Why should you talk to your children about finances? According to Richard English of the Commerce Family Office, communication now can have a positive impact that lasts generations.
“Studies show that one third or less of families who have significant wealth will be able to maintain it beyond the third generation,” he said. “One of the biggest causes for this is lack of communication between the generations. Families who struggle with communication struggle with finances later, regardless of how much money they have. Those who are good with communicating pass their values along and have a greater likelihood of maintaining wealth through the generations.”
So, when and how should parents start talking to their children about money?
“You are already communicating about money to your children by your actions,” said English. “Most of what a child learns (about finances) is a lot less about math and a lot more about personal behavior.”
English does recommend certain guidelines. Most importantly, make sure that what you say to your children is age appropriate.
“Some people give their children too much information, while others give too little,” he said. “Sharing too much about your wealth with a younger child can act as a disincentive for that child to be productive. On the other hand, withholding all of your information from an older adult child can be very frustrating, especially when that child has to help care for you in your later years.”
Money lessons for younger children
Parents can start early with their children utilizing simple lessons. English passed along a personal story of a simple experiment with revealing results. “I placed cookies on a table and told my three-year-old granddaughter she could have one cookie now, or wait ten minutes and have two cookies.” She decided to have the one cookie immediately – as would most three-year-olds. But the exercise showed most people have a natural tendency toward immediate gratification, and learning how to delay that gratification for greater gains later should start early.
An allowance can be an excellent way to teach children how to save and spend wisely –if the allowance isn’t used as payment for fulfilling family obligations such as chores. “You want children to understand that the family all pitches in to do chores. It’s part of your responsibility as a family,” English said.
He suggests teaching children to divide their allowance into three or four categories. The three categories he suggests for young children are spending, saving and giving. As they mature, he said you may consider adding a fourth category – investing.
The act of saving has a simple and fundamental message: pay yourself first. Spending provides a powerful message: when the money is gone, it’s gone; so it is important to live within your means. Giving teaches the importance of supporting their community. The best way to teach these lessons is to demonstrate them by your actions.
As children grow into adults
Families who have larger giving goals may create a charitable foundation, and engage their teenagers or young adult children in giving decisions. Their adult children may choose a favorite cause or charity to receive a foundation grant, but with stipulations. First, they must show in a family meeting why their chosen cause should receive a grant, and second, they should have a personal financial stake in that charity or cause. “If the foundation is to invest in an organization, the child should also have skin in the game,” said English.
While a financial advisor can help young people understand the importance of good financial habits, English stresses that establishing a healthy financial foundation is not a one-day process. “The things we’re dealing with are lifelong lessons.”