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Thursday, June 26, 2014

Avoid Estate Planning Worry: Start Educating Your Children Early


A few weeks ago, I was consulted for a CBS News article about preparing children to handle the financial windfall of a large inheritance. In the article, which you can read here, I suggested parents start educating their children early with hands-on exercises in saving, investing and giving back.  I’d like to expand on that advice.

Depending on a child’s financial education, they may see a large sum of money as something to be spent, and not as a foundation for a secure future. In many cases, these children grow up being spoon fed by their parent’s wealth, without respecting the financial habits that created that wealth in the first place. But with a bit of planning, parents can ensure their children learn about the time value of money, compounding interest, diversifying investments, and helping others through charitable giving.

Starting from a young age, give your children an allowance and discuss with them how they’re going to spend it. Maybe give them some "ideas” like saving part of it or giving part of it to a charity that's important to them. In the beginning its only conversation and will blossom later.

If you start early and they see the value of saving, when they get to middle school they can start investing. Have them "buy" ten shares of stock in few businesses that are interesting to them, then have them follow the companies for a few months. Talk to them regularly about the ups and downs, which are a natural part of investing, and teaching them this way shows them first hand that bad investments can be a valuable learning experience. Losing is just as much a part of the process as winning, and these are lessons best learned at a young age with small sums, rather than later on when the stakes are higher. Meanwhile, the savings account can continue, or some can move into fixed income securities. As they reach their later teen years, start involving more money as they start to learn the game.

Another track is to give them a certain amount to allocate to charities of their choosing. Just like buying stocks, put the choice in their hands. Encourage them to decide which issues are meaningful to them, and then have them research organizations that are making a difference in that field. Hopefully over time they will see the value of sharing their wealth to give an advantage to those less fortunate.

These are just a few suggestions and are by no means the only way of preparing children to manage an inheritance. The important thing is starting early with a hands-on program, allowing them to make their own choices and learn from their mistakes, and discover firsthand the value of using wealth to enrich the world around them.

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