How wealthy parents can teach their children about money

With poor financial literacy a key reason for wealth not surviving, high-earning parents must help their offspring learn how to manage their money

Dubai, United Arab Emirates - October 10 2013 - Maya Prabhu, Managing Director of Coutts speaks poses for a portrait at their office in DIFC. Journalist : Tom Arnold. Section: Business. (Razan Alzayani / The National)  *** Local Caption ***  RA1010_coutts_04.jpg
Teaching your child to save

Pre-school (three - five years)

You can’t yet talk about investing or borrowing, but introduce a “classic” money bank and start putting gifts and allowances away. When the child wants a specific toy, have them save for it and help them track their progress.

Early childhood (six - eight years)

Replace the money bank with three jars labelled ‘saving’, ‘spending’ and ‘sharing’. Have the child divide their allowance into the three jars each week and explain their choices in splitting their pocket money. A guide could be 25 per cent saving, 50 per cent spending, 25 per cent for charity and gift-giving.

Middle childhood (nine - 11 years)

Open a bank savings account and help your child establish a budget and set a savings goal. Introduce the notion of ‘paying yourself first’ by putting away savings as soon as your allowance is paid.

Young teens (12 - 14 years)

Change your child’s allowance from weekly to monthly and help them pinpoint long-range goals such as a trip, so they can start longer-term saving and find new ways to increase their saving.

Teenage (15 - 18 years)

Discuss mutual expectations about university costs and identify what they can help fund and set goals. Don’t pay for everything, so they can experience the pride of contributing.

Young adulthood (19 - 22 years)

Discuss post-graduation plans and future life goals, quantify expenses such as first apartment, work wardrobe, holidays and help them continue to save towards these goals.

* JP Morgan Private Bank 

“Are we rich?” It’s an awkward question, yet one that most children are likely to ask their parents at some point. But what do you say when the answer is actually yes?

Maya Prabhu, JP Morgan Private Bank’s managing director and the head of wealth advisory for Europe, the Middle East and Africa, says a German client was “appalled” when her seven-year-old came home from school and asked the question. It was “vulgar” to think of wealth that way, the woman thought.

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In some cultures, people openly talk about money; in other cultures, it may be seen as grasping and greedy.

But the bank says the question is both common and unsurprising, as children seek to find their place and understand where they fit in with their peers.

“In some cultures, people openly talk about money; in other cultures, it may be seen as grasping and greedy,” says Ms Prabhu.

An easy reply is "interesting, why do you ask?” This will ascertain whether the child is simply responding to idle playground chit-chat or is concerned about having enough, as well as provide time for a measured answer.

It is also worth taking the time to teach your children financial skills and prepare them to inherit wealth. A mind-boggling 70 per cent of rich families lose control of their business or wealth by the second generation – and 90 per cent, almost the lot, have gone from riches to rags by their grandchildren’s era.

These were the 2015 results of a two-decades-long study by US wealth consultancy The Williams Group of 2,500 millionaires and billionaires. Most of the issues arise, it says, from a lack of trust and communication, as well as heirs not being equipped to take over.

JP Morgan Private Bank says there are seven essential financial skills for any parent to teach their child to equip them for the future. These include to earn throughout life; to save well; to spend wisely; to share thoughtfully (both through philanthropy and gifts); to invest wealth well; to borrow effectively and to protect against risk.

Borrowing, for instance, is not “inherently bad” and even a pre-schooler, aged three to five, could be introduced to the idea of loans and their costs and benefits, while six- to eight-year-olds can be taught to invest into stocks, with you matching their investments.

“The heart of it, as parents, is to foster good decision-making and judgements based on family values,” Ms Prabhu says. “There is no one right way to do it; what is essential for one family is a luxury to another.”

British oil and gas contracts manager Alan McGregor, 44, has two boys, aged 12 and seven. He describes himself as “moderately wealthy”, with a “comfortable lifestyle”. He says he is “very open” with his sons about money. “I tell them that we are well off and tell them my salary and saving amounts.”

Mr McGregor, who has lived in Dubai for five years, says his sons receive pocket money for doing chores, which he encourages them to save. Children in the UAE need better financial education to make “smart decisions”, he says. “It is very easy to lose a lot of money quickly here."

His sons, he is proud to say, are learning the value of “long-term, low-cost saving” and have both bought global exchange-traded funds (ETFs) through his broker account from their pocket money.

A lack of financial literacy in well-off families, Ms Prabhu says, is the key reason for wealth not surviving. “You have to ask: what is wealth for in the long term? Could it be a safety net, rather than a velvet cushion, for future generations?" she says.

“What it comes down to is, what are your values? What is the meaning and purpose of wealth? This way you ensure children, coming from families of plenty, can be equipped with the right financial skills.”

More and more, sharing is moving centre stage, says Ms Prabhu. In an age of global inequality, younger generations don’t want to be seen just as “wealthy spenders who are lucky to inherit” but people who are “using wealth wisely and well”. Another trend is to invest ethically, for instance to invest in renewable energy if they care for the environment.

When it comes to philanthropy, there is an historic yet “quiet” culture of altruism in the UAE, says Ms Prabhu. Now is the time to publicly show what we are doing, because we want to set an example for kids to see themselves as “leaders in their community as well as their businesses”.

When it comes to family businesses, the bank says even young teenagers can be encouraged to set up junior boards at their clients’ foundations. It is a “lovely, collaborative exercise”, says Ms Prabhu, and an opportunity for parents to have a “wonderful conversation” about spending money well and enjoying things in life while also thinking about others, which can be “very powerful”.

Parents may also want to prepare older children in their late teens and early twenties, for instance, with a ‘script’ to help them answer if their friends ask about their wealth, and to again use the opportunity to discuss both the parents’ and children’s life and financial goals.

All parents, Ms Prabhu adds, are grappling with the fact that things are so “easily and readily available” to their children today, from an Uber or Careem taxi to Louis Vuitton headphones.

Many clients are entrepreneurs, she adds, which means their wealth levels have gone up “exponentially” and their children are growing up in ways “they never imagined possible”.

In such situations, it is key that the “fruits of their life’s work” result in a source of opportunity for the family rather than of “discontentment”, and that children and grandchildren in wealthy families have a sense of purpose, a good education and learn practical money skills.

Ultimately, rich families should not feel guilty about being wealthy, Ms Prabhu says, but should ensure they are “intentional” about their relationship to money, which is a “means to an end”. Even if we don’t realise it, we are constantly teaching, as children closely observe our attitudes and behaviours with everything, including money, and a good financial grounding ensures you are empowering your children.

Family wealth gives children choices, freedom and the opportunity to pursue and enjoy things they are passionate about, Ms Prabhu says. “To spend, save and share well is to have financial skills for life.” And that should ensure that your riches never get ripped up into rags.

Teaching your child to save

Pre-school (three - five years)

You can’t yet talk about investing or borrowing, but introduce a “classic” money bank and start putting gifts and allowances away. When the child wants a specific toy, have them save for it and help them track their progress.

Early childhood (six - eight years)

Replace the money bank with three jars labelled ‘saving’, ‘spending’ and ‘sharing’. Have the child divide their allowance into the three jars each week and explain their choices in splitting their pocket money. A guide could be 25 per cent saving, 50 per cent spending, 25 per cent for charity and gift-giving.

Middle childhood (nine - 11 years)

Open a bank savings account and help your child establish a budget and set a savings goal. Introduce the notion of ‘paying yourself first’ by putting away savings as soon as your allowance is paid.

Young teens (12 - 14 years)

Change your child’s allowance from weekly to monthly and help them pinpoint long-range goals such as a trip, so they can start longer-term saving and find new ways to increase their saving.

Teenage (15 - 18 years)

Discuss mutual expectations about university costs and identify what they can help fund and set goals. Don’t pay for everything, so they can experience the pride of contributing.

Young adulthood (19 - 22 years)

Discuss post-graduation plans and future life goals, quantify expenses such as first apartment, work wardrobe, holidays and help them continue to save towards these goals.

* JP Morgan Private Bank 

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