How you’re hurting your children’s financial future without realising it

My parents shared a dream in which we children were the stars. Their dream was that my brothers and I would live better than they did. How do you measure “better”? That’s where the problem starts.

Measuring success is hard. Most of the time, to avoid spending too long on the question, people accept that money is the measure of success. So when you want your children to be more successful than you, what you really want is for them to earn more money, live in a better neighbourhood and have more things than you could afford. Wanting the best for your children is normal; the danger lies in equating it with money.

A clear disadvantage

Whether or not parents went to university, they all understand that getting a degree will give their children an advantage in the race towards well-being (above all financial well-being). But is that really the case?

The surefire way to build wealth is to compound interest.

If you have 2,000 euros to invest at 20, and you invest another 100 euros every month until you turn 65, earning just 2% a year you would retire with 92,000 euros in the bank. The hard way to improve that return is to make more money to invest. The easy way is to start earlier.

However, going to university usually delays earning an income (and therefore saving) by around five years. And that’s without counting cases (like mine) where people borrow money to pay for their studies. In that situation, saving can be put off until well into your thirties.

But a degree is always a better bet than simply starting work, right?

• Scenario one: A good degree gets your children a good job. The result is proud parents and children who earn well. But earning well and building wealth don’t necessarily go together. In fact, the opposite is usually true. A good income allows for a better house, with wealthy neighbours and correspondingly more expensive leisure. The car has to be better, and so do the clothes and the tastes, all of which inevitably makes it hard to save and invest.

• Scenario two: A good degree doesn’t get your children a good job. In this case, as far as they can, the parents will help them pay for a good house in a good neighbourhood, and so on, all with the idea that their children should live better than they did. The situation repeats itself, with the added problem that this help, supposedly given to get them up to speed, rarely achieves that goal, so it has to be given again and again, creating financially dependent children.

How can you avoid this?

The answer is not to start a startup.

While it is true that the largest percentage of millionaires own their own business, it is just as true that the vast majority of businesses don’t generate enough to allow for saving (or even a decent salary). So what then?

We’ll have to accept a degree as the lesser evil.

It’s something that has to be done, even though many of the best never did it, and, not doing it, they used the time to invest in other skills that really do make a person more valued.

Once that’s done, all that’s left is to teach your children the reality of money (which they won’t learn at school). The points below are backed by countless interviews, and the results are explained at length in the book The Millionaire Next Door.

1. If you are upper-middle class or wealthy, don’t show your children that you have money. I’m not saying don’t talk to them about money. Just avoid at all costs letting one idea take root in their heads: that your money (the parents’ money) is their money.
2. Teach the virtues of a disciplined, frugal life. Don’t let them associate more expensive things with a happier life. Let them compete to be better, not to earn more money.
3. If you think point 1 hasn’t quite sunk in, do as Warren Buffett does and explain to them, with your best smile, that you don’t believe in handing money down from generation to generation. In other words, they won’t see a single euro when the time comes (I’d understand if you didn’t follow this to the letter, but you can use it as a white lie).
4. Don’t use money in negotiations with your children. If you take one of them on holiday and give the other money to make up for it, at the first opportunity they will try to get more money out of you, arguing that you already gave money to one of them. Keep money out of negotiations, or give the same amount to all of them.
5. Teach them to achieve goals (make sure the goal isn’t “earn a million euros before 30”; that one did me no favours). You can do this by setting them interesting problems.
6. Finally, make it clear to them every day that there are things more important than money. And you have to do it every day to compete with all the media telling them the opposite around the clock. At least you have the advantage of being a trusted source.

See also: The best books for getting rich are over 70 years old and tackle the root of the problem

Conclusion

Each generation should do better than the one before, but reducing this to making more money or living in a bigger house is neither smart nor good for the generations that follow. Anyone can read this article, agree with me and then do exactly the opposite.

That’s why I wanted to show you the consequences of decisions that, on the surface, seem sensible and innocent.

It’s like when you go on holiday planning to spend X and it ends up being X+Y. Or when you get a pay rise and expect to save more, only to discover a few months later that you are now spending more and saving the same. Educating yourself and your children about finances is something you do every day. It’s hard, but the results are among the most tangible you’ll find: euros in your pocket.

About Alberto Mera:

I’m not quite sure what I do for a living. I improvise an occupation every day and cover quite a few topics on my blog, which aims to help people (you?) get more out of their lives. If something can be improved, I’ve already tried it and written about it, or I’m working on it. I also publish a daily videoblog for everything I don’t have time to write about.

I’ve launched seven startups in the last four years, but right now I’m out of the market. Before that I worked on the stock market, so I think I’ll return to business on the investor side (if I don’t have the money, I’ll just have to find someone who does).

I suppose at some point I’ll have to devote myself to that, to making money, but for now I’m just trying to add value.

Featured image: Joe Haupt from USA, CC BY-SA 2.0, via Wikimedia Commons.