When I was 23 I made a terrible mistake. I roped myself into a dreadful car finance deal that cost me £5,000. It was a costly move that bled my bank balance dry, enraged me emotionally and led to a few sleepless nights. It was also a blessing in disguise because it taught me one invaluable lesson that’s never left me: don’t sign up to anything you don’t fully understand.
Since then, I’ve become pretty meticulous about contracts. There’s not a term or condition that hasn’t escaped by scrutiny! This has helped me safeguard myself from expensive and avoidable errors. From that mistake, among many others, I’ve become a lot wiser, more resilient and less prone to making bad decisions.
But making mistakes have given me the opportunity to learn something from them and grow.
This is a valuable lesson for children to make too
If anything, children require the lessons learned from failure more so than adults – especially when it comes to money.
But teaching them this isn’t easy. As parents, it’s only natural for us to want our children to avoid experiencing some of the pain we’ve suffered in the past, instilling almost a sense of duty to protect them from it.
But too much protection can unintentionally cause more harm than good, for it will only trap our children in a false world where they do as they want, behave how they want and get what they want.
This isn’t life.
Living in such a world removes the necessity to push boundaries and to pursue anything meaningful because well… why would you? You have everything you desire, and no reason to place yourself in stressful situations!
But once you step out of this bubble? Well that’s when they’ll start to experience life through its true lens - one that’s just as unpredictable as it is chaotic. And they may not have the skill set or the experience to know how to react appropriately in certain situations.
A little bit of stress can be a good thing
But how much financial responsibility should you give to your children? Give them too much rope and they’ll live seven-day weekends. Give them too little and they won’t grow.
I’ve always seen student loans to be one of the best financial tools to create independence. For one, they give young adults a gentle experience of what it feels like to be in debt, which can be repaid back over a number of decades with minimal interest. And when they’re at university, they’ll have to learn how to budget accordingly to survive the next month.
This will of course mean fewer lattes and beers but it’s still the steppingstone to independence. But here’s one very important factor to bear in mind - your children must repay the debt from their own pockets.
This could be a good example of ‘tough love.’ When they graduate and see the debt they’ve accumulated, it will teach them that the best years of their life came at a cost, reminding them that nothing worth having comes for free.
The conditions of the student loan should apply enough pressure for them to act but not so much for it to be suffocating. They’ll be living in an environment where they can afford to make mistakes and learn from them without these being too severe.
And as soon as they graduate, they’ll already have a goal to work towards - to pay off the debt. This will hopefully have taught them important lessons about money, decreasing the chances of them being handcuffed to a more serious and stressful kind of debt in the future.
There are other options for passing your wealth to children that incorporate a little of that ‘tough love’. Trusts are one financial tool you can leverage. You can delay the handover of money by setting one up that enables you to ‘drip feed’ them with various levels of responsibility rather than handing it to them all in one go.
This is often an alternative for parents who want to help their children to get on the property ladder. This is of course an attractive proposition, but who would really want to be a landlord at 20? Often we find that the parents get lumbered with the maintenance of the property instead, which brings its own issues.
So how much financial responsibility should you give to your children?
There isn’t a one size fits all solution here. A lot of these decisions depend on individual situations, personalities and family dynamics. But what can be useful is working with someone who knows these dynamics and family history.
Working as your financial partner enables me to get to know you as a family and then present the options that best suit your position, as well as your wealth.
I can help you to align the level of financial responsibility you want to give and help you balance this with the level of independence needed to prepare them for the challenges that lie ahead.
As well as look over any T&Cs you’re not sure about!