Beginning Early Is Key
In a previous article, I discussed the problem families all around the globe have when trying to hold on to their net worth for more than three generations. In a related article, I talked about the need for communication within the family pertaining to how assets were accumulated in the past as well as financial decisions that went well and poorly. It’s normally difficult for the older generation to discuss their business affairs with their children, but if the family expects to hold onto its assets long term, communication regarding the management of assets and long-term business planning is crucial.
Part of the communication process involves education, which is what I’ll be addressing in this article. Educating the second and third generation to help manage family assets is something that must succeed in order for the assets to last.
Many parents try to shelter their children from the good fortune they’ve achieved and don’t talk with the younger generation about generic financial and tax decisions. It’s well documented that children need to learn simple financial management when they’re very young and continue learning new financial ideas each year as they go through grade school, high school, college and that very important first job. As a starting point, outlined below are some basic financial ideas for different age brackets.
Ages 4 to 7
- Demonstrate how to count coins and paper money.
- Show how to fill up a piggy bank.
Ages 8 to 12
- Teach how to shop different stores and compare quality and pricing.
- Set up an initial allowance for doing basic household chores.
- Provide jobs for pay, either at your office or company.
- Move your child from a piggy bank to a savings account at a bank.
Ages 13 to 19
- Encourage your teen to get a summer job that pays an income.
- Help your teen develop a budget that includes savings and charitable giving.
- Discuss the pros and cons of credit cards — especially how credit card debt can hurt.
- Set up an investment account at a discount broker and fund it with one or two thousand dollars, then help the teen purchase stock in three companies they like; when their three investments go up or down, explain why.
Ages 20 and up
- Help your young adult develop a monthly spending budget.
- Encourage your young adult to get a summer internship that pays an income in an industry they seem interested in (or at the family business).
- Set up meetings for your young adult with your family’s financial advisor, attorney and CPA; learning more about their professions and what these individuals do for the family is excellent training for the future.
- Send your young adult off to work for a different company for several years before they join the family business.
If you own a closely held family business, it can be an excellent tool for teaching your children financial and business ideas, people management, and tax and budgeting skills. Most of us try to shelter our young children from all the hard work involved in any chosen profession, but in reality, children should be exposed to and understand the benefits of hard work.
When the family gets together, it’s a good idea to spend some time sharing a few brief comments about what has been happening at the company (including what went right and what went wrong). It’s good for children to understand what happens in the real world. When they’re young, take your children to the office and let them watch you work (and maybe give them something to do). When they get older, take them on trips with you to visit a factory or a good client — or perhaps take them to a convention so that they can meet lots of other families, vendors and suppliers in your industry.
If you’re lucky enough to have one or more of your children follow your footsteps into the family business, the pressure increases on you substantially to become their coach and teach them how to maintain this family business for generations, instilling in them the financial and business management skills it takes to run a successful closely held family business. Teaching the second, third or fourth generation entrepreneurial skills is foreign to almost every business owner. Leon Danco, one of the deans of family business consulting, once said “the entrepreneur is like a bush pilot flying by their wits and instinct, but later generations must learn to fly the company business using professional gauges and instruments.”
Educating the next generation and providing them with the training and tools necessary to manage the family assets or family business is a never-ending process. Keep communicating with your children, and keep providing them with education so that they’ll have the skills necessary to take what you’ve accumulated and keep growing it for the future.
Creative Planning specializes in helping families and business owners with valuations, succession planning, estate and income tax analysis, and retirement income projections. For more information, schedule a call with a member of our team.