History suggests that wealth doesn’t last three generations.

As I’ve mentioned on previous posts, and in the article I wrote for the Globe and Mail, there’s usually a generation that builds wealth, a generation that maintains it and a generation that flushes it down the toilet.

Financial success is like physical, athletic ability.  NOBODY (regardless of their genetics) can win a marathon without facing physical discomfort; nobody can win a tennis tournament without swinging the racket thousands of times.

 But if I had a dollar for every time I heard a parent say that they’re going to “help” their kids financially because they don’t want them to struggle, I’d have enough money to buy weekly drink rounds for everyone at the local pub.  Newsflash:  training for a marathon is a struggle; training for a rugby tournament is a struggle; training for financial independence is a struggle.   Not struggling promotes weakness, no matter what the discipline.

Gifting money to a child (or worse, an adult child) is like getting your kid a wild card entry into an elite tennis tournament.  If they haven’t worked their butts off, they’re going to get hammered.

In tennis, that hammering is pretty obvious.  You miss nearly every shot, the crowd yells “mismatch” and you take the walk of shame into the locker room. 

In the world of money, it’s different.  Credit cards and high-paying jobs allow many people to bluff their success– for a while.  But eventually, the generation that doesn’t earn its fiscal muscles pays dearly for the atrophy.

Wealth doesn’t commonly last three generations.

A Tale of Two Boys And A Super Mom

My sister (a single mom) is raising two boys on a school teacher’s salary in Victoria, British Columbia.   Like preparing athletes for competition, Sally is teaching her kids to metaphorically hit backhands, forehands, read the court, and hit killer serves.  Adam and Tyler (aged 9 and 6) are building their financial muscles without even realizing it.

Lesson 1:  Children shouldn’t always equate household chores with money

Sally started their training three years ago by assigning household chores when Adam and Tyler were 6 and 4 years old respectively.  And she gave them $2 per week for their allowance.  It didn’t take long before the boys came to their own conclusion:

Chores = Allowance

But Sally squashed that idea when Adam (her eldest) said, “Mom I don’t want to do chores today, so I won’t take my allowance this week.”

Sally, not wanting to turn her kids into a couple of mercenaries, said that the chores were their household duties; they could voluntarily relinquish their allowance, but they would still have to do their chores.

Doing these jobs every week didn’t appeal to the boys as much as bouncing on their trampoline outside, but they’re learning to value their work.

Six year old Tyler’s favorite chore is vacuuming the couch.  As he bragged after finishing the job today:

“That’s the most dog hair that anyone has gotten off a couch.”

 I doubt that.  But if he sees himself as a super canine hair eradicator, that’s a good thing.

Lesson 2:  Responsibly saved money can help others in need

Tyler and Adam don’t spend all of their allowance.  They’re learning to delay their gratification, and more importantly, they’re figuring out that they aren’t the center of the universe.  Recently awarded a raise (to $3 a week) they allocate 25 cents per week towards a charity of their choice.  Nine year old Adam recently donated $10 to the Canadian Cancer Foundation, “So people can get cured from cancer,” he says.

The boys have been allocating a percentage of their allowance towards charities since they were just 4 and 6 years old.  But according to Sally, Tyler (aged 6) knows as much about molecular biology as he knows about money.

If you ask Tyler how much money he has, he can’t tell you.  As Sally says, “He gets confused about how much he has ‘in savings/investments’ and how much he has ‘in spending money’.  As you’ll see below, Sally split their money into categories.

Lesson 3: Delayed Gratification Can Be Taught

My sister doesn’t spoil her kids with toys, so when they want something, they have to save for it.  Here’s how their weekly $3 allowance gets divided:

  1. Two dollars towards savings/investing
  2. Seventy five cents towards spending money
  3. Twenty five cents towards charities

But Sally has some concerns about how she initially laid out the rules:

 “I want to be really careful about this whole delayed gratification thing.  They should probably have access to some of their ‘invested savings’ over time, so they can learn to enjoy the benefits of saving large, regular amounts.”

 Currently, Adam is coveting on an ipod touch on  e-Bay.  He knows the retail value, and he has decided not to pay more than $150 for it.  He has $80 in his “spending money” account, but Sally is prepared to give him $70 from his “savings/investment” account, to cover the difference.

Bottom line: it’s his money.  He earned it.

Adam knows that the purchase might not work out.  If the bids go higher than $150, he’s out of the running.  And that’s a great lesson for a nine year old kid: learning self – control and delayed gratification.

Little Extras

Realizing the benefits of earning money, and delaying gratification, Adam has asked his mom if he can increase his weekly income with some extra chores around the house.  “Poo Patrol” for their Golden Retriever is one of his regulars.

Six year old Tyler also wanted to get in on the action – but he was fired.  As Adam says, “When Ty does Poo Patrol, he goes outside, shuts the door, explores for a while, and then comes back and says, ‘Mom, I’ve finished Poo Patrol!’”

Little Ty is learning a great lesson.  When the quality of his work improves, he’ll earn the special privilege of picking up dog poo.

College Savings

In my opinion, one of the worst things a parent can do is pay 100% of their child’s college education.  Sally isn’t going to do that.  Her boys are going to start saving for their college expenses soon.  She’ll help out when they need it, but Adam and Ty are developing some big financial muscles; as a result, they won’t have umbilical cords connected to Sally’s purse.

These kids are going onto the tennis court swinging.  They’ll earn their rightful places in the tournaments of life and money. 

And in November, when I arrive in Canada, Sally and I are going to open an investment account (in trust) for Adam….with his own money, not with Sally’s.

What do you think of Sally’s methods? And do you have any useful tips for parents?

For more information on how children can become financial powerhouses, check out my book, Millionaire Teacher.