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How Can Wealthy Parents Avoid Spoiling Their Kids?


It’s a natural impulse. You want what’s best for your kids, and you have the means to ensure they want for nothing. But shielding your children from financial realities—spoiling them, in other words—can have unintended consequences. “You’re neglecting the preparation for adulthood every child needs,” says Thayer Willis, a licensed clinical social worker who counsels affluent families and their advisors on the impact of wealth. The right kind of financial grounding, on the other hand, can help kids develop financial literacy, and along with it, a meaningful life, Willis says.

The author of Navigating the Dark Side of Wealth: A Life Guide for Inheritors, Willis knows first-hand the challenges family wealth can present. An heir to the multi-billion-dollar Georgia Pacific Corp. fortune, she helped pioneer a career niche counseling the wealthy about the meaning of their lives—and their money.

“What no one can inherit is a meaningful life,” Willis says. “We must all create that for ourselves. Our wealth is a great resource for creating meaning, but wealth itself does not deliver meaning or purpose. The greatest gift you can give your children is to facilitate the discipline, focus, and initiative to help them make their own way.”

Here are suggestions from Willis for giving your children the financial building blocks they need:

Give an allowance. As soon as children express an interest in money, typically at age five or six, provide an allowance with guidelines for what proportion of the money to spend, how much to save, and how much to give to a charitable cause.

Show them how to keep a ledger. At about age eight, have your kids start tracking every dollar that comes in—from their allowance, investment earnings, or gifts—and goes out. This will help children understand the value of money, and it will be useful later when the child has a bank account or credit card and needs to establish a budget.

Help them become savvy consumers. Rather than letting your kids shop with an unlimited budget, coach them to become informed and choosy. Willis, for example, recently gave her 15-year-old daughter three gift certificates, of the same amount—one to a high-end boutique, a second to a department store, and a third for a discount outlet. “I’m going to take her myself,” Willis says. “It’s a great lesson. Retailers market so heavily to teens, and I want her to think about whether she wants a trendy brand or something that’s exactly the same but less expensive.” Willis also suggests talking about products’ short- and long-term appeal.

Encourage kids to get a paying job. Earning a paycheck is a self-esteem builder and an important component in developing financial competence. “One of the greatest plagues of kids that grow up in wealthy families is never becoming good at anything,” says Willis. “Unfortunately, that’s quite common. But earning money is a step forward in helping kids become competent—a priceless treasure.”

Model your values. “The most important values in life are caught, not taught,” Willis says. So make sure you and your spouse are on the same page, and be creative in using your wealth to set the kinds of examples you’d like your children to follow. That could mean a family philanthropy project, cash rewards for accomplishments, or achievement-oriented travel.

Encourage community service. Hands-on volunteer work can help your kids gain perspective on what’s truly important in life. From an early age, children can learn to make decisions about giving money, saving it, and spending it. A priority on community service will deepen the message.

Guard against a sense of entitlement. Children who lean on their family wealth often fail to become people of significance in their own right. Working recently with five generations of a wealthy family, Willis had the third- and fourth-generation inheritors answer the question: “We are the first generation of what?” As Willis notes, “Your whole reality doesn’t have to be based on those who created the wealth. This question is about what you have accomplished.”

Answer your children’s questions. If they ask, “Are we rich?” give a truthful answer, but phrase it carefully. When her 11-year-old son asked if he was going to get an inheritance, Willis replied, “You are going to get a great starter kit, a great education, and maybe money to start a business or get into a house. But you are not going to get so much that you can do nothing.” She also used the question as an opportunity to teach gratitude. “We are so fortunate in that we have enough money to pay for what we do,” she told her son. “Many families don’t have that.”

Not spoiling your kids is a lifelong process. But these suggestions can be a good beginning, Willis says. “Most young people do not grow up with this kind of guidance, and learning these lessons will set your young adult offspring apart from their wealthy peers,” says Willis. “Your best gift is to allow them to develop competence and the opportunity to make a life for themselves.”

Confronting Mortality

ofour clients died suddenly last week. He was only 56 and had just begun working with us three months ago. As a financial planner, you come to learn the harsh reality of mortality, but this death was a particularly tough one. Dan (not his real name) dies suddenly last weekend of a massive heart attack. He never had any health problems and the death stunned his family. In the short time I knew this client, I came to admire his cheerful way and kind manner. But what makes Dan's death so difficult is that he left without properly taking care of his affairs. When Dan came to us three months ago, he told me that he owned a business and was always too busy to get his financial house in order. When he was referred to me, he vowed to properly address these issues. We started working with him and collecting his data. Truthfully, despite several calls from staff In the last few weeks, It seemed like Dan had once again put his financial affairs on the back burner. What's difficult is that he did not even have enough life insurance. With one child in graduate school and another in post-graduate studies, their mom says she has no Idea how she is going to pay for their college education.

People tend to be either overly optimistic or pessimistic about the prospect of their own mortality, according to data collected by the National Bureau of Economic Research. Many people estimate their chances of living another 20 years at either zero or 100%, NBER says, with no middle ground. Furthermore, those with a relatively high life expectancy are too pessimistic about the chances of living, while those with a relatively low statistical lifespan take are too optimistic. While medical science continues to make breakthrough after breakthrough, sooner or later, we all die. This is obviously not something any of us want to hear, but that doesn’t make it any less true. Nor does it absolve you from the responsibility of planning ahead for those you will leave behind.

The August Stock Sell-Off
It started when the Dow Jones Industrial Average plunged 400 points in February 2007 after a market meltdown in China. Then, a series of jolts came in July and August as investors worried about the subprime mortgage collapse and a credit crunch. Make no mistake about it, volatility was back with a vengeance. The summertime stock collapse was so unsettling that the Federal Reserve Board felt compelled to ease credit by reducing the bank discount rate—a rare move by the nation’s central bankers. But what does all this really mean, and should you worry? One explanation for the summer’s market turbulence is that, after repeatedly shaking off bad news during the past few years, stocks were simply overdue for a correction. Despite soaring oil prices and military setbacks in Iraq, share prices had pushed steadily higher, and in mid-July the Dow and Standard & Poor’s 500 stock indexes hit record highs. And it had been a very smooth ride. From May 2003 through January 2007, the Dow never dropped more than 2% in a day. That was a period of stock market stability unmatched in more than a century, but it couldn’t last forever. Finally, “the past few years’ speculative excesses were pulled from the market,” says Doug Roberts, chief investment strategist at Channel Capital Research. But the summer stock market was also buffeted by a sudden credit crunch.

When the economy is on the upswing, things often get a little out of hand, and this time that took the form of easy credit being offered to poorly qualified homebuyers in the form of subprime mortgages. When those homeowners couldn’t keep up with their payments, foreclosures began to rise. And because those mortgages had been repackaged into complex, illiquid securities bought by hedge funds and other institutional investors, it was those sophisticated professional investors who suffered the worst losses. With these rarely traded securities still buried in some portfolios, the full extent of the damage may not yet be known.

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