Having conversations about money, inheritance, and monetary responsibility with your children is crucial, regardless of your socioeconomic status. It’s understandable that these discussions can feel uncomfortable, but they’re essential for preparing your children for the future and ensuring they can manage any inheritance responsibly.
It’s important to help your children understand the lifestyle they’ve been raised in, and how to maintain it after you are gone. This involves teaching them about monetary management, introducing them to trusted advisors, and demonstrating responsible financial behaviors.
Remember, discussing money with your heirs does not mean giving them immediate access to it. You can create structures for gifting and inheritance that support their ambitions and work ethic while also promoting responsibility. Your team of financial professionals can assist you in setting up these structures.
Normalize financial discussions within your family. Money should not be a taboo topic. Instead, view it as a tool for achieving family goals and discuss it openly. Model saving and investing behaviors, and work towards a shared vision of philanthropy with your children.
Encourage your children’s early involvement in financial matters so they can gain experience and confidence in managing money. While not every child may be ready at the same age, you might be surprised at how resourceful and capable they can be.
Separate discussions about inheritance from discussions about death. Focusing solely on the inevitability of your passing can overshadow the practical aspects of managing inherited wealth. Instead, frame the conversation around the responsibility and opportunities that come with managing a significant amount of money.
Educating children who will inherit wealth about fiscal management is crucial. One effective approach to instill good financial habits is the “50/30/20” rule, tailored to guide them in responsibly managing and allocating their future income. This can be particularly important for those who might not have to work out of necessity, but who need to maintain and grow their inherited wealth wisely.
Here’s how you can explain the 50/30/20 rule to children of inheritors:
1. 50% for Needs
This portion of your budget should cover your essentials or needs. Even if a substantial inheritance might cover these costs, understanding how to allocate funds responsibly is vital. Needs can include:
• Housing: Whether it’s property taxes, maintenance, or insurance, knowing these costs helps maintain the property value.
• Food and Household Supplies: Understanding how to budget for groceries and essential supplies.
• Transportation: Costs related to vehicles, including insurance, maintenance, or even public transportation fares.
• Healthcare: Regular health insurance premiums, out-of-pocket expenses, and planning for unforeseen medical costs.
• Basic Utilities: Keeping up with payments for necessary services like phone and internet.
2. 30% for Wants:
This part of your income is for discretionary spending. It’s important to recognize the value of money and the importance of spending it in a way that enhances your life without compromising financial stability. Wants might include:
• Entertainment and Hobbies: Whether it is sports, arts, or other leisure activities, budgeting for these shows the value of money and enjoyment balance.
• Travel: Understanding how to set aside funds for personal enjoyment like vacations, which can also be educational.
• Personal Care: Items such as gym memberships, wellness treatments, and other self-care expenses.
• Shopping for Non-Essentials: Learning to allocate funds for non-essential items responsibly, ensuring they do not overshadow financial priorities.
3. 20% for Savings and Investments:
Inheritors must learn the importance of saving and investing money, to ensure the growth and longevity of their wealth. This includes:
• Emergency Fund: Creating a safety net for unexpected costs helps ensure stability.
• Wealth Building: Investing in stocks, bonds, real estate, or other assets can help grow the inheritance responsibly.
• Charitable Giving: Encouraging a sense of responsibility to give back to the community by setting aside a portion of wealth for philanthropy.
• Estate Planning: Understanding the importance of saving for future generations and continuing the cycle of responsible wealth management.
By teaching these principles, children who are future inheritors can be better prepared to handle their financial responsibilities wisely, ensuring the preservation and enhancement of their wealth for generations to come. Feel free to reach out to us here at The Wealth Conservancy, as our planners and coaches can help you navigate these processes.