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.