Having worked as a financial adviser for nearly 25 years, many of my clients are now at the stage where they’re thinking about the financial legacy they’ll be leaving their children. Due to well-managed finances, many will be leaving a significant inheritance to the next generation, writes Certified Financial Planner at Liberty, Marietta Tappan.
What’s keeping these clients awake at night is not whether they have enough money for retirement, but whether their children are equipped to manage their own money effectively. It is an unfortunate reality that because many millennials have grown up in privileged environments, they don’t know how to manage money. They’ve never learnt to save towards a goal or even been taught the basics of investing, despite growing up in households where saving and investing for the future were possible.
What I’ve found over the years is that the children of my clients who encouraged their offspring to manage money have grown up to be responsible and financially independent adults. One of my favourite stories is that of a client who brought his two sons to see me when they were aged just 10 and 11. The boys had started a paper route and their parents were determined that they must learn to invest the money, not simply spend it on computer games and sweets. I spent time explaining the power of compounding as well as diversification to them. The boys starting investing in unit trusts and today have qualified as professionals. Last year the eldest son took a year off from his attorney practice to complete his pupilage in order to qualify as an advocate – all paid for from those years of newspaper rounds.
I always encourage my clients to get their children to meet with an adviser as soon as they get their first job. I work on the premise that the first pay cheque can be spent however they choose, but that from the second, they must start putting 10% away each month. Those who have adopted this principle have learnt to manage their money, while those who haven’t, never seem to have enough money.
Apart from encouraging my clients to talk to their children about money, I also encourage them to develop healthy boundaries for their children and not just give in to their expectations. Millennials have grown up in a world where they’re used to getting what they want immediately and without effort. This does not prepare them up for the real world later in life. Even if you can afford to give your children what they want, you are not necessarily doing them any favours by not setting boundaries.
I had my own experience of setting boundaries with my son. While my elder daughter was a diligent student and completed her university studies, my son showed a lot less interest and quite frankly messed around in his first year. I told my son that he could pay for his own studies by taking out a loan. When faced with having to pay his own way he decided not to study further and entered the work force. Money spent on education is only an investment if your child takes their studies seriously, it should not be used as a way to delay working life.
Too often I see clients raiding their retirement funds to keep their children in perpetual education and I wonder at what point is the desire to remain in formal education a result of the fear of entering the workforce and becoming independent? The longer we support our children financially, the more we erode their self-confidence.
We also need to teach our children to be proud of the work they do, whether it’s washing cars on the weekend to make extra pocket money, gaining work experience as an unpaid intern or one day being the partner in a law firm, having a job and a purpose is something to be proud of. Children should learn to value work from a young age because earning an income and using it wisely are interconnected.
Ultimately, how you spend your money defines you, so when it comes to raising our children to be good custodians of the wealth they will be inheriting, we need to start with our own value system. Children learn through the values they experience at home, not through what they’re told to value.
If you want to give your child the gift of knowing how to manage money, you need to start preparing them as early as possible. Here’s how:
- Decide what your value system is and how you want to discuss finances with your children.
- With younger children, use concepts they will understand such as the fact that a giant oak grows from a tiny acorn to explain that growing money takes time and that even the small amount earned on a paper route can grow into something significant. This is particularly important in this world of immediate satisfaction.
- When discussing finances with older children, you’ll be surprised at how quickly they grasp the concept of saving and investing and the many financial terms. If you feel uncomfortable or unsure about how to discuss money with your kids, ask your financial adviser to discuss it with them.
- Give them boundaries and opportunities to develop independence. Remember that they’re the custodians of the future.
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