An American study has found around two-thirds of wealthy families lose their wealth by the second generation. The same study reported it took less than 20 days for the average inheritance recipient to splurge on a new car. A significant challenge facing financially successful parents is how they might help their offspring develop positive money habits thus preventing the loss of their wealth.
Many parents find themselves continuing to provide substantial financial assistance to their children into adulthood; from providing significant allowances to assisting with the purchase of new vehicles and homes. Such assistance can make adult children financially dependent, often leading to unsustainable financial behavior such as expenditure exceeding income and a failure to save or invest for the future.
Negative emotional outcomes may also be triggered; for example, an economically dependent adult may have lower self-esteem than they might otherwise possess or may struggle to find a direction in life as they know, should a difficulty arise, “mum and dad will sort it out”.
Encouraging the development of positive money habits which lead to financial success, increases the chances of young people not only being happier and more content but also dramatically increases the likelihood of sustaining the successful stewardship of wealth through the generations.
So, how might young people develop the skills to be financially successful?
First, they must develop an awareness of their own emotional approach to money. Do they see it as a threat, a chance to spend frivolously or a burden? Conversely, might they view it as an opportunity for investment or as providing the basis for starting a business? Or might they swing between these two poles, depending on their mood or what peer pressure dictates? Young people need to be guided through their money emotions and encouraged to reflect upon how they come about – and how they might be changed. This process provides one of the building blocks of financial success.
Secondly, education in some of the key components of personal finance is vital. These include the basics of budgeting, calculating net worth, borrowing for study or house purchase, thinking ahead to retirement and considering the different options around savings and investments. Understanding these tools and techniques allows young people to be better prepared for the economic world in which they live and encourages them to make astute financial decisions.
Tying these together is the development of a mind-set linking larger life intentions to money goals, which in turn lead to specific money actions. For example, a young person might want to start their own internet coding business (life intention) and so decide to save for university or take out a student loan (money goal) and then begin a series of small steps such as developing a household budget, working out a flat share, considering part-time employment and so on (specific actions). This process not only achieves the life intention but also develops character and independence.
Having the ability to help our children financially is wonderful and often a key reason cited to work hard and accumulate wealth. But perhaps the next time you‘re helping out with financial assistance, consider facilitating the development of positive money habits as well – it may be the most valuable assistance you can give.
Dr George Callaghan – Money Coach, Wealthflow LLP