5 mistakes high-net-worth parents make when teaching children to manage money

Woman on couch with daughters reading a book

When it comes to wealth planning strategies for Canadians, I know the importance of passing on generational wealth. In fact, it’s something I help my clients with every day as a Calgary financial advisor. Yet, as I mentioned in my last post, “An Important Way High-Net-Worth Parents Can Teach Their Kids About Money,” the focus is often on the wealth transfer itself and not on whether children or grandchildren have the financial literacy to handle their inheritance responsibly.

I’ve worked with many high-net-worth parents and grandparents over the past 22 years and I always bring families into the conversation to ensure everyone is on the same page. My goal is to empower the next generation to be good stewards of the family wealth. Yet, I’m not just teaching my clients how to do this for their families; I’m also doing it myself as a mother and grandmother.

I know a lot of parents worry about the impact wealth will have on their children. We all want to raise well-balanced adults who can manage money effectively and don’t have a sense of entitlement. Believe me, it is possible. In this latest post in my generational wealth series (and as I also covered in a recent webinar), I’ll be discussing the five key mistakes I see high-net-worth parents make when teaching their kids about money, and what you can do instead to give your children a hand-up instead of hand-out.

The 5 common mistakes to avoid when teaching kids about money

1. Spending, giving or saving not in line with the family values

Parents often unconsciously model financial actions, such as spending, giving or saving, that’s not in line with their family’s values. This is why the first step in my Net Worth Thinking Lens is the Focus Lens. It’s here that I help you identify your purpose. We spend time discussing what your goals are, what your values are and how you want to live. We define your family’s story and determine what is important to you.

Why? Well, if you don’t know your values or what you want your family legacy to be, how can you pass that on to your children and grandchildren? If you’re not using your money thoughtfully and intentionally, how can you teach your children to do so? It’s not about keeping up with the neighbors or just going through the motions; it’s about making financial decisions in line with your values and communicating this to the next generation.

2. Adult children using your credit card or staying on the family payroll too long

I started off by giving my own children access to a supplementary credit card they could use for emergencies when they went to university. I set clear ground rules and we talked about the expectations ahead of time. Once they finished school and were on their own, they had to use their own credit card and pay their own way.

Giving teens or young adults a debit card or credit card can be an excellent tool for teaching them about managing money. And there are certainly stages in life or specific times where you may want to help your children out. Yet, after a certain point, continuing to bankroll your child or allowing them to use your credit card doesn’t give them the opportunity to develop financial wisdom and learn to spend responsibly.

3. Keeping the family wealth a secret

Talking about money with kids, grandkids or anyone for that matter can be difficult and awkward. That’s why some parents’ instinct is to keep the family wealth a secret. This can be detrimental to children. They never have the chance to really understand what wealth means, what the family’s money values are and how to manage money. Additionally, many kids begin to realize that they do have money when they go to private school, have a larger home than their classmates or fly first class to Hawaii, which adds to their confusion and can create a sense of shame around wealth.

It’s not about denying your kids things on the premise of not being able to afford it when you really can. You’ll miss out on teachable moments. The better alternative is to be transparent and educate kids on the difference between needs and wants, as well as the ins and outs of spending, giving and saving.

4. Not holding your children accountable and letting them suffer the consequences of their actions

One of the biggest worries for parents today when it comes to their children’s finances is credit, as well as the amount of debt their child is in. It can be hard to teach your children about being financially responsible and then step back to let them put what they’ve learned into action by themselves. Even with my own children, I’ve made the mistake of rushing in to pay off a credit card. In reality, I should have let my child figure it out and either negotiate a payment plan or even default on the credit card and face the consequences.

5. Not following through on promises

Finally, the last common mistake I see high-net-worth-parents make when teaching kids about money is not following through on what they say they’re going to do. Maybe it’s saying you’re going to take your child’s credit card away after they rack up a high balance and then letting them keep it. Or, perhaps it’s telling your child if they want a car, they’ll need to get a summer job and save to buy it on their own and then, ultimately. giving them the money when they don’t save enough. Similar to the point above, when you do this, kids don’t have to face the consequences and it gives them the impression that the family has so much money, the rules don’t matter or apply to them.

5 things can parents do instead to help kids become financially responsible

1. Read, read, read

Whether you want to learn more about investing or creating a retirement plan, there’s a book for that. The same holds true for the younger generation. There are so many great books that can help teach children about money. Start reading to kids in the toddler stage and encourage children and grandchildren to read books on managing money right through adulthood.

One of my favorite books for toddlers is The Berenstain Bears Get the Gimmies. I can relate to it right now because my four-year-old granddaughter has a case of the gimmies: Can I have that? Can I have this? There are also a number of other financial literacy children’s books that make for a good starting point (Santander Bank has an excellent list here).

For young adults, I recommend Rich by 30 by Lesley-Ann Scorgie. It’s an easy-to-read book that covers paying off debt, creating a budget, saving and other important topics. Simple Wealth, Inevitable Wealth by Nick Murray is another one for young adults. It talks about the miracle of compound interest and how to invest prudently. And, one of my all-time favorites for all ages is from the 1920s, The Richest Man in Babylon by George S. Clason. This thin book is based on Babylonian parables but covers thrift, financial planning, and how to avoid the trap of keeping up with the neighbors.

In addition to books, there are movies, videos, online content and even money games for kids that you can use as an educational tool. The point is finding valuable, reliable information on finances and sharing it with children and grandchildren throughout their lives.

2. Have money conversations when appropriate

While, yes, reading books is a key when it comes to how to teach kids about money, you’ll also want to have discussions. Books, videos and other educational content on money management for children won’t delve into your personal situation or your own family’s financial values. They also won’t get into the intricacies of what the future will hold for your children or grandchildren based on the wealth planning strategies you’re using to pass on generational wealth.

Not every financial conversation has to be a planned, sit-down talk. You can have these conversations with anyone in the family when the opportunity arises. For example, if a school-aged child asks why one of their classmates never seems to have enough money for lunch, you can talk about how people’s financial situations vary and the different needs in the community. If a teenager gets angry because you refuse to buy them the latest video game console, use it as a chance to reiterate your family’s money values and the difference between needs and wants. If a young adult expresses disbelief that they spent so much on their credit card this month, discuss using credit cards, as well as budgeting and spending habits. There are a ton of things that go on that allow these conversations to come up naturally; you just have to recognize the right moments.

There are also times when you can have more structured conversations about money with your kids. One of the best times is when a young adult is leaving for university. Discuss what your expectations are about money and how they can create a spending plan. If you set up a college savings plan, show it to them and talk about what you invested in and why. Another ideal opportunity for a structured financial conversation is when adult children get their first real job. Set up a time to talk about their compensation, stock options, etc. It’s a great teaching moment!

3. Structure loans rather than gifts

I’m not saying you can never give your children gifts or help them out. However, there are times when structuring a loan instead of simply handing a child money will give both you and your child a different mindset. It teaches kids it’s not their parents’ responsibility to pay for everything and can help prevent children from developing a sense of entitlement. In my own practice, I often see parents gifting their children money for things like a down payment on a house. Rather than giving a gift, consider loaning them money with an interest rate and repayment schedule. Kids get the help they need, while also building money management skills as they honor their agreement to pay back the loan.

4. Contribute to an RESP

This tip holds true for parents and grandparents alike, because many of the grandparents I work with have the ability to contribute to their grandchildren’s RESPs. Kids today have an abundance of toys, many they probably don’t even play with, devices and games. So, when birthdays and holidays roll around, maybe it’s not in their best interest to give them more “stuff” and, perhaps, contributing to their education is the best gift of all. A book and a contribution to an RESP can have a more meaningful impact by encouraging lifelong learning. You’re also modeling how to save and invest prudently.

5. Provide children access to your financial advisor

As I talked about, there are important money conversations to be had at different points in a child or young adult’s life. If you’re not able to steer your child or grandchild or you feel uncomfortable talking about money with them, give them access to your financial advisor. I frequently talk with the children and grandchildren of my clients, including helping them navigate things like the financial aspects of their first job after university and strategic philanthropy. Allowing children to have access to your financial advisor will make a huge difference in their lives today and in the future.

Everyone’s situation is different and maybe all of these points, or just one or two, apply to you. You know your children and grandchildren best. As long as you’re actively trying to teach kids about managing money and continuing to have the important financial conversations, you can help ensure the next generation will be able to handle the family wealth responsibility and build on your legacy.

Whether you’re just starting to consider retirement planning or you need help with family wealth planning, contact the Susan O’Brien Group today. By looking at your financial plan through a Net Worth Thinking Lens, we can put long-term, customized strategies in place that benefit your entire family for generations to come.