Financial Education

Some conversations are uncomfortable, and talking about money can be one of them.  But it's important to educate your children about money, whether you have a little or a lot of it.  In fact, many people with the most money never discuss it, which can lead to sad consequences.  The problem is so common, we have the saying "shirtsleeves to shirtsleeves in three generations."

I work with clients on passing on their wealth to their children (or other beneficiaries) every day.  But no matter how much work we put into creating the "perfect" trust, it cannot substitute for sound financial education, which includes how to obtain, save, invest, spend, and give away money.

Most financial education focuses on how to obtain and save money.  Obviously, if you don't obtain it, you can't save, invest, spend or give it away.  Saving, also, is fundamental.  If a person lives below her means, she will avoid much stress and financial pressure.  But do most people think about teaching their children how to spend money and how to give it away?

Spending money must be balanced with saving money.  What is the point of obtaining, saving, and investing, if you don't receive any enjoyment from your wealth?  One tragic example of a person who did not know how to spend money is Hetty Green, who lived in New York in the mid-1800s.  Hetty inherited millions from her father and through investments grew it to many millions more during her lifetime.  But she could not bring herself to spend any of it.  When her son Ned broke his leg, rather than take him to a doctor, she set the leg herself.  Ned developed gangrene, and his leg had to be amputated.  This problem also has a saying, "penny wise and pound foolish."

Educating your children about money should start at a young age.  If they are old enough to receive an allowance, they are old enough to learn how to use it.  Parents can use a variety of methods to educate with an allowance.  First, they can require children to do their chores to receive the allowance – how to obtain money.  The can require children to save part of the allowance, or they can reward savings, for example, by matching the amount the child saves.  Investment education usually comes at a later age, but many children really enjoy owning a share of their favorite company, such as Nestle (ice cream) or Sony (Playstation).  Unfortunately, it is generally not possible any more to get an actual stock certificate for one share of stock, which makes the stock tangible to a child.

Children also need to be taught how to spend money, usually through trial and error.  Allowing them to spend their allowance on anything the want (within reason) will teach them the value of money both in the quality of the items they purchase and the amount of time it takes them to spend it.  They may blow their first few allowances on the first day of the week, but they should learn over time to evaluate their purchases and to hold some money back for later in the week.

I often include this type of education provision in trusts clients create for their children.  For example, the trust agreement  could provide that the child receives one-third of the trust fund at age 25, another third at age 30, and all remaining funds at age 35.  The hope is that if the child wastes the first distribution, he will be wiser five years later.

Last, but not least, children need to learn to give money away.  Parents can require their children to "tithe" with their allowance, contributing a certain amount to charity every week.  Parents can also inform children of their own giving and include the children.  For example, if the parents support a food bank, they can tell the children it is important to help others and take the children to the food bank to see how it works.

As an attorney, I help clients transfer wealth to their children, but the clients need to transfer their values, and the earlier they start, the better.

This article is for informational and educational purposes only and does not constitute legal advice.