Inheritance money can be an unexpected windfall for the survivors that can change their lives. Unfortunately, the change may not always be for the best.
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Most consumers are not prepared for what a sudden increase in wealth can bring. A study conducted by Ohio State’s Center for Human Resource Research for the U.S. Bureau of Labor Statistics suggests that adults who receive an inheritance save only about half of it, while spending, donating, or losing the rest.
So how, when, and what do parents teach their children about the wealth that will prevent them from squandering future money? In our society, where consumer messages about spending far outweigh messages about saving or donating, it is never too early to talk with children about the value of money, especially if parents have plans to leave an inheritance behind.
Outlined below are financial strategies and tips to pass from one generation to the next:
Determine ‘Financial Personality’ Early
Research shows every person has a money temperament and is inherently a spender, saver, or giver. Discussing money values with your children will help them determine their own financial personality and implement goals over time that work best with these “traits.”
For spenders, it’s important to set up concrete goals regarding saving levels. However, the goals initially may need to be more short-term in nature, so the “spender” gets some satisfaction of purchasing items as opposed to a person who is inherently a saver.
On the other end of the spectrum, savers don’t typically need instant gratification of a purchase. They get more comfort seeing their account values grow. With this in mind, long-term goals should be created that allow the saver to increase funds, while realizing it’s also acceptable to spend at times.
Help Create Goals and Allow Mistakes
To help children value money, they need to be responsible for making financial decisions, without judgment. Many experts recommend setting specific goals for the child and using funds from an allowance, birthday, or holiday gift, etc. Goals should include saving a portion of an allowance or gift money, giving a piece to charity, and having the freedom to spend the remainder.
Mistakes will occur (not enough money left to spend, not enough put in the saving “bucket” etc.) and as a part of the learning process that should be expected. Children need to practice appropriate financial decision-making and learn about the responsibility of making wise monetary choices. The goal is to instill positive money habits early, rather than trying to change bad habits when someone is in their 20s or 30s.
Let Children In on Family Financing Plans
As children get older, their financial responsibilities should grow: give them a budget to purchase school clothes, help plan a family vacation, or be in charge of adopting a family for the holidays and organizing gifts to be purchased. By allocating such responsibility to the child or teen, they will learn the importance of budgeting and how to properly use funds for a variety of different reasons.
Regular age-appropriate discussions should occur regarding how much income the family has in addition to family savings and giving objectives.
It is important for parents to set the stage for open discussions about money, and not allow their children’s habits to be influenced by media, friends, or other people whose financial values may differ from their own. By introducing strong money habits at an early age, parents can teach strategic lessons to children so that when they pass down an inheritance, their children can utilize the funds to secure their own financial future.
Lynn Mayabb, CFP, office director at BKD Wealth Advisors in Kansas City, MO, has more than 25 years of experience providing financial management and consulting services to high net-worth families and corporate clients. She assists clients in developing financial plans, managing portfolio strategies and ongoing wealth management.