How to Educate Children of Wealthy Families
In every family, educating children presents a challenge. The challenges, opportunities, and responsibilities in deciding how to educate children of wealthy families are no greater than those experienced by families who are less wealthy, but they are unique unto themselves because of the circumstances. Knowing how to teach children, and at what age to start teaching those children about family wealth, can make all the difference when it comes to what type of person the child becomes later in life.
Preparing them early, arming them with the tools of responsibility, instilling good morals, and teaching them how to make sound financial decisions are the keys to educating children of wealthy families.
Stewardship is the cautious and conscientious management of something valuable entrusted to someone’s care. Teaching financial responsibility to children in wealthy families begins with this concept. Simply put: The family’s wealth is not an individual possession. Rather, it belongs to the whole family and should be drawn on with certain limits.
If a child is born to wealth, parents must play a balancing act. Many wealthy families give their children far too much, thus creating a sense of entitlement, which gives such children an aura of privilege, a sense that they are special, with no opposing balance of responsibility, blurring the line between need and want. Parents should begin by teaching a child the value of a dollar. Children who learn the difference between need and want will become more responsible, successful, and independent by making decisions that enable them to earn money on their own. While wealthy children do not necessarily need the money, they do need the education and sense of productivity and self-worth that work provides.
Be a Good Role Model
Teaching children how to be good stewards of family wealth begins within the family. Parents should inform children about that wealth, where it came from, and what was necessary to accumulate it. (Naturally, it’s a much easier story if it came through hard work.) Then parents must teach the child the specific values and expectations that come with owning that much wealth.
One very important way children can learn about money is by watching how their parents handle themselves and their money. Another way is by actively making money on their own, which they can do by any number of methods, from getting a job to making responsible, thoughtful decisions about money they already have.
How to Educate Children of Wealthy Families about Investments
Investments are particularly important in growing money you already have. The simplest form of investment is to put money earned into a savings account or checking account, where it will accumulate interest. When there is a lot of wealth, decisions become more complex, especially when a family is trying to teach a child how to invest money safely and responsibly. This step is when financial advisors come into the picture.
Whether the child has worked at some sort of job (where money is earned) or is learning to manage money by investing an allowance, a financial advisor can provide invaluable insight for the child. Many parents are comfortable discussing their family wealth with a financial advisor, but they are unsure about how to include a child in these conversations. Fortunately, families can utilize certain resources to initiate the discussion.
Take your child with you when you visit your financial advisor. Let your child listen to the discussion, and then later both of you should discuss the decisions you made and why. You may even ask them what they might have done differently. As children grow older, include them in the decision-making process during the meetings. Let them communicate directly with the financial advisor. You will be able to learn about their communication style and understand what values are important to them.
Be sure there is a clear family mission statement that helps your child understand what values are important to each individual and the family as a whole. You may talk about what values contributed to the family’s current wealth, how you go about making decisions regarding investments, and how the family’s wealth has been used to promote charitable goals.
One way for parents to encourage philanthropy in their children is by being philanthropic themselves. Whether it is during a meeting with a financial advisor or not, be sure to reinforce family values, including the importance of philanthropy. What cause is important to your family? Why is it important? This can be a great teaching tool: Perhaps a relative died of cancer—and donating to cancer-fighting causes is important. How does your contribution benefit the charity? Why is it important to give?
Let children talk about something that is especially important to them and give them an opportunity to donate a portion of their earnings or allowance to that cause. When deciding which group could actually benefit the most, the financial advisor could provide a list possible causes and let the child decide which one they prefer to donate to. Or let the child think about a cause. It’s great if the child finds one without prompting. Additional reinforcement could come as the parent offers to match the child’s contribution.
Once the foundation between the child and the financial advisor is in place, the advisor can offer invaluable tips and strategies for wise investments.
Some practical investment tips:
• Utilize Disposal Income
Disposable income is how much money is available after taxes. The average person wants to spend the remaining 100% of their income after taxes instead of investing a portion of it. Financial advisors can help a child learn, at a very young age, how they can spend 80% of their allowance or earnings and put the remaining 20% into a blue-chip stock portfolio.
• Low-Cost Index Fund
One of the most practical investments is a low-cost index fund. Such a fund, which is also referred to as an index tracker, is typically a mutual fund that looks to mirror a specific market, regardless of overall economic conditions. The goal here is to keep money invested in a group of safe, intelligent funds that steadily increase over time. Rather than trying to “stock pick,” which can be a risky approach to investing, the idea is that a rising tide will lift all ships.
• Reinvest All Dividends
Dividends are the payoff for an investment. When a company earns a profit, they issue a portion of their profits in the form of a payment to their stockholders or shareholders. This payment is called a dividend. Once the initial investments begin to pay off in the form of dividends, it is an excellent idea to reinvest those dividends to increase the value of the investment. Most corporations offer dividend reinvestment plans, or DRIPs, that will allow the investor to reinvest in the corporation by purchasing additional shares at a significant discount, commission free. A good rule of thumb when reinvesting dividends is for investors to put no more than 1%–2% in any one company. This simple formula is often stressed by financial advisors, with some saying, “It is a slam dunk.”
• Dividend Aristocrats
Dividend Aristocrats are those rare companies that have continually increased their dividend payments to their investors every year for at least 25 years. These companies are ideal for investment purposes. There are often fewer than 100 Dividend Aristocrat companies, and because they are able to continuously increase their dividend payout, they are considered more stable than other companies.
Investing is simple but also very hard, especially for young people just beginning to make financial-planning decisions on their own, which is why it is vital to begin early and include the child in meetings with financial advisors. Parents should be open to hearing their children’s thought process and decisions regarding the best ways to manage their own finances, as well as the family’s wealth, especially in light of tough economic times.
Lifestyle Management Relative to Income
For most people, deciding how to spend their money determines their lifestyle. This decision may or may not apply to children of wealthy families. The value of the family’s wealth, as well as how that wealth is maintained, distributed, and contributed to, are all factors that influence the wealthy child’s lifestyle. It is important, however, that children of wealthy parents learn the skills necessary to earn money for themselves and develop as much motivation as any other children. Doing this will help them overcome the obstacles they will likely face in the future.
When deciding how to educate children of wealthy families, the bottom line is preparing the child to be morally and financially responsible. Ultimately, doing this will help them develop good financial habits. From the beginning, be open and transparent about the family’s wealth, and discuss the impact of changes that could occur because of irresponsible spending, bad financial investment decisions, and unstable economic factors.
Above all, give children the opportunity to make decisions regarding money but also allow them to fail. The greatest lessons can often be learned from failing.
Please contact one of R. W. Rogé & Company’s Senior Wealth Advisors to aid in this important discussion.