Wealth Clarity Blog

Guest Blog provided by Richard Beaton & Linda Wagener of Marigold Associates.

Over the past several weeks, we discussed the value of using deliberate training strategies such as allowances and budget management to teach children financial skills. In this segment we’re going to tackle the problem of how to form our children’s attitudes toward money and work. These are rarely shaped simply by education. They are rooted in the basic practices and habits of family life.

You may have heard the phrase “shirtsleeves to shirtsleeves in three generations.” It refers to the fact that often a person’s attitudes toward money and work can be traced to where they are in the family wealth cycle. Those in the first generation of affluence learned how to earn and manage money because they had to. There were no family funds to buy them everything that they needed, wanted, or thought they wanted. They had to work to pay for any extras and even in some cases, the necessities, like clothes. If they wanted a college education, they had to take out loans and work part time. By the third generation, the work ethic has often declined to the point where the accumulated wealth of the family is depleted by a generation who has learned to be consumers rather than creators of wealth.  But it doesn’t have to play out this way.

We interviewed a member of a fourth-generation family of wealth who illustrated this pattern clearly. His side of the family had continued to live productive lives. Their wealth had increased in every generation. Another branch of the family, the “country-club cousins,” had burned through their inheritance. Their kids would be back to shirt-sleeves. The difference? He pointed out the window to an 8-year old neighbor kid, mowing the lawn across the street. “See that kid? His family is worth millions. But they live modestly, and expect their kids to work as soon and as hard as they are able. See that other kid next door? He’s 16 and has never held a job. His family doesn’t have the wealth of the other, but probably never will.”

In our work with entrepreneurs and families, we have heard variations on this story over and over again. The families whose children grow up to be hard-working productive contributors are expected to work and be responsible, just like everyone else. They live comfortably but modestly. They also recognize that their wealth is a responsibility, not a privilege. It is to be used for good, not for pleasure.

Five Things You Can Do to Teach Your Children to Handle Wealth Wisely

1. Let them learn the joy of working hard and the reward that follows. It may be tempting to think that schoolwork is enough to accomplish this, but schoolwork has sadly become more about performance achievement. In contrast, work contributes to the well-being of others and is a piece of a larger enterprise.
2. Never use money as a reward for achievement such as grades. Such practices teach kids that money is the only reward that matters, and they distract them from the intrinsic pleasure of doing well.
3. Live modestly. This is often very difficult for those who want to enjoy their wealth. One entrepreneur we interviewed came from significant poverty and loved the lavish lifestyle he was now able to afford. The children of his first marriage had blown through every cent he had given them. He didn’t want the same thing to happen to the kids of his second marriage, yet he couldn’t give up the ostentatious lifestyle. Eventually he had nothing left to pass on.
4. Be wise with your inheritance strategy.Let your kids know from an early age that they will be expected to work and live responsibly. Make a commitment to yourself that you won’t give large sums of money to adults who have not demonstrated the capacity to use finances wisely. 
5. Don’t use your wealth to protect your kids from the harsh realities of life. Admittedly, this is difficult for any parent, but your children need to be exposed to those in need in order to build their sense of empathy and gratitude. You can build their hope by demonstrating how your wealth can make a difference in the world. Involve them early in giving back through hands-on service in their community. There are many excellent organizations that provide opportunities for young people to develop their skills. Social Venture Partners (Seattle) is one good example.

There is little in life as satisfying as seeing your children flourish in their lives; delighting in their life’s purpose. Whether they end up with modest or robust incomes, they will need to know how to work hard and manage their finances. As parents you can make a significant difference through financial education and creating a family environment that forms their character and values.

A big “thank you” to Richard Beaton and Linda Wagener of Marigold Associates for guest blogging.  Feel free to contact them directly if you have questions or need more information.  As a reminder, we are hosting a luncheon on February 15th to hear more about the subject of Kids & Money from these two experts.  If you have an interest in learning about the event, please contact jessica@highlandprivate.com.

Hot off the press is the latest edition of the Highland Investment Snapshot; our best thinking on 2012 investment and economic themes and outlook.  As most investors are aware, this time in history is fraught with a tremendous amount of conflicting data and unique risks. In our opinion, this environment is creating some interesting investment opportunities for those willing to put the broad range of global economic and political concerns in perspective.  I hope you find our reading of the tea leaves to be insightful and helpful.

This link will take you there:  Highland Investment Snapshot 2012

This is the second post in the series on Kids & Money from our friends at Marigold Associates.  Enjoy!

Kids typically don’t pick up basic life skills through osmosis. They have to be taught how to clean a bathroom, check the oil in their car, and manage their money. Often what they have learned about money is “ask and ye shall receive.” As you can probably guess, this bit of wisdom doesn’t lead to financial independence.  A good financial education can provide a wonderful foundation for your child as he learns to manage wealth on his own.

The goal of financial education is to form financially responsible adults with positive values about money and useful financial skills. Financial training and education should begin as soon as children are old enough for pocket money, around kindergarten or first grade. There are several good programs on money management for children available in your local bookstore or on Amazon. These offer common-sense approaches and point out typical mistakes that can derail the enterprise. One such example we like to recommend is Making Allowances:  A Dollars and Sense Guide to Teaching Kids About Money, by Paul Lermitte with Jennifer Merritt.

Keep in mind that the biggest obstacle to the success of financial training is whether busy parents will commit the time and energy to stick with it!

The details of the plan that you decide to use can vary, but generally it should include the following elements:

• Allowance system. An allowance system is a basic contract between you and your child that guarantees you will give her a set sum of money to cover out-of-pocket needs on a regular schedule. In return, she agrees to responsibly contribute to the family by performing basic chores. Start simply and add funds and complexity as your child demonstrates readiness. The allowance amount should be appropriate for their expenses. By adolescence, kids should be able to manage their clothing budget. By the time they reach college they should be able to handle all of their own living expenses within the budget they are given. This will give them lots of experience having to make difficult choices. Do they save money to travel on spring break or buy new clothes every month?
• Let them control their own funds. Resist the temptation to “help.” Let them learn from their mistakes. No bailouts! On the other hand, do not use the allowance as reward or punishment for behavior.
• Talk with your children about money and your family financial decisions. Show them how you decide to make substantial purchases, shop for the best product/prices, ascertain what you can afford. Be sure to provide examples of decisions that include delaying or denying purchases.
• Use moderation in your spending. It is not good for your children to have the most expensive and latest of everything. No teenager ever needed a $300 pair of shoes!
• Give them something to work for and save toward, for example, an iPhone or a car. Help them learn the habit of putting away a portion of their income (gift and earned) for a larger project. As they master the early stages they may able be handle to loans and repayments for larger purchases, though saving is a better model.
• Help them establish the habit of giving to others. Remember, however, it is not theirs to share if you have handed it to them. In order for them to feel the benefit of giving, it needs to come from their own pocket.

Beware the financial education you provide your children will bring up all your own issues about money. You will discover what those are as you implement a money management system for your children. Over-protectiveness will come up as you find yourself tempted to give them a “bail-out” when they have overspent. Equating money and self-worth will lead you to want to give your kids expensive gifts to keep up with their schoolmates. Using money as a reward or punishment will demonstrate your own need for control.

We hope you will follow one of the excellent programs that offer detailed instruction in wealth management. While education is essential, it is not enough on its own. The deeper challenge lies in developing character, values, and a commitment to living a life of purpose. Formation of character and values within family practices play a prominent role in limiting the negative impact of wealth on your children. This is the topic of our next blog in this series.  Stay tuned!