Passing on More Than Money

We frequently get asked for advice on how to teach children about money. Although financial literacy is a key life skill, regrettably it is not usually taught as part of the school curriculum. A corollary question is how to offer our children the privileges and opportunities wealth provides, while teaching them the value of work and independent achievement.

It’s no surprise that a common motivation for building wealth in a family is to ease the way for future generations. This is particularly true if the generation that created the wealth had to struggle through hard times. We want our children to have an easier time than we did, but we don’t want to take away their motivation to live purposeful, productive lives.

While it is self-evident that affluence brings great advantages to children, there is also a downside to making things too easy for them. It’s human nature to take the path of least resistance, and that is not always in the direction of our greatest good. Happiness seems to be an outcome of having a strong sense of purpose in life and of having achieved something that is important to us. This sense of achievement is perhaps experienced in direct proportion to the resilience we had to build in order to tough out challenging times and circumstances. Being rewarded without having made an effort commensurate with the reward usually feels quite hollow.

A well-known advisor to wealthy families, clinical psychologist Dr. Lee Hausner, has observed that effective parenting focuses on process and structure more than the end result. For example, successful Type A parents may set expectations – implicitly or explicitly – that are not realistic for most children (i.e., that a child always be first in any competition or get straight A’s). In these situations, children may feel that it is impossible to ever live up to their parents’ expectations, however hard they try. As a result, they may become discouraged and ‘drop out’ in various ways.

A more effective approach is to teach the child how to be successful by setting up a structure and process which, if followed rigorously, will produce the best results that particular child is capable of achieving. For example, a schedule of activities for the school year would include a designated homework period every day; a daily practice period for an instrument, skill or sport; keeping track of assignments and due dates in a daily journal; and using a project planning process for longer range projects, competitions and exams. In focusing on process and implementation, you set the groundwork for a strong work ethic and values that are grounded in honest effort.

As children gradually learn to tackle tasks of increasing complexity and difficulty, they enjoy the confidence and feeling of competency that comes with being offered more responsibilities and independence.

This process-based approach ties in to learning how to manage money responsibly, as well. Hausner suggests that you start early by getting a child to distinguish between wants and needs. She suggests giving an age-appropriate allowance that is large enough to be a meaningful teaching tool and can be split into three parts (not necessarily equal):

  1. A part to spend right away to enjoy immediate gratification.
  2. A part to save: Saving for something they really want will help them learn the valuable lesson of delayed gratification. A young child who wants a new bike might be asked to save a certain amount to contribute to its purchase. Older children might be taught some investing basics with their accumulated savings.
  3.  A part to give away: The portion of the allowance that is given to a charity teaches children that they can make a difference in their community and allows them to feel the joy of giving.  Older children can be taught how to research charities before they make their donations, and to follow up on how the work the charity is doing. Some parents give children a designated amount to contribute (starting with perhaps $50 or $100 for a younger child), and ask them to present their research at a family meeting before approving the donation.

Over time, children can be given more financial responsibility and the opportunity to learn from their mistakes. Teenagers can be asked to present a budget for clothing, entertainment, etc. Once you approve their spending plan, they are held to that budgeted amount. If they overspend in some area and run out of money in that budget period, they will quickly learn to avoid the consequences of imprudent spending.

Investment guru Warren Buffett famously commented that his intention was to give his children the means to do anything they wanted to do, but not so much that they could do nothing. Wise advice.

This article was originally published in the June 2014 issue of Sask Business, authored by Daryn Form.

Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.  The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.  Rates are not guaranteed and are subject to change at any time without notice.