Do you often wonder about how your children — or children’s children — will fare financially?
Do you worry about how they’re spending their time and money?
And personally, have you done everything you can to prepare them to shoulder the responsibility of their own finances?
If these fears keep you up at night, don’t worry — you’re not alone.
We’ve heard from many Money Morning New Zealand readers — and one of the central themes continues to be shaping one’s children to be financially stable.
And we hear you. In fact, studying generational wealth (and discerning the key factors of success) is a core pillar of our research.
Fortunately, setting up your children for success is possible, but the odds are stacked against you.
According to Time Magazine, ‘70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third.’
How can you beat those odds and keep your kids from eating pods with the pigs?
Through our research, we’ve distinguished three steps that you can take immediately to reroute your children for success.
Success factor #1: education
‘An investment in knowledge pays the best interest.’
No, it’s not giving your children money when you die that will start them off right. It’s teaching them how to fish. It’s putting a hefty value on learning…because if you don’t learn, you’ll pay a hefty price.
And let me be clear — education does not mean university. It can, but most of the greatest learning that your children will ever experience will be from real-life examples…which can be further bolstered by having you there to offer wisdom.
There’s a reason why the Bill Gates and the Warren Buffetts of the world don’t plan on giving their wealth to their kids.
They know that putting their children in a position to make billion-dollar decisions — without having taught them how to make one-dollar decisions — will likely result in ruin.
Start small. Start young. Build a foundation of learning — an appreciation for new ideas; a desire to be better — and your children will be rewarded for generations to come.
To be practical, consider giving your children a little investment money to learn with.
InvestNow offers a special children’s account that gives you — or another guardian — control over the money. It also gives your children an investment account they can experiment with and watch their investments grow (or flop).
Check it out here. [openx slug=inpost]
Success factor #2: discipline
‘It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.’
Becoming disciplined can be extremely hard. And it can be even harder to learn. But once you’ve gotten in the groove and seen it pay off, discipline can bring about decades of success.
We already mentioned Warren Buffett. He’s an all-star of discipline.
He still lives in the same house he bought 60 years ago — a modest home purchased for $31,500.
For breakfast, the third richest man in the world picks up a combo from McDonald’s…for no more than $3.17.
He rarely swaps out for a new car…and when he does, he opts for used cars, preferably damaged by hail for a tidy discount.
Buffett is not only frugal, but he’s disciplined. He’s maintained the same smart buying habits and the same value-based investment strategy his whole life.
He doesn’t splurge or act on impulse. He has a goal in mind…and lives in a way that will allow him to achieve his goal.
That’s how discipline can start with your children. Help them set goals. Some serious — like college or a mortgage or a retirement account — and then some not-so-serious. Help them sort out the steps needed to achieve those goals…and then push them to stick the straight-and-narrow.
One important thing to note: Don’t confuse discipline with safety. Risk is a part of any successful investor’s perspective. It’s part of life. It’s risk — carefully managed risk — which can open up new and exciting opportunities.
If you want to get your child disciplined, consider setting them up with their own budget. Nothing will help them become frugal like seeing their hard-earned dollars dwindle away. A fantastic programme we’ve seen for managing your budget in New Zealand is PocketSmith.
It allows you to build a budget and automatically organise your transactions to fall into the different buckets. Think groceries, transportation, utilities, etc.
And it even has some predictive elements built in…so your son or daughter can easily see that they’ll never afford that new car if they keep eating out for lunch.
Success factor #3: understanding value
‘The stock market is filled with individuals who know the price of everything, but the value of nothing.’
Our last factor success brings the previous two together — it’s understanding value.
Knowing the value of money is one thing. But knowing the value of time is another.
When their minds are young and the world is still new, thinking long-term can be hard. And so it makes sense that your children might not consider how their actions today can affect their lives tomorrow.
But it’s going to happen whether they realise it or not. The best thing you can do is to show them.
To me, that critical moment in understanding the value of time came when I was introduced to compound interest. Geeky, right? I know. But it blew my mind.
The fact that I could deposit 20 bucks today and get back thousands when I’m older was shocking. Especially with how little effort it can take.
But it’s important to understand that a dollar amount isn’t the end game. Getting value from those dollars is.
In other words, how can you best use your time and money now to achieve your goals later?
If your actions or investments don’t get you closer to your goal, then it lacks value — regardless of any ‘gains’ or ‘losses’ you may have encountered.
Teaching your children to learn about money and to become disciplined through budgeting is a good start. But help them appreciate value by helping them experience it.
Have them work. If you really want to drive the point home, have them work in the food or retail industry.
They need to know what translating work into dollars actually feels like. So when they spend $15 on something, they know and feel that the product is actually costing them an hour or so of their life. Is that candy bar really worth scrubbing dishes for an hour?
And if the problem is them wasting their time, consider sitting down and going over what else they could have done in the same amount of time.
In the time it takes for one game of Fortnite, your child could have learned how to write in Korean.
In the time it takes for a round of golf, your child could have learned to code in HTML.
In the time it takes for an episode of Westside, you child could have completely thrown together a starter portfolio.
It’s all about trade-offs, isn’t it?
But if your children educate themselves, become disciplined and consider the true value of time and money, they’ll be leaps and bounds closer to achieving their goals.
Editor, Money Morning New Zealand