Don’t Give Your Grandchildren Money … Give Them the Gift of Learning About Money
Key Points – Don’t Give Your Grandchildren Money … Give Them the Gift of Learning About Money
- Giving Your Grandchildren Proper Financial Guidance
- Understanding How to Build Generational Wealth
- You Worked Hard for Your Money … Don’t Let Your Heirs Waste It
- How to Communicate to Your Grandchildren About Wealth Management
- 6 Minutes to Read
Teaching Your Grandkids to Be Good Stewards of Money
As we enter the season of giving thanks and gifts, I thought it would be a good time to discuss what happens when you simply give money, particularly to your grandkids, as a gift. I specifically want to discuss why it might be a better idea to give your grandchildren money in a way that educates and empowers them to be good stewards of money. That goes for their own money, and your money that they may one day inherit.
As a father of seven kids and grandfather of 11, I understand the desire to give your children and grandchildren money. However, the fact is that financial education is woefully lacking in today’s educational environment. Failing to give our kids and grandchildren proper financial guidance is setting them up for failure.
The reality is that most of you reading this are likely to leave behind a monetary inheritance to your children and/or grandchildren. And like most people I speak with about this subject, you probably believe (and likely rightly so) that your heirs will not squander the money you worked so diligently over your lifetime to accumulate.
But what if that’s not the case? Statistically speaking, the odds are that the money you leave behind will be gone in a very short time.
Some Alarming Statistics About Inheritance
According to BLB&B Advisors, it takes just 19 days for the average recipient of an inheritance to buy a new car. And, more shockingly, 70% of wealthy families before the end of the second generation (the kids), and 90% lose it all by the end of the third generation (the grandkids).
These statistics are especially troubling when you consider that the second generation generally won’t inherit their parents’ money until they are in their 50s and 60s. So, obviously age isn’t the biggest determinant of who will be diligent with an inheritance. Rather, it’s education about money, and financial guidance that will make the difference.
So, what can you do to help ensure that the money you give now, and the money you leave behind, is used wisely and diligently? That’s what we’re going to discuss today.
There’s No Substitute for Education
Earlier this year, I had the extreme pleasure of helping an enterprising 12-year-old (who happened to be the grandson of one of my clients) learn about investing in the stock market. We spent the better part of an hour talking about his hobbies and interests.
Then, we used that information to find good company stocks to buy that he either had interest in or used their products. He learned the difference between publicly traded and privately held stock, and how to allocate his money (which was a gift from his grandparents) to buy shares of the stocks we picked.
He also learned about risk and reward, as we analyzed each of the stocks he ultimately picked. His grandfather, my client, was in the room with us, and we had an absolute blast! We’re going to do this every year from now until his grandson goes off to college.
I love the fact that the money wasn’t simply given; it came with a life lesson. That’s method number one to ensure that your heirs have the highest probability of beating the odds, which are stacked against them. Education. There is no substitute!
That education should also involve what to do with money they receive, either as a gift, an allowance, or from their first job, so that they have those practices ingrained in them when they get older and are on their own.
Three Important Wealth Management Lessons for Your Grandkids
Generally, I like to use the 70/30 rule. You live on (get to spend) 70% of the money you receive. The other 30% is allocated 10% to church or charity, 10% to savings, and 10% to investments. This teaches them three very important things that will serve them well all their lives.
Delayed Gratification
First, it teaches delayed gratification. If they can learn to delay purchases that seem important at the moment, they’ll soon learn that they really didn’t need whatever shiny object they were tempted to buy. Delayed gratification also teaches them the very real concept of making tradeoffs. Deciding what is most important, and what can wait, can be the difference between living paycheck to paycheck and being financially secure…no matter how much money they are making at any point in time. Give them that gift.
Gratitude
Second, it teaches gratitude. Being grateful for the things you have, even as you strive to improve your position in life, is a priceless state of mind. It allows you to be at peace with yourself as you make your way toward achieving your goals.
Goals are there to motivate and inspire. A grateful state of mind will only make achieving those goals that much sweeter. People who live with a sense of entitlement are not happy people. They aren’t fun to be around. But people who live their lives with a sense of gratitude are happy, peaceful people, who are a joy to be around. Give your grandchildren the gift of a gracious heart.
Risk Taking
And third, it teaches risk taking. We all know that without risk, there is no reward. Everything in life worth pursuing involves risk. Everything. There is no exception.
Dating is risky…you risk rejection. Marriage is risky…you risk divorce. Having kids is risky…you risk the next 18 years of your life in the hopes of raising a productive member of society. Driving is risky…you risk being in an accident.
But all these things are also potentially incredibly rewarding, with the rewards far outweighing the risks. In life, the risks we DON’T take are generally the ones we regret the most.
The sooner kids understand that concept, and how to manage the risk in their lives, the better off they’ll be. Investing money for their future is a perfect example. They may experience significant gains as a reward for the risk they’ve taken on in the stock market. But as you all know, they may experience significant losses as well.
Understanding that the possibility of loss is real. Knowing how to handle/limit those losses is vital to them being willing and able to keep investing when it seems like there’s no current reward for the risk they’ve taken. Give them that gift.
Communication Is Critical
As important as education about money and finances is, communication is just as important. Not everything needs to be as formal as the concepts above. Talk with them about news stories where celebrities and other people mess up their estate. There are plenty of them. Explain how those things work or how you’ve taken steps to make sure that doesn’t happen to your money. That will connect with them, and they might even think you’re smart.
Stories are another way to communicate important principles. Like the Bible, our lives contain stories that are warnings and examples. Your grandchildren can learn from both, and they need to hear both. Nothing brings a point home like hearing how someone you love endured or overcame a situation that you may find yourself in one day. That generational wisdom is priceless.
While it is true that you can lead a horse to water but can’t make it drink, it’s also true that the horse is eventually going to get so thirsty that it has no choice but to drink from the water. What I mean by that is that if you start teaching your grandchildren early, and are consistent in your instruction, eventually something in their life will make them say “So that’s what my grandparents were talking about” or “Oh, now it all makes sense.”
Give Your Grandchildren the Gift of You
But they can never have those revelations if there is no instruction to begin with. If you’re a grandparent, you have an opportunity, if not an obligation, to be wise council to our grandchildren. As my experience with my client and his grandson proved, that wise council doesn’t need to be boring or heavy. It can, and should, be entertaining and memorable.
If you’re a Modern Wealth client and want to start educating your grandchildren about wealth management, we’re happy to help. My client and his grandson can attest that learning about wealth transfer is educational for both of them. We would love for you to bring your grandchildren into the office so we can begin to lay the foundation of generational wealth education. Simply reach out to your advisor or click here to get the ball rolling on that.
We can also assist you if you’re not a Modern Wealth client. But first, we need to learn more about your personal situation so we can begin building a plan that takes you to and through retirement and prioritizes generational wealth. To learn more about what that plan could look like for you, start a conversation with our team here.
So, as you’re thinking about gift ideas for your family, remember that giving your grandchildren money isn’t the answer. This year, give your grandchildren the gift of knowledge, and of wisdom, like only a grandparent can. Give them the gift of you.
Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.