Warren Buffett is famous for saying you should give your children “enough so that they can do anything, but not so much that they can do nothing.” Never is this sentiment more true than when parents are planning for their children’s financial independence in adulthood. Most parents hope that their children will be good stewards of their family’s wealth. They envision their grown children spending responsibility and making investment and philanthropic decisions that reflect their priorities and values. On the flipside, no parent wants to see their young adult children burn through an amount of money that was supposed to last a lifetime—and perhaps beyond.
So what makes the difference between the two scenarios? In many cases, the groundwork for financial independence begins long before children come into any wealth of their own. Parents spend time teaching and modeling healthy financial habits. In adulthood, parents can lean on that foundation to have more significant conversations around their generational wealth transfer plan. Ultimately the secret sauce for ensuring that your children are ready for financial independence is education, communication, and smart planning. Put those ingredients together, and you’ll cultivate happy, responsible adults more than capable of handling the responsibility that comes with their money.
Laying the groundwork
Preparing your adult children for financial independence is ideally a process that begins early in their middle school or teenage years. At this point, you can start talking to your children more openly about the role wealth plays in the family’s life. If you haven’t, discuss how you acquired your wealth and the values that inform how you save, spend, and donate, if applicable. Then allow your children to manage small amounts on their own. This is where establishing an allowance is invaluable. Providing tweens and teenagers with a set amount of money each week or month enables them to figure out how to spend responsibly. If they want to purchase something, but they’ve already used up their allowance, then it’s an easy segue into a discussion about matching your expenses with your means.
As they get older, you can incorporate additional learning tools—and keep the conversation going. For example, create bank accounts and debit cards for middle and high-school children. Educate them about the power of compounding interest and how that may apply in their own adult life. Some families also involve their children in their philanthropic efforts. Parents may explain to their children what organizations they support, their reason, and how they make that happen. You might even empower your children to begin doing a small amount of gifting themselves. The bottom line is to ensure your children are financially literate before they leave your home. Ultimately, you want to give them a foundational education that they can draw on in adulthood.
A different path for every family
Financial independence doesn’t necessarily occur at a specific age or after a particular event. Instead, the process and concept will vary from family. Broadly, however, we think about financial independence for our clients’ children as the ability for them to support themselves with their own wealth. They’re not dipping into the principal of their investments to fund their lifestyle. Instead, they can afford to meet their current and future needs with the income they generate. When and how this independence occurs varies by family. For instance, some parents may insist that their children “make it” on their own, with little or no financial support. Others may enable a wealth transfer at a specific age or create a staggered strategy that provides young adult children with money at certain life milestones. Perhaps they receive an amount when they graduate college or get married.
There’s no one right way. However, regardless of what your family chooses, clearly communicating the plan to young adult children is essential. We often help facilitate these crucial conversations, answer questions, walk grown children through the details, and provide advice. The discussions—there’s usually more than one—prepare the young adults for this next critical stage in their life.
Guardrails and guidance
The transition to financial independence entails questions and potential pitfalls that few textbooks cover. And there’s a whole other layer of complexity when that independence coincides with coming into significant wealth. How do you manage wealth to ensure it lasts? What type of expertise do you need to tap? How do you navigate real estate purchases, first business investments or requests for support from friends and relatives? Young adults will encounter all these issues and then some. Fortunately, establishing early guardrails provides protection and reduces the risk while they’re learning. For instance, we often advise parents to distribute wealth to adult children in tranches—and avoid the shock of one big wealth transfer event. As noted, tying the distributions to achievements or milestones can provide incentives to pursue degrees or dive into a career.
Guardrails regarding how young adults use and spend the funds are also helpful. For instance, distributions may be designated for educational expenses or real estate purchases. Such parameters can prevent young adults from excessively spending while they’re still learning how to manage their finances. They also can ensure that the mistakes don’t have an outsized impact on their future. The decisions—good and bad—provide learning moments that will inform how they handle their wealth in the future.
Educating and then empowering children to become financially independent is one of the most significant gifts a parent can give. Start the planning, education, and communication early, and you’ll tee your children up for a successful transition into adulthood.
