At a Berkshire Hathaway annual meeting a few years ago, Warren Buffet was asked, “In light of the record amount of wealth that is about to pass from the Baby Boomer generation, how much is enough to leave your children without ruining them?” As is often the case, Mr. Buffet’s response is worth repeating…
“I think that more of our kids are ruined by the behavior of their parents than by amount of the inheritance. Your children are learning about the world through you and more through your actions than they are through your words. From the moment they’re born, you’re their natural teacher. And it is a very important and serious job, and I don’t actually think that the amount of money that a rich person leaves to their children is the determining factor at all. In terms of how children turn out, I think that the atmosphere and what they see about how their parents behave are more important. I’ll say this. I’ve loosened up a little bit. Every time I rewrite my will, my kids are happy, because they know I am not reducing the amount.”
Teaching your children how to manage money and wealth is very important and as with most parental responsibilities, it can be very difficult. You must take advantage of the opportunities presented… the “teachable moments” in everyday life. And more important, you must be willing to let your children fail; don’t rescue them every time they make a poor choice.
The Early Years
It is important that your children learn the basics of cash management… counting, purchasing, saving money. They need to learn the value of a dollar. Many children have trouble holding on to money and consequently tend to spend all they have very quickly. The younger they learn that the money supply is not endless, the better. Let them “waste” a few dollars on trivial purchases or spend too much for an item. Inevitably (probably sooner rather than later!) they will come across a must-have trinket, but their pockets will be empty. Don’t give in to the “all my friends have one” plea! Let them go without.
The Teenage Years
By the time your children reach the teenage years, hopefully you’ve had some success instilling money management skills. It certainly doesn’t get easier as they grow older! The teachable moments don’t present as often and when they do, there is competition for advice from other forces, most notably other teens.
The teen years offer an opportunity to teach about work ethic and earning power as well as risk. It is very hard to succeed without hard work and risk. Take the opportunity to discuss your family business or career with your children. I’m sure there were many tough decisions over the years.
At this stage in life, your children are likely interested in more expensive purchases (i.e. a new car). They should help with the cost. This will not only give them some ownership and responsibility, it should also foster decision making. Hopefully they can determine on their own that a used Honda is just as good as a new BMW at getting them from point A to point B.
As your children transition out of school and into to the work force, their financial well-being becomes primarily their responsibility. Setting aside funds for an emergency, saving for retirement and budgeting are all important. We have been fortunate over the years to work with the young adult children of many clients. It’s very rewarding to play a role in their major life decisions, whether buying their first home, deciding on graduate school, or making a career transition.
Back to Mr. Buffet to finish where we started. His frugality has been widely reported over the years. He still lives in the same modest Omaha home where he raised his family. All three of his children are independently successful. He has helped them over the years, but not without a cost. His eldest son, Howard, is a farmer in Illinois. Mr. Buffet purchased Howard’s first farm for $300,000, but he didn’t give it to him. He kept ownership and charged Howard rent.
Those with good character will do well without much money, but massive wealth left to someone with no character is sure to do no good.
Chris is a Certified Public Accountant. He joined Trust Company of the South in 2008 after more than fourteen years with PricewaterhouseCoopers, LLP where he was a Director in their Personal Financial Services group. He is a Wealth Advisor in Charlotte, responsible for working directly with our clients to provide integrated wealth management solutions.