Helping the next generation (‘nextgeners’) learn financial best practices early in life has always proven to be one of the most valuable skills that will help them navigate adulthood. Nextgeners typically refers to young family members like children, grandchildren or other young close relatives of the primary wealth holder. Enterprising families often consider financial skills and a strong work ethic as invaluable tools in teaching their nextgeners the importance of money. For the very fortunate few, financial concepts are learned from a very early age, for many others, often later in life.
It is believed that many nextgeners learn financial skills and practices from their parents. This financial knowledge often does not include financial best practices which should form the base of their financial knowledge. They end up not having the basic knowledge and essential skills associated with effective financial management. This has made teaching financial literacy to nextgeners who are the next generation of wealth owners, one of the most critical aspects of sustaining your enterprising family’s wealth over generations.
In our practice of advising wealthy families, we have found some simple ways to help educate younger family members about the basics of sound financial management. These skills, when learned from an early age, can help foster successful wealth transfer between generations and encourage responsible financial behavior.
The way to begin this journey is by firstly addressing the goal of growing the family wealth, which is represented by more than a number on a balance sheet. It includes the human, intellectual, social, and financial capital held by a family. Teaching financial responsibility enhances all of these forms of capital. A useful strategy is to apply a methodology to distribute a child’s allowance before spending it, classifying it into four categories: Spend, Save, Grow and Share.
The allowance a child receives could be earned by a combination of task completion and positive reinforcement. There are four useful practices that can be implemented in any family to engage young family members, encouraging responsible financial practice from the beginning, and strengthening the cognitive connection between a family and its wealth. These basic practices are easy to do consistently, and continuous, daily practice at home helps to reinforce the concepts.
Lesson #1: Teach the Value of a Dime and Delayed Gratification
Studies have shown that the average human is born with an inherent urge to react without considering long-term consequences, so it is necessary to explain to children that patience pays off by explaining delayed gratification. It is also important to learn how to earn money in order to truly know its value. Here are some creative ways to teach value and delayed gratification:
Learning Opportunity: Compare the difference between desire and need. Parents and children can walk around the house and categorise the items inside: was this a “need” or a “want”? Identifying the difference helps children understand the family does not need everything it has. Establish a basic allowance system for accomplishing specific tasks. When children receive their allowance, take them to the store to allow them to help with household purchases or purchase their own lunch. This will demonstrate the challenge between earning and spending.
When a child asks for something, teach him or her the concept of waiting by delaying fulfillment of the request for a short period. For larger asks encourage waiting for more time to teach delayed gratification.
Lesson #2: The Importance of Having Clear Savings Objective:
For savings to be an effective exercise, it should have a clear objective and be measurable, attainable, realistic, and specific, with a specific timeframe. Families can teach children that saving should come before spending with an assigned percentage such as 10 or 25 percent. Saving as little as any N5,000 per month amount to almost N60,000 in a year.
Learning Opportunity: Work together and prepare a list of various forms of income from the children’s perspective: allowance, extra housework, gifts, etc. Next, prepare a list of all their expenditures, including snacks, games, toys, and activities. If the difference between income and expenditure results is positive, consider a “match” to positively reinforce; if the result is negative, consider a “loan” with some degree of interest.
Families can work with their children to establish clear savings goals. Once those goals are established, consider some incentive for meeting the goals, such as matching the savings.
Practice #3: The Difference between saving and investing
The number one enemy of savings is debt. However, it is important to understand that there is positive debt, which gains value over time (e.g., a business loan.) By saving a little at a time and investing wisely, money can grow significantly as it compounds interests. Sell the message, “Put your money to work!”
Learning opportunity: Buy a share of stock that children are familiar with, such shares from telcos and known commercial banks. Have each family member pick up a different company and after a certain period of time (month, quarter, year,) share and compare the results in terms of market value and performance.
Practice #4: The value of giving back
Protecting the family’s money is critical to sustaining wealth, but just as critical is giving back. Sharing time and resources with the community proves an invaluable experience for young family members, because it demonstrates the positive impact wealth can have on the community at large, rather than just themselves.
Learning opportunity: A family can decide on a philanthropic mission or purpose and encourage the children to identify ways they can contribute to the cause.
Discuss and establish a percentage of the family income that will be dedicated to philanthropy. When the children receive money, they can dedicate a portion to savings, a portion to spending, a portion to investing, and a portion to philanthropy, so they can begin to understand how to maximise the money they receive.
The bottom line is that the family’s example will shape children’s attitudes and behaviors towards money, and ultimately impact their spending habits. Hence, parents must plan carefully by incorporating formal and informal education into their everyday family life.
Ultimately, the goal is to raise financially literate individuals who can manage wealth wisely, achieve their goals, and contribute positively to society. By starting early and creating a supportive learning environment, parents can make a significant impact on the future of the next generation and the family’s legacy.
Osikomaiya is a Family Wealth Advisor at the Meristem Family Office. She can be reached via: [email protected]
