In the Gospels, Jesus states that it will be tougher for a rich person to get into heaven than for a camel to fit through the head of a pin. His point is not that there is some heavenly bias against rich people. It is that when someone is wealthy, he/she tends to assign a great importance to himself/herself. This can lead to putting either oneself first, or one’s wealth first. Either of these actions disobeys the first commandment, to put God first before anything else.
It also appears difficult, from what I have been able to observe, for the children of extremely wealthy parents to grow up and amount to anything. An example is Paris Hilton, who was recently arrested for drug possession in Las Vegas: http://omg.yahoo.com/news/vapor-trail-leads-to-paris-hiltons-vegas-arrest/46349?nc
Here is an individual whom one would think had all of the advantages – wealth, great schools, connections – and yet her life appears to be a complete waste of breath. While I’m certain there are plenty of exceptions, too many children of the ultra-wealthy spend their time going from party to party and spending their parent’s money on frivolous things. I’m certain that the Hilton’s have worked extremely hard to build their hotel empire, but the outlook for their daughter does not look good.
While the Hilton’s are an extreme example, I’m certain there are a lot of lawyers, hedge fund managers, Wall Street executives and quants, business owners, and others who started middle class or poor, but now have children who have never known a life without plenty of money. These children have a warped sense of reality, need to be taught how to handle money and, more importantly, make something of themselves. There are also plenty of people in the middle class who would like to teach their children how to handle money to keep them from coming back home after college. Here are some suggestions:
1) Start the kids on commission. An allowance teaches children that they deserve to get money for breathing air. Instead, teach children that work equals money. Create a list of chores that can be done for a commission. Very young children can do jobs such as putting away silverware, helping set the table, or dusting tables in the living room. Older kids can start helping with the dishes, taking out the trash, weeding in the garden, folding the laundry, and washing the car. Finally, teenagers can help mow the lawn, do the laundry, and other more dangerous chores. In each case, don’t pay a child wage, pay what you would expect to pay an adult for that amount of time. For example, a job that took a minute might be worth 50 cents. One that takes a half-hour should at least pay $3. If you would pay an adult $30 to mow the lawn, so should you pay your son.
2) Give the kids a choice at restaurants. Many of us are drinking more water these days at restaurants. Originally this may have been to reduce the number of calories taken in, but the fact that most drinks are now $2 or more is certainly an added motivation. Children typically have no concept of the cost of their drinks, and order a juice or soft drink out of instinct. They often take one sip of the drink and throw the rest away, resulting in an effective cost of about $2 per ounce for that soda. Here’s an idea: Before the waiter gets there, tell the kids that they can get $1 if they order water instead of a drink. For younger kids, offer to buy a small toy out of the vending machines in front or at the dollar store. This then puts a value on the drink that the children can appreciate. You’ll be amazed how many waters are ordered.
3. Start a Bank of MAD (Mom And Dad). Let’s face it, bank interest rates are lousy. I’m certain that it will soon cost money to keep money in the bank. But the bank of MAD is available for the children with a fixed interest rate of 5% (or 10% if you’re really generous). It comes with an old-fashioned passbook where interest payments are calculated when desired and deposits are recorded. Teaching your children to save up for things by serving as a bank is a great way to teach them about compounding and saving. Be sure to stress that the interest is a result of saving the money, such that with time one could have the money and the things one wants, rather than either-or. A variant on this is a 401Dad, where money saved for a big-ticket item (such as a car) is matched by the parents.
4) Talk to your kids about credit cards and other types of loans. Calculate your amortization (if you’re not handy with a calculator, there are various tools online) for your home. If you’re on a thirty year loan, you’ll find out that for the first several years on the loan you’re paying mostly interest. It actually takes more than 20 years to reduce the balance by half if you pay the minimum. Credit cards, with their high interest rates, are even worse. For any of your bills, see how much you’re paying in interest and share this information with your children. In particular, figure out how much more you are paying for the item over the course of the loan versus simply paying cash. It should help them avoid credit cards, and may even cause you to cut yours up.
5) When they leave the house, give them an emergency fund. Probably the single best way to stay out of credit card debt is to have an emergency fund. Most people do not intend to get into debt, but then have a car break down, an accident requiring medical attention, or another unexpected bill. With an emergency fund containing 3-6 months worth of expenses, these little emergencies are simply paid for in cash. Without it, they result in a credit card balance. As interest and fees start to build up on the card, and everyone having expenses that equal what they make each month, one ends up in a situation where the card never gets paid off.
One of the best ways to keep your children out of this situation is to start them off with an emergency fund. Explain to them that this is not a blow fund or a way to go on vacation. It is only for emergencies, and should be replenished with vigor whenever it is depleted for any reason.
Hopefully, by starting to teach your children about handling money early, you can avoid boomerang kids. And, if you’re in the unfortunate situation of having children who could go through life without working, perhaps sending them out on their own after college with $50,000 in their pocket would be a good idea. Explain that they have had all of the advantages growing up, that you have given them enough to get a start and find a job. Explain that you have made your fortune, and now they must make theirs. Finally, explain that you love them enough not to allow them to waste their lives away on superficial things such as shopping and parties.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.