONEY—AND BE UPFRONT ABOUT THEM
You may opt to give your kids an old-fashioned allowance, or you may allow them free access to their own bank accounts. Whatever system you choose for your family, make sure the rules are clear, transparent and mutually agreed on. Explain the "why" behind your decisions and refer back to your goals and values in order to put them in context so your children understand. For example, if you expect your children to donate a portion of their savings to charity each year, you can explain that you're doing so because one of your family's key values is giving back to the community—it's not just "because I said so." Furthermore, being clear about the limits you set helps avoid conflict and surprises down the line.
TEACH THE VALUE OF MONEY
Children growing up in wealthy households risk thinking of money as an abstract, unlimited resource. Parents can counter this tendency by finding ways to make money both concrete and limited. For example, if a child has his eye on a particular high-ticket item, you can encourage him to contribute to the purchase. Having to work for a new phone or video game system will help your children feel more ownership over the eventual purchase—and they'll also learn the pleasures of delayed gratification.
DuBurg says even affluent families suffer from a desire to keep up with the Joneses. A family he once worked with didn't consider themselves particularly affluent, though they lived in a very wealthy area and by most measures were quite well off. But their wealth didn't match up with that of some of their neighbors. "The kids in this family would go away on weekend trips on their friends' private jets," he says. "Their parents took the opportunity to say, 'that's great, but that's not something we can do in our family.'" Instead, the parents planned family vacations and gave the children a set budget to plan the activities for the family. This taught them that they had to select wisely. If they spent the bulk of the funds on a parasailing adventure, that may have meant they weren't able to go scuba diving the next day. This may have been disappointing—but it was also an instructive, foundational lesson that helped them better understand the value of money and why it's important to maintain a budget.
ALLOW AGE-APPROPRIATE INPUT AND FEEDBACK
Setting hard-and-fast rules has a way of backfiring and encouraging children to rebel. While setting guidelines and limits is crucial to raising money-wise children, you may also want to allow younger generations to have input on the limits you set, when appropriate. For example, you may want to come up with an annual clothing budget for each child. If they want to exceed that budget to buy a pricey new jacket, ask them to make a presentation justifying why the purchase is worth the extra spending or have them suggest additional chores/projects they can do to earn money for the item.
ENCOURAGE PARTICIPATION IN THE FAMILY'S FINANCIAL DECISION-MAKING
Allowing your children to make age-appropriate financial decisions can help them learn to take ownership over their choices and their consequences. As children get older, you can allow them to take on more substantial decision-making roles. That could mean allowing them to manage a small portion of the family investments or asking them to serve on the board of the family foundation. The key is respecting your children's decisions, even when their choices aren't exactly the ones you would make. Remember that the best way to learn is through experience.
DON'T FEAR FAILURE
Children of successful parents often have an outsized fear of failure. While their parents' willingness to take risks likely contributed to their success, their children may fear not living up to their parents' examples and consequently do whatever they can to avoid being perceived as making a mistake. This allergy to failure can be harmful, making children less likely to try out new experiences or take on tasks that challenge them. It may also help explain the higher rates of anxiety found among children of affluent families
if failure isn't an option, then every action becomes a high-stakes test.
In some cases, parents contribute to the problem by stepping in to protect their children from the consequences of poor decisions. But while doing so may help their children in the short-term, in the long run it reinforces risk-aversive tendencies. Furthermore, studies have shown that over-involved parenting has been associated with higher rates of childhood depression and anxiety.
Allowing space for children to try and fail can actually make children more resilient over time.
5. Prepare for a lifetime of conversations
Raising money-wise children who treat the family finances with respect isn't something that happens through a one-and-done conversation; rather, it's a process that deepens and evolves over time. "Parents don't want their children to fight about money after they're gone," says DuBurg. "These conversations are a way to help ensure financial harmony for the family today and in the future."
By opening up about your own money story; framing your decisions in terms of values and goals, not fears and anxieties; and learning to embrace failure, you can help your children sidestep many of the potential negative effects of growing up with wealth. Along the way, you'll gain some added bonuses, such as stronger interpersonal bonds and a better understanding of your family members. Raising money-wise children who are set up to thrive is a life-long journey, and it's one well worth embarking on.
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The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your situation.
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