Here at DISCUS we enjoy sharing information relevant to our readers, particularly when it can help them to deal with specific client problems. This week we found an article, written by Justin Urquhart Stewart, Co-founder and Head of Corporate Development at Seven Investment Management (7IM). Below is a three step guide for helping wealthy individuals to deal with the problems surrounding children and money. (You might like to share the contents of this article with your wealthy clients!)
How to stop your wealth becoming a problem for your children
I was on stage at the Financial Times (FT) Weekend Live event, a festival put together by the pink newspaper to celebrate all the things its readers love… and provide some education to be able to buy it all i.e. money.
In a discussion chaired by the lovely Claer Barrett, the paper’s own personal finance guru, I joined one of their columnists, Jason Butler, to debate the problems that could affect children if their parents happen to have done well financially in life.
Now known as ‘rich-kid-itis’, it results in children baulking at flying economy class, relying far too heavily on the Bank of Mum and Dad, and demanding large inheritances perhaps even before the poor parents have actually planned what they want to do with their hard earned gains themselves!
We covered off three main areas about how to help kids realise the responsibilities attached to money, offer up some practical advice and highlight how you can protect your tender offspring.
And for those that foresee similar symptoms even if they are milder cases being contracted in their family, here’s what I opined based my own experience, both personally and with clients.
1. How do you talk to your kids about money?
While Dr Doolittle’s musings on talking to the animals may seem to be an extreme example of the difference in the language you might have to use, I’m not too sure it is that far away.
First of all, you have to put yourselves in their shoes. Many under the age of 25 (or even older) struggle to think beyond the next weekend. So planning for an event that’s decades off isn’t naturally appealing. Just because you’ve realised the importance of saving for retirement, doesn’t mean everyone else has, despite what a neat achievement that would be.
What is equally clear to me is, when you’re chatting to a chimp in chimpanzee, you should have mastered the vocabulary yourself first. So if you don’t trust yourself to be fluent in kangaroo, you can always reach out and get help from your wealth manager. Lots of our clients at 7IM do.
Many conversations will of course remain well within your grasp. I started small and helped my daughter with the basics as early as possible: setting up a savings account; encouraging pocket money to be paid in; looking to use the money she had to partially buy some ‘I want’ purchases; and paying only for chores that would otherwise see me pay someone else for the job (such as washing the car, shoe shines etc.).
As they get older, conversations about tax can start with national insurance when they get their card through the door at 16, and detail how inflation can kick in. And you can use any savings they’ve had to show how money can accumulate and compound. In my daughter’s case, one bank account became three: two current (one for fun and one for the necessities) and a separate savings account (with lots of constraints about when/ how it should be accessed) when she went to university all much easier than when money’s amassed in one lump sum.
And it doesn’t take a degree animal or otherwise to realise probably the most important piece of wisdom may lie in ensuring they understand the responsibilities sums of money can bring. Now you just need to somehow convey that spending today, while it’s an instant drug, is usually less effective than the delayed drug of savings…
2. How much is enough (and when)?
We all want to make sure our children have the best possible start and sometimes giving them the best things in life is worth it. But even if you’re not so worried about being seen to be spoiling them, you may be overwhelming them and that can lead to far greater expectations about your future expenditure being raised.
For example, there is often a lot of confusion about credit and credit cards. A £3,000 credit card limit is not the same as £3,000. But it’s repeatedly viewed that way and often when they’ve flown the nest for the first time and you’re not there to keep an eye on the post, store spending cards can also often quickly become a problem.
A better way in my view is to equip your child is with a debit card (so their spending comes off their bank balance across the month), while an overdraft facility will mean they will never starve or be left in the dark when the meter runs out.
Also, any Junior ISAs are technically theirs, but should be clearly kept separate from any finance conversations you have. They were set up for the long term…
Similarly, establishing them with housing as soon as they finish university often leads to issues around mortgage repayments and maintenance costs that can quickly overwhelm. Perhaps waiting until they’re beyond 25 (or when you’re confident they can afford the responsibility attached to your generosity) may be better for them in the long run.
3. How do you protect them?
Again, starting early has its advantages. Stranger Dangerand the perils linked to accepting gifts and sweeties from brand new ‘friends’ are lessons that can extend well into adulthood.
I know the easy option (for you too) is to provide them with a contact(less) payment card, but that can soon become a contact stick (just for you). It is tough teaching kids not to have money just slip through their fingers when everything’s electronic. Money in used £5 and £10 notes is still much more difficult to part with.
You may also need to have conversations with your partner/ spouse and the wider family to agree your moralities about money. If you’re going to leave the children a limited inheritance because that’s what you believe, say so. Half the issues often seem to stem from your lack of clarity on your own choices. Consider going through your finances with them so they understand the need to budget and put money aside for the proverbial rainy day… That conversation could even be a boom for you!
And while many believe Trusts are magic wands, use them wisely. Trusts get very complicated, very quickly and you often find out five years on from setting one up that there are a lot of unintended consequences. Please do make sure you get the right advice.
Last, but definitely not least, there will inevitably be scenarios when the medicine is a remedy that has (and probably most painfully) to be self-administered. Hopefully though they’ll have also contracted some natural resistance to any form of kid-itis, whether that’s about money or common sense in general.