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Teaching the next generation the value of money
DURING a portfolio review in the midst of the Asian crisis in 1998, the patriarch of the family was being berated by his eldest son, who complained about his father's excessive risk taking that 'reduced the value of his inheritance'. This level of entitlement felt surreal but, as I learned after many more years in banking, is far too common.
While my columns focus on investment markets, this month I thought of tackling a subject that is of greater importance to most investors compared to whether their portfolios returned an extra one or two per cent the previous year.
The most common lament we hear from our clients is that their next generation has no perspective of the value of money, and that their biggest concern is their children will not lead a productive life. And while not always said, there is a fear that their hard-earned wealth will be squandered away.
One of the biggest flaws in the global education system is that schools don't teach about the value of money and good money management, so it is solely up to the parents to impart these values to their children. The older generation needs to understand that if they grew up poor and struggling for every meal, their next generation will always view money differently, having been brought up in more comfort. While it is not realistic to expect that the frugality from growing up poor will be passed on, it is critical to pass on a good sense of the value of money from an early age.
While for most people money is a target, such as having five million in the bank by age 50, people who have exceeded their money goal in life and continue to work will tell you that the journey is far more enjoyable than the end target, and having ever-higher amounts of money doesn't materially change their life. Money is far too often a source of discord in wealthy families, and instilling a strong sense of values that lead to a purposeful life is key to resolving this issue.
It is the natural wish of every parent that their next generation have a better life than they had, but many of their actions around money impart the wrong value system. Successive generations often struggle to find their own identity, feeling that they are in the shadow of a highly successful parent or grandparent. The more that proper values can be passed on, the happier and healthier the whole family will be.
Having seen many families work through their intra-generational differences, a number of common themes have emerged. When addressed properly they lead to more harmonious families, where the next generation are not just waiting for the parents to kick the bucket so that they can get their hands on the money.
* Start working from an early age. If this is in the family business, it should be at the bottom of the company hierarchy with no special treatment for being the son or daughter of the owner. While in college, every student should have a part-time job irrespective of how rich their parents are. The more menial the job the better, as I have met too many fresh graduates who think that flipping burgers at McDonald's is beneath them. One of my 'work jobs' during my last year in boarding school was shovelling horse manure in the school farm. This was the second most dreaded assignment on campus. The first was cleaning student toilets.
* Do not buy children a car when they turn 18. This is far less common in Singapore compared to other countries, but the message applies to all consumer goods, including the latest iPhone. If the next generation is just given things, they value them far less than if they had to work hard for them. This will be the same for any inheritance they receive. The sight of crashed Ferraris and Lamborghinis soon after an 18th birthday are far too common. My father refused to buy me a car when I was in college even though he could easily afford it, whereas most of my international classmates had one (a few of which were Ferraris). I remember his words to this day: "If you want to buy a car, get a job and pay for it yourself. My only financial obligation to you is to give you a good education." I got the job while in college, and immediately realised that buying a car for just four years made no financial sense.
* Do not expect to fly in business (or even worse, first!) class if you didn't pay for it yourself. If they want to fly better than economy, they should pay for it themselves. Knowing the value of money is realising that a long-haul return business class ticket costs more than an average person's monthly salary.
* Do volunteer work in impoverished locations. I have yet to see anyone who wasn't emotionally moved by the poverty around them, and came away with a grateful attitude that lasted the rest of their lives.
* Passing on the value of responsibility can only be done by creating situations for the children to have accountability. This means they will inevitably fail sometimes, and in the process learn important life lessons. Do not handhold children through every minor setback they go through. Life is a struggle, but overcoming these struggles in their own way, rather than being constantly shielded from them, is key to becoming a well-rounded person.
And finally, two finance related lessons that are better off learnt as early as possible:
* Appreciate the power of compound interest, both how it can work in your favour by starting to save and invest early, and more importantly how it can work against you. For example, a daily habit of buying a S$6 latte will cost a 20-year-old a full S$1.26 million during their working career until they turn 60. The long-term effect of compounding is the single most under-appreciated fact among investors.
* Spend less than you earn. This sounds like basic common sense, but according to the latest MAS statistics, the average outstanding credit card debit per capita is S$932. Compounding the interest on credit cards is the biggest source of profits for financial institutions, and therefore one of the biggest source of cost to you.
- The writer is co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund management services to endowments and family offices, and wealth-advisory services to accredited individual investors.