How to Teach Wealthy Kids About Money

As a teenager reading F. Scott Fitzgerald’s The Great Gatsby, I was struck by the scene where Gatsby flings his expensive tailor-made silk shirts from the closet, one by one, bringing Daisy to tears. At the time, that seemed romantic: I saw the shirts as a symbol of how hard Gatsby had worked to win Daisy’s love. But why did Daisy cry?

Of course, as an older reader, the scene seems sad — a horribly misguided display of wealth that underscores how Gatsby believed wrongly that his fortune would win him the girl of his dreams. Perhaps Daisy cries because she knows it’s not that simple, and that a man’s love can’t be measured by the quality of his shirts, or the size of his bank account.

I think of the tragic distance between Gatsby and Daisy when I counsel clients who have worked hard to build their wealth and enjoy great happiness. They want to share their success with their loved ones, but many worry that their children won’t learn to be effective stewards of the family’s wealth — that they, like Gatsby, will confuse spending with happiness.

Plenty of books offer advice on raising financially responsible children; I’ve listed a few in a sidebar on page 40. But I think there’s also room here for a trusted advisor to help. I encourage you to try some of the following strategies with your clients.

WHAT WEALTH SAYS

First, ask clients — particularly those who didn’t grow up wealthy themselves — about the ways their wealth defines them. Being conscious of their own relationship with wealth can help them assist their children.

It’s also important that parents understand that their children are growing up in a different economic culture than they did, and may see themselves as subject to different rules. The wealth-builder parent may have walked a mile to the local public school, while the child drives a Ranger Rover to private school. While the parent had few luxuries growing up, the child may feel entitled to the best — from first-class flights and five-star resorts to using the family name for prestigious jobs or club memberships.

I urge clients to be careful about judging their children’s behavior or attitudes on the basis of their own upbringing. Entrepreneurs, for example, may expect that their children appreciate the stories of how the family business was built — but they must take the time to listen to their children’s experiences (and struggles) with wealth.

HELP BUILD A FOUNDATION

Many parents ignore the difficult, but effective, process of teaching their young children to handle wealth — but are baffled when the kids reach their 20s and begin to struggle with their finances. If a teen was indulged and not taught to budget, she may simply not know how to avoid burning through a year’s worth of college funds in one semester. And if a work ethic has not been established early on, it can be difficult for a young graduate to develop the discipline to succeed in the corporate world.

To avoid family wealth management crises, advisors can help parents build strong financial and emotional foundations for their children — providing basic education and fostering a connection to wealth.
In working with parents across all levels of net worth, I’ve found that early contact with money helps children develop a connection to it.

Encourage your clients to set up allowances for even younger kids. In the elementary-school years, children can pay for their own small purchases and save up for larger ones. As they become teenagers, the allowance can increase, but children should pay for their own personal expenses, such as movie tickets or back-to-school clothes.

One important issue that’s difficult for helicopter parents: Let children make mistakes and learn from them. If a teen feels the pain of overpaying for a pair of sneakers because he refused to wait for a store’s upcoming sale, encourage clients to resist supplementing his weekly funds; perhaps the teen will be more motivated to shop around next time.

PUT THEM TO WORK

Because problems arise when children view money as totally unconnected to work, I encourage clients to insist that their children get jobs. I also suggest that parents introduce the concept of dividing their earnings into three pots: save, spend and share.

I also counsel parents on helping their kids separate needs from wants. This is particularly important for kids with ample resources who must learn to become more conscientious consumers.

I suggest they tell children to ponder these two questions: Do they really need it? And how many hours will they have to work to pay for it? Clothing is a need — but there is a difference between a $12.99 cotton T-shirt from Target and a $500 Chanel T-shirt.

When I wanted a pair of designer jeans at the age of 11, my parents allowed the luxury — but only, they said, if I paid for the jeans with money I had earned. That’s a practice I continue with my own children.

SCHEDULE CHECKUPS

The next generation needs to be instructed in three main areas: values, finances and family communication. Advisors should focus on the latter two, appreciating that teaching children to manage wealth is a process.
In addition to regular office meetings — or the occasional house call — I suggest hosting family meetings that have an educational element. As a presenter on family retreats, I’ve addressed diverse topics, from “What is a bond?” (because a grandchild asked) to managing your first paycheck, paying for college and applying for a mortgage. This summer, I even added an etiquette class.

The classes are generally 30 minutes long; in many cases I can cull at least an outline from the newsletters I write during the year. And although the topics hold universal appeal, I tend to keep these events family affairs due to privacy concerns. My clients’ response to the highly personalized service has been overwhelmingly positive.

TALK ABOUT GIVING

Whether you frame this as paying it forward or giving back to the community, I find that encouraging children to help others is the most effective teaching method.

I tell my clients a story about my own daughter, who attended a church retreat in Mexicali, Mexico: She helped build homes for village residents, and returned home a more humble and grateful teenager. It’s so easy to find a way to give back to the community. Local soup kitchens and homeless shelters always need volunteers — especially over the holidays, when the entire family can get involved.

Finally, counsel clients not to be afraid of having the Money Talk. Wealthy parents understandably wonder how much detail to share; they may worry that children will share information with friends. Yet many parents find themselves in a paralyzing Catch-22: Reveal too much and kids may think the sky’s the limit, but keep too much secret and kids may worry unnecessarily.

I believe trouble brews when children are kept totally in the dark about family wealth. So help clients decide on the appropriate level of detail to share. Many of my clients wind up revealing the extent of their wealth in stages, as the children get older.

I make myself available to facilitate these discussions, but I also spend a lot of time helping clients prepare for the disclosures. These conversations establish the foundation necessary for clients to help their children develop a healthy relationship with money.

Kimberly Foss, CFP, CPWA, is a Financial Planning columnist and the founder and president of Empyrion Wealth Management in Roseville, Calif., and New York. Follow her on Twitter at @KimberlyFossCFP.

Read more:

• 5 Steps to Connect With Clients' Kids
• How to Have the Money Talk With Kids
• End-of-Life Issues: Get Clients & Their Kids Talking