Your Kids Will Inherit Your Money, So Teach Them How To Handle It

Nancy L. Anderson
Millions of dollars will pass through your kids’ hands over their lifetime. Eventually, they may  inherit your hard-earned money, too. They need to ready to handle their finances.
 
In fact, many parents want nothing more than our kids to be good with money so they can be successful, invest for their future and give to charities they care about. To do that, we, their parents, need to start their education early and guide them along the way.

Many wealthy parents keep quiet instead. According the study titled “Navigating the Wealth Transfer Landscape” by Campden Wealth, the Institute for Private Investors, and Wilmington Trust, though wealthy families want to preserve wealth for future generations, 67  percent are concerned about sharing the details of a possible future inheritance.  

Though wealthy parent’s concerns are valid such as they don’t want to demotivate the heirs, the details aren’t fully ironed out and the heirs seem too young, the beneficiaries aren’t informed so they can be ready when the time comes.  The study found only 10% of wealthy families share the complete details with the heirs.  

There has to be a better way to prepare the next generation to be good with money. David York, a Utah estate-planning attorney and author of Entrusted: Building a Legacy That Lasts, suggests that estate planning needs another step—”preparing the family for the wealth, not simply preparing the financial wealth for the family.”

Traditional estate planning is often age based, where the beneficiary receives funds when they “old enough to handle them.” The age is often arbitrarily set at 30 or 35. York suggests preparing the next generation “so they don’t find themselves shocked and unprepared for what happens next” when a pile of money gets dumped on them. Working in a partnership — like a financial mentor — with your children and grandchildren can teach them to be good with money at an early age.

Your kids should earn and manage their own money at an early age. According to a 2016 study by US Trust, that’s how many wealthy individuals start out. The study states, “on average, the wealthy began saving money at 14, and by age 15 were earning money for work outside the home.”

You don’t have to throw your kids directly into the deep end. Start with small steps and build on them, just like any other part of their education, with guidance from seasoned teachers. Kids need to learn how to handle money and understand that even one dollar is valuable. Once it’s spent, it’s gone, so they better make good choices.   

Money lessons are best learned through experience.

Having some skin in the game, actual money to work with, to learn with, and to invest makes all the difference in the world.  Real money equals solid money lessons.
Here are a few ideas for teaching your kids to manage their cash flow well:

Money lessons are best learned through experience.

Having some skin in the game, actual money to work with, to learn with, and to invest makes all the difference in the world.  Real money equals solid money lessons.
Here are a few ideas for teaching your kids to manage their cash flow well:

Have them work for it.

Whether you pay your tween or teen an allowance, hire them, or they work part time, have them earn their own money. You are still the parent, though, so monitor what they do with it. Make sure they save at least half of what they earn to invest and then “save up” the other half to spend.  

Beginner exercise:

Teach them the “hours worked” formula.

To determine whether a purchase is worth it or not, make the connection between what your tween or teenager makes per hour and the number of hours they would have to work to pay for it
Take them on a field trip to the sporting goods store, clothing store and even an auto dealership.

Bring your calculator. Choose something that aligns with their interests, such as their favorite sport or pastime—maybe it’s skiing or video games. Calculate what they would have to earn per hour’s work to purchase the item they want.

If your daughter earns $10 an hour babysitting, she’d have to work for 20 – 30  hours to pay for the new ski boots she wants. If your son makes the same wage and wants a Tom Brady jersey, he’d have to work for 6 hours to get it. Pick any item—a new car, a boat, a house, etc., and tie the purchase price to hours worked.

Intermediate exercise:

Put them in charge of one of their own household budget items.

When I was a kid, my parents gave me a clothing allowance. It was $25 per month, and I had to buy everything with that—school clothes, a new coat, sweatshirts, etc. So I had to learn how to save up money for back-to-school shopping or larger items, such as a cute jacket. I often ended up with ragged underwear and socks because I didn’t think about the staples, but overall it was a good lesson.

Start small and work with your kids. One way to start is putting them in charge of toiletries. Give them a soap, toothpaste and hair care budget every month.  

You can teach them to maximize their dollars by shopping sales, using coupons and buying generic versus name-brand products. Teach them not to waste—when they buy their own shampoo, they’ll use every last drop! They’ll even dilute it with water instead of throwing it away with a quarter of the shampoo left in the bottom. When they come in under budget, let them keep the difference.  

Celebrate with them if they want to spend the difference on themselves—they earned it by managing the money well.

As they get older, expand their responsibility so they are managing their own expenses before they leave for college or trade school.

Advanced exercise:

Invest together.

Start a joint venture with your son or daughter. York suggests setting up a family Limited Liability Corporation (LLC) which your child funds with an age appropriate amount, even as little as $100. The parent is named as the manager and then loans money to the LLC.  

For example, the child puts in their allowance money for $100 and the parent loans them $900 to make a $1,000 investment.  Then, as a team, the child and parent decide where to invest the funds—traditional investments such as equity or bond mutual funds, real estate or a small business.

Your child learns a plethora of lessons as they work side by side with you. York calls this “a laboratory of sorts, where one generation can learn from another.”  The young entrepreneur may start a business.  An artist may buy and sell paintings.  An aspiring investor may choose traditional investments such as mutual funds. 

The investment choices all depends on their interests. The child benefits from the investment return, leverage and learning about a host of different investment possibilities.

Your kids start as beginners on a tricycle, then move up to a two-wheeler with training wheels. Eventually, you take the training wheels off and run beside them until they ride off and you stop, breathless, leaning over with your hands on your knees.

Training them to be good with money is the same thing. Get started early and guide them along the way until they are ready to take on whatever challenge faces them.