Wealth Advisory & Planning
April 28, 2022
Raising Financially Responsible Children
In discussing financial matters with clients over the years, many voice concern for how to best prepare their children for the privileges and responsibilities of managing wealth. While most want to share the rewards of financial success, they are equally keen to ensure this does not breed misfortune for future generations.
The path to developing young people with the expertise to effectively steward family wealth is complex and multifaceted and includes good communication, sound family governance and effective leadership development. While many factors ultimately contribute to raising financially responsible children, education plays a central role.
There is no sure-fire approach to educating all children or families on financial matters, but there are widely adopted practices that have proven successful. Here we introduce five areas considered fundamental to educating children to effectively manage the responsibilities and privileges of financial wealth.
Great wealth requires an advanced financial education that includes having the ability to apply critical thinking, developing a sense of purpose and protecting oneself from those who may take advantage.
The challenge is that an advanced level of knowledge takes many years to acquire and is complicated by external influences such
as peers and the media. Experts generally advocate beginning the financial education process early and with an age-appropriate point of view.
For young children, it is important to conceptualize that money can be held, counted, received or given. By age 6 or 7, an allowance can be a useful tool that enforces the tangible experience, provides a first lesson in basic money management and reinforces positive messages about family values and money. Importantly, this ritual sets the foundation for the introduction of more complex and abstract financial concepts later on.
One common practice is to encourage children to divide their allowance into three equal “buckets” between spending, saving and giving. This three-part system teaches children to set short- and long- term goals and introduces the concepts of growing assets and earning interest.
For children, an allowance provides a real-life opportunity to practice decision-making skills. For parents, it facilitates a means to observe a child’s financial decision-making and allows for developmental feedback and training. While parents may cringe at the spending decisions, it is important to remember that the goal is to teach, not to control.
Preadolescents and adolescents
The time between ages 9 and 12 is fertile training ground, as preadolescents are interested in learning about money and are often more teachable than adolescents. By making it entertaining or even challenging, preteens can learn how to quickly calculate tips in a restaurant or estimate a 25% savings earned from a promotional sale.
In the teenage years, parents can build from this framework, adding lessons in investing and risk management. Additional life concerns such as interest rates, credit card fees and the nuances of bank lending are also appropriate lessons. Children at this stage should learn to write checks, balance a checkbook and monitor periodic bank and investment statements.
By age 18, a child should have basic financial literacy skills, understanding how to budget, spend, save and give, each underscoring the value of a dollar. Overall, learning usually involves trial and error — young people need the ability to experiment and make mistakes.
Since children of significant wealth will inevitably be responsible for complex financial decisions, it is essential the education process begins early and the teachings be age appropriate.
Life experiences as teachable moments
Children need leeway to err, balanced within a framework of boundaries that keep them on course. Once these boundaries are set, parents can “let go” within reason.
The key is to initiate and embrace teachable moments. Children need to develop a concrete working knowledge of money, learning through real life experiences that illustrate its real effects and the process of making financial decisions.
An often-repeated anecdote is the inevitable point when a child asks, “Are we rich?” Parents can make this a teachable moment by sharing family stories and promoting positive role models. For younger children, a common approach is to discuss the question in terms of having enough, not enough or more than enough. For older children, it is appropriate to let the child know the family worked very hard and, as a result, is financially secure. It is also a good time to reinforce the family’s beliefs about community service and giving back. The idea is not to avoid the question but rather to respond in a manner that demonstrates responsible pride.
The developmental path for young people includes a series of educational experiences, dialogues and challenges. It is a matter of continual engagement and active involvement by parents. It’s important to capitalize on everyday experiences that provide an opportunity to send a positive message and model responsible financial values, attitudes and behaviors.
Knowing yourself, your children and your family’s values will more effectively guide children toward financial responsibility.
It is wise for parents to first engage in thoughtful and honest self-reflection. Consider your personal financial development. What were your early experiences with money, and how did these shape your beliefs, values and behaviors? Are you at a stage of building your career and accomplishing your personal objectives? Are you at the stage of giving back? Where are you in relationship to your wealth? What do you want to teach your children?
Know your child. Each child in a family has unique strengths, foibles and personality characteristics. It is important to identify individual interests and skills to appropriately nurture the respective talents. It is also critical to recognize that each child has a unique way and pace for learning different kinds of information.
A family’s history and values set the foundation for current and future members to feel proud of the family’s achievements, connected to the family’s wealth and motivated to continue the legacy. Extended family members can serve as mentors and provide an expanded opportunity for learning experiences.
Importantly, the family’s values become the compass that informs and guides family financial actions and decisions, especially in difficult times. Future generations will be prepared to share and support the family’s priorities and mission only to the extent which they are taught.
Family values are certainly communicated by actions and by sharing family stories. Stories passed from generation to generation demonstrate and memorialize the meaning behind the money. As this history is shared, it reinforces how hard work and risk-taking are part of the family history.
Communication is the key to establishing healthy beliefs and behaviors. The guidepost is transparent communications — age appropriate, but transparent.
Talking with children about money — what it means and setting expectations — allows a parent to influence a child’s perceptions and provides a valuable means to raising financially responsible children. Although children may initially feel empowered by having more than others, this same realization may make them feel awkward and alienated. If the realities of the family wealth are not proactively communicated, children are left to draw their own conclusions or learn from people outside the family, which may unwittingly reinforce unhealthy attitudes about money.
When it comes to communicating with your children, it is important to be curious and ask questions. This will lead to fruitful conversations and allow parents to gain insight into the child’s understanding of money while imparting values and insights. The result is that the children will be more likely to use their wealth, when the time comes, in a way that is consistent with the family’s values.
For philanthropic families, family foundations or other charitable activities can provide an ideal environment for teaching financial literacy, building skills, sharing values, practicing decision-making and reinforcing positive messages. Further, it often provides children an opportunity to work with older or younger siblings and cousins, grandparents and extended family members. Adult family members are often involved in shaping the lessons learned, and children are often quite receptive to learning from them.
Lessons learned from active involvement with family philanthropic activities can go well beyond developing good money skills. Using a child’s allowance as a proxy, parents can teach the values of charity and philanthropy simply by requiring the child to set aside a reasonable portion for charity and helping them to make decisions about their gifts.
The path to developing young people with the expertise to effectively steward family wealth is complex. With adequate and thoughtful financial literacy, children will likely be far better prepared, emotionally and financially, for the responsibilities of managing family wealth. This is the gratifying goal of our collective efforts.
This material provides information of possible interest to Glenmede’s clients and friends, and does not provide investment, tax, legal or other advice. It contains Glenmede’s opinions and/or projections, which may change after the date of publication. Information obtained from third-party sources is assumed reliable but is not verified. Any potential outcome discussed, including but not limited to performance, legislation or tax consequence, ultimately may not occur due to various risks and uncertainties. Clients are encouraged to discuss anything of interest in this material with their tax advisor, attorney or Glenmede Relationship Manager.