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An Age-by-Age Guide to Talking to Your Kids About Money

Talking to your kids about wealth is ideally an ongoing discussion — and one that can begin earlier than you probably thought

Multi generational family

With their son, Steven, about to graduate from college, Mark and Penny were thrilled that, through their family’s connections, they were able to help him land a job with a starting salary of $140,000 as an assistant to a national celebrity. But on graduation day, Steven informed his parents that he’d turned down the job because he didn’t think it paid enough. “Steven had no realistic concept of a starter job or understanding of why he would want to live independently of his parents’ wealth,” says Holly Harben Swan, managing director, national practice executive at the Family Office at Bank of America.

His parents, concerned about their son’s lack of financial awareness and alarmed by his sense of entitlement, enlisted Swan’s help. She swung into action with what amounted to a financial intervention. Bringing Steven and his parents together, she ran a cash flow analysis to show him how much he would need to earn in order to support the lifestyle his parents had given him. The number: $350,000 annually – not exactly a starting salary.

Then Swan helped Steven’s parents describe their concerns to Steven about his expectations for adulthood. She walked the family through a conversation about values – particularly financial values – ultimately helping Steven learn some important lessons. Eventually, Steven took the job.

Many parents, Mark and Penny included, admit they’re reluctant to disclose much about their family’s wealth to their children, worried that doing so could reduce their kids’ sense of purpose, drive and independence. But trying to keep your kids in the dark about your wealth comes with its own set of potential consequences. Avoiding the topic deprives you of a valuable opportunity to pass on values that could help your children develop a healthy relationship with money, a drive to build their own wealth, and an understanding of how to wisely spend and manage what they earn.

“A parent’s task isn’t about waiting until the right moment to do a data dump about the family’s money.”

Besides, your kids already know the family is wealthy. “Kids figure out that most families don’t travel to France to visit their own vineyard, and they’re savvy about using the Internet to find the value of your home, your business and your net worth — much of which is probably inaccurate,” says Swan.

Educating children about what it means to have wealth is a process that, ideally, should start when they’re young. “A parent’s task isn’t about waiting until the right moment to do a data dump about the family’s money,” says Keith Whitaker, president of Wise Counsel Research, a nonprofit consultant to high-net worth families or family businesses, and author of several books, including The Cycle of the Gift and Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask. 1 “ Instead, they should think about imparting information in small chunks and in age-appropriate ways as their children mature, which also helps prepare them to receive the information. This multi-step process takes some intention, work, and courage to do it well.”

Here are a few best practices in raising kids with healthy attitudes toward wealth:

Ages 5 and 6: Answering “Are we rich?”

It’s a fair question from a young child, and in turn deserves a fair answer from a parent. One potential response that Whitaker suggests: “There are many people in the world who don’t have enough money, there are people who have just enough and there are people like us who have more than enough.” Then, once the topic is on the table, you might continue the discussion by talking about how your family achieved financial success, and explain the responsibilities that come with it, to, say, help people who are less fortunate. “This is a perfect time to introduce the concept of philanthropy by, for instance, encouraging a small child to donate one of their toys to a local charity to make another child happy,” says Swan.

As every parent knows, it’s far easier to say “yes” when a child asks for something than to say “no” and have to deal with the meltdown that might follow. But even as young as age 3, parents can begin to help small children differentiate between needs and wants. And for children growing up in an environment of wealth and privilege, hearing “no” from their parents is particularly important, especially in response to unreasonable requests for material things.

“You don’t want to create the expectation that every time they ask for something, they’ll automatically have it handed to them,” says Swan. “For young children I think it’s also important to include the phrase ‘that’s not how we choose to spend our money.’ Parents need to teach kids how to navigate financial choices.”

Swan notes that the practice of having young children make purchases for themselves using cash — not a parent’s credit or debit card — can be important for helping them develop an understanding of how money works. “Young children see parents’ credit cards as a magical way to make things happen, but they lack appreciation for the fact that swiping a card causes an account balance to go down,” she says. Counting out their own cash is tangible proof that money is a finite resource.

Ages 7 – 10: Budgeting basics

Young kids can learn the basics of important concepts like budgeting. One set of grandparents who has a tradition of taking a vacation with extended family every February gives their grandkids a budget to plan the trip. “The amount is not so much that they can go anywhere or do anything,” says Swan, making it critical for the children to give careful thought to how to allocate the money. The kids work in teams, with the younger ones pasting pictures of the destinations on posters, and at Thanksgiving, all the kids pitch their proposals for trips that fit within the given budget for the family to vote on.

Families should also foster additional entrepreneurial endeavors and philanthropic engagement. At this age, kids can be introduced to the stock market and parents and their kids can choose a few companies to invest in together. Parents often choose companies that the child has an interest in, such as gaming manufacturers or restaurant chains.

Preteen: Establishing a work ethic

By now, your child should be earning an allowance so he or she has some experience in keeping track of money and making purchases on their own. Using that as a foundation, taking the following steps can help further the child’s understanding and appreciation for money and generating wealth:

Preteens & Money

Even if it’s just doing odd jobs around the house, “work gives children a sense of accomplishment, identity and self-worth that can’t be diminished either by admiring or being afraid of their parents’ wealth,” says Whitaker.
If they run out of money before their next allowance, Whitaker says, don’t bail them out by giving them more money. “When parents aren’t acting like an ATM, children learn about delayed gratification, planning and the enjoy¬ment that comes from working toward a goal.”
“Wealth is an abstract concept until the child understands how it was accumulated,” he says. It’s important they know that it took hard work for the family to get where it is today.
Give them a general sense of where the family’s money is — in a business, stocks, homes, art collections or cars, for example. “Kids assume that the wealth is totally liquid and sitting in an account, which is almost never the case,” says Swan. Now is when you might want to teach your kids about risk and reward.
“Say you are funding an orphanage in a foreign country,” says Swan. “That’s a great opportunity for your kids to see what life outside their own bubble is like and the importance of giving back and doing good with the wealth.”
Your Bank of America advisor can help your child set up a savings account for a specific purchase or event. Then visit the bank on a set schedule so the child can deposit money towards the goal, and only let them make a withdrawal once the goal has been reached.
Depending on the family, some parents may want to en¬courage their kids to start businesses of their own. In those cases, “make it a legitimate exercise in developing a business plan and marketing strategy, as well as how to manage the financials,” says Swan.

Teenager: Set financial expectations

As your teenager is thinking about the future, you’ll want to make clear what kinds of financial help you’re willing to give. “If you’re worried about your child becoming a career student, maybe you state that you’ll pay for one undergraduate and one graduate degree,” says Swan.

If your teen asks for specifics about the family’s net worth, you may want to respond, “We’ve accumulated substantial wealth, but I’m not going to get into the numbers right now. As time goes on, however, I promise I’ll share more with you and want you to be involved in thinking about the choices we have ahead of us,” recommends Whitaker. “Now you’ve opened the door for your teen to ask about larger wealth management issues instead of how much is in your portfolio,” he says.

In your child’s late teenage years or early 20s, you may want to introduce him or her to your financial advisor to talk about what’s involved in managing your wealth and how they might be involved (or become involved) in structures such as trusts, LLCs, or foundations. This is also a good time to start setting expectations about financial assistance and estate plans. Your financial advisor can also counsel them about pre-nuptial agreements, managing their own investments and estate planning.

Young adult: Don’t try to buy their affection

As your child transitions into adulthood, be wary of using gifts of money to maintain a connection. “Your goal as a parent is to raise independent children with a strong work ethic and generosity to others,” says Swan. “It takes away from an adult child’s self-esteem and sense of accomplishment when mom and dad are always there to foot the bill.” While it’s fine to launch your kids into adulthood with some financial support, be clear in defining expectations. “Perhaps if they can demonstrate that their paycheck will cover rent for a studio, you can kick in the extra so they can rent a one-bedroom apartment,” says Swan. “Or give them better terms on a loan to start a business once they’ve obtained bank financing.”

FINANCIAL EMPOWERMENT FOR YOUNG ADULTS

With the complexity of financial matters today, it’s important to engage your children and grandchildren in expanding their knowledge and interest in their own financial well-being.

Bank of America Private Bank’s Financial Empowerment Program has been specifically designed to provide a hands-on financial education curriculum that young adults can access in partnership with your Private Bank team. The program covers a range of topics to help young adults prepare to manage money, like investing basics and the financial implications of life events such as getting married, starting a family or even changing jobs.

To learn more, visit privatebank.bankofamerica.com/education or contact your advisor.

 

A lesson to learn at any age

Whether your children are five or 25, when the topic of wealth comes up, parents should consider it a chance to provide a learning opportunity. Using the guidelines in this article can help you approach the conversation with the confidence in knowing what information is appropriate to share and when — helping you instill in your children the values and understanding you wish them to have when it comes to money, work and wealth.

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