Strait Talk Blog

How Much Should I Give My Children?

Four Guiding Principles To Prevent Unhealthy Money Conversations

 

Cory Baer

Cory Baer

Chief Business Development Officer, Founder

Cory Baer is the Chief Business Development Officer for Strait & Sound. In this role, he fulfills a dual mission. First, he serves clients by ensuring that they have the best possible financial plan to achieve their long-term goals, particularly complete financial independence. Second, he also serves as an ambassador of the Strait & Sound brand by introducing the firm to the larger community and select strategic partners.

I love being a parent. My children mean the world to me. One of the reasons I work as hard as I do is so I can provide for my children. But I do worry about something. My wife and I did not grow up with money. We both learned to scrap and scrape to make a life. We learned as young adults how to rub two nickels to make a dime. Necessity forced us to be financially disciplined. But my children will never know that kind of necessity. This leaves us wondering sometimes – are we giving our children too much? Are we robbing them of the opportunity to learn financial discipline?

I often find my clients struggling with the same question. Here is why this matters. If we give our children too much, they never learn to stand on their own two feet, something every parent wants for their child. But that also impacts us financially. Our financial futures can be put at risk if we give our kids too much. After reflecting on my own, and my clients’, experiences, I’d like to share with you four guiding principles to address this important and often difficult topic.

 

It Begins With A Conversation

I believe we all have money problems. My two-year-old has money problems that can be solved with a $5 toy. The money problems of a 15-year-old can be solved with a few hundred bucks. The money problems of a 22-year-old college graduate might cost us several thousand dollars. But the money problems of a 50-year-old might just wipe out our savings. I’ve seen this happen.

This is why I encourage my clients to start having money conversations with their children when they are young. This doesn’t mean that you can’t have healthy money conversations later in life. But if you start that process when kids are young, you may not need to have hard money conversations later.

The core problem with giving our children too much is that they don’t learn to develop their own financial muscles. Think of it this way. Would you ever expect that you could go to the gym and exercise, instead of your child, and yet the child would feel the endorphin flow and all of the health benefits that come from exercise? Of course not. They have to do this for themselves. The same is true of money.

Exercising on a regular basis is an indication that someone has learned personal discipline, that they are taking control of their health and making good decisions. That same mindset—discipline, control, healthy decisions—also applies to money. As parents, I believe one of our jobs is to help our children learn to be healthy with money. That usually starts with talking about money—and that’s something most parents really struggle with, myself included.

More often than not, our children will actually broach the subject for us. When they’re small, they’ll ask for money for things they want. It’s a pleasure for most of us to buy things for them. But herein lies a trap. If we set expectations with our children that we’ll consistently give them money for things they want, that sets us up for some really tough, really stressful, really ugly conversations later in life.

So to help with this, I’d like to offer four guiding principles for how to talk to your children about money.

  1. Make them earn it.
  2. Don’t be afraid to say no.
  3. Don’t rescue them from financial consequences.
  4. Share risk.

Key Take Away

THE CORE PROBLEM WITH GIVING OUR CHILDREN TOO MUCH IS THAT THEY NEVER LEARN TO DEVELOP THEIR OWN FINANCIAL MUSCLES.”

Make Them Earn It

One of the biggest mistakes I see parents make is giving their children too much. This is a tough balancing act because sometimes it’s hard to know how much is too much. I also find that the notion of “how much is enough” changes substantially from one generation to the next.

For instance, in my family growing up, there was a simple philosophy about this sort of thing. My parents would provide the basics, the necessities like food, shelter, clothing access to education and some amount of support for extracurricular activities and sports. But anything beyond that, I had to earn.

If I wanted a car at age 16, I had to earn the money to buy it. If I wanted to go to an expensive amusement park with my friends (when it wasn’t a family trip), I had to pay for it myself. If I wanted a computer or a phone or a gaming system, I had to buy it from money I earned. Here’s what this taught me. A dollar earned was so much more precious than a dollar just given to me. When I had to earn it myself, I valued it more.

But in today’s generation, is a mobile phone a necessity? I think for many families, the answer would be yes. How are you supposed to know your child is ready to be picked up from basketball practice or needs a ride somewhere or wants to make a change in plans (like going to a friend’s house after school), if they don’t have a mobile phone. But the core principle still applies. Provide whatever you believe “the basics” should be, given your family situation, and make them earn the rest. How do you do this?

I don’t think a child should start having to “earn” money before the age of 5. Before this age, their minds usually can’t process the concept of the worth of material goods. But right around that age, they begin to notice things that they would like to play with. Sometimes those things can be quite expensive. How do you ask a 5-year-old to earn money for something they might want that’s not a necessity?

Chores. You tell them you’ll buy it for them as long as they do some chores. I recommend that you create a chore list and put it on the refrigerator or some other common area in your home. Make the chore list something they’ll need to do on a regular basis, say a few times a week. You can also create check marks or stars to indicate that the chores are being done. If the chores are not being done, you have leverage to say “if you want to keep playing with that toy I bought you, I need to see stars on the board.” It’s amazing how this can work.

This sort of discipline teaches very small children the value of a dollar. It also makes it very easy to say, later in life: “the bank of mom and dad is closed and now you need to start earning money from a job.” By that point, the child should be acclimated to the notion that they have to earn money for extra things they want. This can start to happen right around age 15, possibly younger, depending on the child.

 

Don’t Be Afraid To Say No

It’s hard for us parents to say no to our children. But it’s necessary. More than that, it’s healthy. Children need to learn money-limits just like they learn about other limits, like gravity. Most parents would tell their children not to jump off the roof onto the paved driveway. That just might break their leg. Gravity is a law of the universe that no one can ignore.

Gravity limits our behavior and that’s healthy. The word “no” serves a similar purpose. It helps prevent tragedy. One need look no further than the story of the prodigal son to understand this. Because the father didn’t say “no” to the prodigal, that son went down a very dark path. Don’t be afraid to say no.

 

Don’t Rescue Them From Financial Consequences

This is a really hard thing for most of us to implement. We want to protect our children from many of the harsh realities of the world around us. And yet, rescuing children, young or old, is usually very unhealthy for them. They never learn to persevere through hard times if we always come riding in on a white steed to save the day.

Sometimes, dealing with financial consequences can be just the wake-up call a child needs to chart a better financial course in life. To help you think about this, I’d like to put forward my lists of things I do and don’t recommend when it comes to this topic.

Things I don’t recommend:

  • Paying off debt accrued frivolously.
  • Paying off student loans for them.
  • Putting a down-payment on a home or buying it outright.
  • Giving adult children cash to cover monthly living expenses.
  • Not living your budget in front of them.
  • Not introducing them to a financial advisor who can help them adopt a long-term financial plan.

Things I do recommend:

  • Help them build up a rainy-day fund if they don’t have one – but contribute no more than 30% to it. Match your contributions to theirs, over time, as they build up their 70% of the nest egg.
  • If they have children, make sure they have life insurance. You don’t want grandchildren to suffer an additional tragedy on top of the loss of a parent.
  • Pay for health insurance, if necessary. That can impact you. What wouldn’t you give to help your child?
  • Help your adult child maximize their employment benefits, if they need guidance in this area. 401k matching, health insurance and other benefits should be maximized and young people, in particular, often don’t know how to do this.
  • Pay their mortgages temporarily, if they fall on hard times not of their own making. Don’t let them lose their equity because that could set them back financially for decades. If they lose a job and it’s not their fault, don’t be afraid to help. But if they lose a job because of unhealthy behavior, helping in the short-term might actually hurt them later.
  • Don’t tell them how much you’re worth—only you and your advisors need to know this. Be careful what you show. The reason you don’t want them to know is because this can reduce their grit and determination if they know a huge windfall is coming in the future.
  • Name them in your trust and estate documents, but for later on in life. Let them know that they’re named. This tells them that you love them, but they’ll have to wait for the money until later, when, hopefully, they’re more mature.
  • Provide seed money to start a business that you believe in. More on this point below.
  • Blame it on the advisor when you say “no.” I can take it. I encourage my clients to say: “Cory said we can’t do this because it’s not in line with our financial plan.”
  • Introduce them to your financial advisor. This can help them adopt a long-term financial plan. It would be best if it was with a financial advisor who already knows your family, values, goals and net worth.

 

Share Risk

There are all kinds of ways parents can take risk with children. Most of the time, I think that can be a good idea—as long as the potential upside and downside are clear and reasonable. For example:

  • A child has been working in an industry for 10 years to learn the ropes. Now they want to start their own business and need seed capital. Their options are to get it from a bank or other lender or get it from you.
  • A child already owns a primary home and has been looking for good investment properties for the last several years. They’ve done their homework and know the risks. Now they need capital to buy the property.
  • A young adult child has been miserable in a certain job or industry and wants to make a change to a better-paying role in a new industry. To do this, they’ll need training and equipment.

These are all great examples for adult children and mature parents to partner-up on opportunities. Here are some guiding principles to help you achieve the wins you want to see while avoiding unhealthy money conversations.

  • Make sure you do your due diligence. Get professional, third-party valuators involved who can give you the straight scoop about upside and downside.
  • Shared risk is the model I recommend. This means your risk and your child’s risk are balanced enough that you both win and lose in the same proportion. Most parents feel like they can afford to take more risk than their children because they have more net worth. That may be true. But it’s equally true that you have fewer opportunities to recover your losses if you are mature and in or near retirement. A younger person, by comparison, is actually taking less risk. Why? Because they have more working years to earn back the money they might lose.
  • Never put in more than you can afford to lose completely.
  • Compare the risk scenario to other options, things you can do with the same amount of money that might give you and your child similar returns—sometimes for lower risk. For example, if your child needs 500k to buy a property, could you invest that 500k into something else that will give you both a similar level of return, but with lower risk?
  • It would be best if your horizon to returns are within your lifetime. Some investments can take decades to fully mature. While this would be a great gift to your child, you deserve to enjoy the benefits of risk-taking too.

 

Final Thoughts

Money conversations with our children, whether they’re 5 or 55, can be tough. I really want to help you avoid the kinds of conversations I’ve seen tear families apart. The disciplines I’ve recommended here for younger children can create good money habits that serve them well for the rest of their lives and that protect your wealth too. But it’s also important to recognize moments when our financial resources can make a huge difference in our children’s lives. After all, that’s probably why we all worked so hard for money in the first place. If you have questions about anything I’ve said in this article, let’s talk.

We Provide Comprehensive Wealth Management Services For People Seeking Complete Financial Independence

Register For Blog

Please fill out the form below to register for our Email Newsletter.

  • This field is for validation purposes and should be left unchanged.