Moving on from the bank of mum and dad
One challenge facing financially successful parents is how they might help their offspring develop good money habits. Financially resilience is not only a valuable life skill in and of itself, it also dramatically increases the chances of sustaining the successful stewardship of wealth through the generations.
There is some evidence, however, that not all wealthy families rise to this challenge. For example, one American study found that around two thirds of wealthy families lose their wealth by the second generation. This same study reported that it took less than 20 days for the average recipient of an inheritance to buy a new car.
Some parents might find themselves providing substantial financial assistance to their middle-aged sons and daughters. So, for example, adult offspring of wealthy parents in well paid jobs and in their 40s might still receive substantial financial allowances and assistance with purchases such as new cars or even accommodation. Researchers Stanley and Danko describe this as the provision of Economic Outpatient Care and describe how continuing to receive large amounts of money from wealthy parents makes adult offspring financially dependent. It is also likely to lead to unsustainable financial behavior, such as expenditure exceeding income and a failure to save or invest for the future.
There may also be negative emotional outcomes from this situation. For instance, an economically dependent adult might have lower self-esteem than they might otherwise possess; or they might struggle to find a direction in life as they also know “mum and dad will sort it out”.
The more positive alternative is to facilitate the development of healthy money habits which lead to financial success. This will increase the chances of young people not only to being happier and content, but also might help sustain intergenerational stewardship of wealth.
How might young people develop the skills to be financially successful? The first approach is to have an awareness of their own emotional approach to money. Do they see it as a threat, a chance to spend frivolously or a burden? Conversely, might some see it as an opportunity for investment or as providing the basis for starting a business? Or might young people swing between these two poles, depending on their mood or what peer pressure might dictate? What needs to happen is for young people to be guided through their money emotions and encouraged to reflect upon how they come about – and how they might be changed. This process provides one of the building blocks of financial success.
Another important component is education in some of the key components of personal finance. These include the basics of budgeting, calculating net worth, borrowing for study or house purchase, thinking ahead to retirement and considering the different options around savings and investments. By understanding these tools and techniques young people will be better prepared to understand the economic world in which they live, increase the likelihood that they make informed financial decisions and assist them in making a full contribution to society.
Tying these all together is encouraging the development of a mind-set which links larger life intentions to money goals. These in turn lead to specific money actions. So, for example, a young person might want to start their own Internet coding business (life intention) and then decide to save for university or take out a student loan (money goal) and then begin a series of small steps such as developing a household budget, working out a flat share, considering part time employment and so on (specific actions).
This process helps develop character and independence, but developing good financial habits is not done in isolation. To be sustainable the pursuit of financial goals must involve others. For example, family, friends and associated professionals can offer practical and emotional resources. They can act as a sounding board and also offer a framework of supportive accountability. As the American educator and business person Stephen Covey writes in the 7 Habits of Highly Effective People, “Dependent people need others to get what they want. Independent people can get what they want through their own effort. Interdependent people combine their own efforts with the efforts of others to achieve their greatest success.”
So to re-cap, if young people can develop an awareness of their emotional attitude to money, if they can learn more about the practical aspects of money and if they can work towards financial goals which fit with their life’s intentions they will financially successful – and very probably happier and more contented individuals.
Dr George Callaghan