This is a question that we were asked by a client recently, and as with many such questions, it’s a complex one to answer as it depends on your own personal views and values, as well as the personality and capabilities of the child. Here's our response.
When we thought about it further, we came to the conclusion that it’s actually the wrong question. You have no idea when you are going to die, what your future circumstances might be, how much wealth you may have, and what sort of person your child may grow into. We would therefore suggest that a much better question is to ask,
“How can I prepare my child to make good decisions around money, to use it creatively and for the good of him or herself and society, and to avoid the bear traps and leeches that populate the financial world?”
There is plenty of evidence for the damaging effects that too much money too soon in life can wreak on young lives. Vorayud Yoovidhaya, the grandson of the founder of Red Bull was accused of the hit-and-run death of a police officer whilst driving his million-dollar Ferrari, and reportedly used his wealth to buy off the officer’s family and avoid prosecution. Brandon Davis, 32 year old oil heir and friend of Paris Hilton, is a regular in the tabloids for drug infringements and alleged nightclub brawls.
Prince Pierre Casiraghi, son of Princess Caroline of Monaco, was accused of being “completely obnoxious”, insulting models and swigging from a $500 bottle of vodka after a brawl at a New York nightclub that left him in hospital. There are plenty of other examples.
For parents trying to deal with these excesses, views also vary. Gene Simmons, bass guitarist with American group KISS and reportedly worth $300 million, reportedly told CNBC “…in terms of an inheritance and stuff, (my kids are) gonna be taken care of, but they will never be rich off my money. Because every year they should be forced to get up out of bed, and go out and work and make their own way.” Microsoft founder Bill Gates feels similarly. He said “I didn’t think it was a good idea to give the money to my kids. That wouldn’t be good either for my kids or society.” Instead, he and his wife Melinda created the Bill and Melinda Gates Foundation in 1994, which today has assets of over $37 billion. Movie star Jackie Chan does not plan to leave his millions to his son, Jaycee. He told a reporter “If he is capable, he can make his own money. If he is not, then he will just be wasting my money.” Contrast that approach with young Suri Cruise, daughter of Tom Cruise and Katie Holmes, who at the age of six reportedly had a three million-dollar wardrobe, and whose mother was apparently planning to surprise her daughter with an eight foot, $24,000 Grand Victorian Playhouse for Christmas, complete with running water, electricity, and extensive landscaping.
These are, of course, examples from the extreme end of the wealth spectrum. Nevertheless, the range of sentiments which are expressed can apply to all of us who have surplus funds that our children may one day inherit. So how do we prepare them for that day? Inevitably, the good financial habits of children are likely to be built on the foundation of the practice of their parents. But sometimes, those habits aren’t always recognised. One of our financial planners had a conversation with clients a few years ago wherein their mother expressed a desire to give her three children a significant sum so that they could each buy their own homes. The planner asked her what was important about making this gift to her. She thought for a moment, and then told me that she didn’t want her children to struggle in the way that she and her husband had done over the years. The planner reminded her of a previous conversation when we had explored her values in depth. At that time, she told me of her pride in achieving her financial success as a result of having to struggle and make good decisions in the tough times. This, she had said, had been the making of her. The planner didn’t need to ask whether she wanted to take this away from her children. She saw the point immediately. The planner quickly told her that they didn’t disagree at all with her giving money to her children – she could easily afford to do so – but she should firstly be clear about whether the children were ready to receive it. George Kinder refers to these issues extensively in his book, ‘The Seven Stages of Money Maturity'. He describes the first two stages, Innocence and Pain, and explains how it is necessary as part of life’s journey to feel the pain before one can move onto the next stage, acquiring Knowledge. If the pain isn’t there, neither is the incentive to do the work necessary for personal growth. Financial knowledge is essential on this journey. It is common for the very wealthy to enrol their children in financial education classes at an early age, enabling them to be equipped to deal with complex decisions around investment, accounting and trusts as well as to understand the role of philanthropy and community service in a well rounded financial life.
It is a fact that the financial literacy of many young people leaving school today is extremely poor. Many have little idea about how a mortgage or credit card works, what the stock market does or how companies and governments operate. The child who understands these things early in life has a clear head start when it comes to understanding and dealing with his or her parents wealth. Perhaps the starting point for your child’s financial education is to revisit your own. Are your financial habits and attitudes appropriate and taking you where you want to go, or do you need some further coaching or education? Have you written down your own attitude to money, wealth creation, borrowing, saving and investing? When your child asks a financial question, are you able to give a rounded response? Is money a problem for you, or is it the solution to a problem? How comfortable are you with your own wealth? If you have some issues in these areas, the chances are your child will grow up reflecting your views. At Woodgate Financial Planning we seek to work with our clients and their families to address these issues over time. If you don’t have a relationship with a financial planner who can assist you in this area, there are lots of financial information websites that are a good starting point. You need to make sure, though, that they aren’t just a cleverly dressed up sales message and that they are offering genuine education.
Take your time to research and find a source of help that chimes with your own personal goals and values.
If you need any help on this topic, our team of advisers at Woodgate Financial Planning will be pleased to point you in the right direction.