Preparing Children to Handle Wealth

Handle large amounts of money requires a great deal of character.  Perhaps in many ways it is better for a child to start out penniless than to start out with a lot of money.  How many children of pop stars and corporate titans can we think of who live meaningless, empty lives?

If you have been following the advice of this blog and are saving and investing, chances are good that your children will end up with a couple of million dollars in inheritance when you die.  If your children also follow down the same path, their children may be deca-millionaires or even billionaires.  Chances are also good that you will have a million dollars or so by the time your children are ready to leave the home, meaning that they will probably have a good variety of college choices and have become used to a fairly high lifestyle.

Bringing up children in such a way to be able to handle large sums of money starts early.  Part of the training is learning the mechanics of investing and handling money.  One way to do this is to have them start investing small amounts when they are around 12 years old.  Perhaps transfer 10 shares of a company you own to them and have them keep the certificate so they’ll receive the dividend checks directly.  As they get more mature you can establish a uniform gift to minors act (UGMA) account and start to transfer some money to them (while staying under the gift exemption each year) and help them build a portfolio.  Note that eventually they will need to start filing a tax return, so check with your accountant.

As they learn, start to explain the concept of cash flow.  Explain how the cash flow of a normal person sees income come in through work and then go out to liabilities.  Explain that the cash flow of a person who becomes and stays wealthy involves using earnings to buy assets, and then getting income from both working and those assets.  Explain that to maintain wealth, you should only spend a portion of the earnings from investments and reinvest the rest.  Never touch the principle.

When they get to college, they may have a fairly large investment account at that time.  Expect them to make some mistakes, perhaps thinking they can day trade to riches.  Hopefully they will learn their lesson before they lose too much.   If they seem to have matured, you can continue to transfer some funds to them even through college and beyond.  If not, you can wait a bit longer for them to grow up.

If you find that they are well into their forties and still can’t handle money, it might be better to set up a trust for them, perhaps one that pays them a yearly stipend from the earnings.   You could also look at establishing a trust that provides funds for something like the college education of your heirs, a family gathering each year, or some like goal.  Maybe you could provide a nest egg to each of our heirs when they reach the age of 25 or something, just in case one of your descendents is better with money.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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