Growing Up With Wealth: Help Your Kids Make Smart Decisions

Growing Up With Wealth: Help Your Kids Make Smart Decisions

Affluent children have tremendous advantages, but often lack basic, life skills that many of their non-affluent peers acquire early in life. That’s because when resources are scarce, you’re forced to make tough choices, work harder, manage uncertainty, juggle, and deal with consequences. When life is more comfortable, there isn’t as much natural opportunity to learn.

Identity issues, lack of motivation, embarrassment, and isolation are common byproducts of affluence. I think this quote by Dan Baker, from his book, ‘What Happy People Know,’ sums up an issue affluent parents and children have to deal with:

“The human mind, body and spirit thrive on struggle and challenge, just as a muscle thrives on exercise. Satisfaction without effort… creates only dissipation, alienation, boredom, weakness and a sense of worthlessness.”

As parents begin to enjoy the fruits of their labor, their kids are more likely to experience satisfaction without effort. The more money a family has, the more prone children are to these issues. This tendency does not apply only to millionaires and billionaires. It can happen in any home where there is abundance. Modestly affluent families may be blind to the impact their affluence has on their children because they don’t see themselves as wealthy.

My take on how to mitigate these risks, from reading extensively on the subject, talking to experts, being a father, and working with families over the years is summarized below. The concepts apply to teens and young adults.

  • Show children the family’s expenses. Consider sharing your budget (or part of it), letting your children see what their portion of the expenses are. Explain how you make decisions. This makes them aware of the tradeoffs you make, and is a great opportunity to identify together what expenses are needs versus wants.
  • Allowances give children the opportunity to budget and make mistakes. Give them expenses to manage on their own with an allowance that is large enough to cover their needs but small enough to force them to compromise. For example, you might give them $600 per month to cover school lunches, entertainment, hobbies, trips to Starbucks, a cell phone, clothes, transportation, savings, and charity. If your child starts making their lunch, downgrades their data plan, and skips Starbucks so they can save more towards a goal, they are on the right path.
  • Establish a checking/savings account with a debit card to give “hands on” experience. This makes the budgeting exercise feel more real and holds them accountable to someone (the bank) other than their parents. There’s nothing like an insufficient funds fee to get their attention! When they have mastered this, consider helping them sign up for a credit card to establish a credit history. Keep in mind this can have consequences to credit scores (yours and theirs) if bungled.
  • Consequences & Agreements. Inevitably, your child will make a mistake, spending more than they have, or missing a bill. You will have to decide whether to bail them out, or allow them to suffer the consequences of their mistake. It’s important that your kids participate equally in shaping the agreement you have in place, so that you will not be to blame if a mistake is made. Consider leaving some high-stakes responsibilities out of your child’s hands.  For example, it might sound like a good idea for children to pay their own auto insurance, but the risk of missing a payment might be too high.
  • Kids and jobs. Parents often say they don’t want their kids to have a job because school, sports and extracurricular activities are already stressing their kids out, and they fear that letting their kids work will put them at a disadvantage to kids who don’t. However, work provides a sense of competence and satisfaction that sports and school do not. Consider keeping a list of chores to do around the house, and let friends/relatives know your kids are available to work. This can be a good step toward eventually getting a real, part-time job. Keep in mind they may want to work only if there is something they want, so do your best to keep them wanting.
  • Visioning Exercises. Show kids what’s in it for them. Help them explore different careers and what they pay, drawing the connection between career choice and lifestyle. Get them talking about what kind of material possessions are important to them, where and how they want to live, and the impact they wish to make on the world. This is also a great time to remind them that saving money when young makes much more of an impact than when older.
  • Decouple Money from Success. When helping children envision future careers and lifestyles, it is easy to conflate success with money. Instead, help them define success for themselves. Explain that success means different things for different people, and that cultural norms of success can lure kids down a dangerous and unfulfilling path.
  • Teach them to invest. This is a great opportunity to involve your advisor in your child’s life. Some parents give the child a “starter package” of investments to be used for long term goals, like a down payment for a home. The investment will have more meaning and purpose for your child if they’ve done the visioning exercise mentioned earlier.
  • Trusts. For tax reasons, many wealthy parents set up accounts for their kids. If your children have money set aside, it is essential to prepare them for what’s coming. Don’t let the money become a major distraction in their 20’s. If that is unavoidable, preparation can go a long way. Teaching children to be good stewards, what it means and doesn’t mean, and the purpose of the funds gives them a framework for managing the responsibility well.

One of the best resources on this topic is the book Raising Financially Fit Kids by Joline Godfrey. Children of Paradise by Dr. Lee Hausner is another timeless book on the subject.

Lifestyle Implications

One of the potential hazards of affluence is that the lifestyle of parents can also become those of their children, intentionally or not. Paul Comstock once said “a luxury twice enjoyed becomes a necessity.” The point is once someone is accustomed to a certain lifestyle, it is really hard to go back. The more grounded your lifestyle, the less of a leap your kids have to make when they leave the nest. At a minimum, make sure children understand that the lifestyle you have is yours, and it is up to them to create their own.

Set Expectations Early and Share Values

Children are much more aware of their family’s wealth than you might think. If the subject of money never comes up, assumptions are made about what the family’s money means. It’s important for parents to share their values about money and walk the talk. Children need this context to help them form their values. As any parent knows, children learn more from watching your actions than listening to what you say.

An example of expectation setting might be:

“We intend to pay four years of college, two years of graduate study, and an international experience. We will cover room and board while in college, but expect that you will earn your spending money from working part time and summer jobs. We also want to help you get started in life and we have established a trust for your benefit. The purpose of the trust is to help you make a down payment on a house, start a business, provide some security, and be a source of funds to modestly enhance your life along the way.

“We want you to have the opportunity to make your own way, build your own identity, and experience the challenges that build character and competence. We will be here for you, supporting you with our love and wisdom. We want to keep investing in you!

“We have been very fortunate and our intention is to give back, which means we expect to give a significant amount of our wealth to charity throughout our life and at our death. We have a foundation that we would love you to be a part of so you can build awareness of issues in our community and around the world and make a positive influence to causes you care about.”

This type of statement sets a clear expectation of what the parents will do and eliminates ambiguity. The earlier children understand the deal, the earlier they can develop their own realistic plan. If you plan to leave your children a significant sum, you may want to hold back that information until they are well into their 40’s to minimize the turbulence such information could cause during their formative years.

One of the greatest fears affluent parents have is that money will interfere with their child’s development. While this is a “First World” problem, it is very real for those fortunate enough to be in this situation. Everything in life has a pro and con, and when it comes to money, there are lots of both. If you try to incorporate some of the ideas shared here, your children should be better equipped for the future.


Ben Johnson
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