Discuss family finances with your children

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Circa 2005, the start-up I was heading was passing through turbulent times. Around that time, my son, Akshay, passed his International Baccalaureate (equivalent to HSC) exams and was in the process of choosing a professional course.

Like most of his schoolmates, he was keen to pursue his undergraduate studies overseas. The product design course he wanted to pursue was available in India, but the peer pressure to go overseas was high. The overseas course cost a bomb. Given the state of our (my spouse and mine) personal finances then, we couldn’t afford it.

We realised this issue would have to be handled sensitively. My spouse and I decided to be open and transparent about the state of our finances with Akshay. We did the math and prepared well for the discussion. We told him bluntly we couldn’t afford the overseas course.

Many questions followed. He wanted to know whether we would have to shift house or downgrade our lifestyle in any way. How had we afforded the fee for the rather expensive school he was in? and so on. Akshay took the difficulties in his stride and went on to complete his undergraduate studies in product design in India.

The preparation for transparency forced me to take stock of our finances formally, rather than carry it in my head. This clarity improved my investment decision-making abilities by several notches.

In later years, I created a proper financial plan with specific assets allocated for each goal (children’s education and marriage, and our retirement). I have created a spreadsheet titled “What to do if I die” and shared it with my spouse, children, and daughter-in-law. We earmarked a fixed time during our family holidays to discuss family finances, including succession plans.

This allowed our children to feel responsible and plan their career choices in line with our budget. It created an environment that allows them to ask sensitive questions about money, including our methods for prioritising our spending.

I have been sharing these learnings with our clients with mixed outcomes. Some have reported excellent results. Some have asked for tips on how to start this transparency journey. But some clients are worried that if the children know how rich the family is, it may breed complacency. Some feel it might increase the money demands by their children, especially teenagers. Some are worried the children may fight among themselves to get a larger share of the resources. Some are concerned that transparency may cast a burden of accountability on a plan that may have to be changed later. All these are valid concerns. Obviously, transparency is not a catch-all cure for bringing up your children well. Neither can transparency be an overnight phenomenon.

Transparency should ideally start right around the time when children first become aware about the differences in money status in various families. Questions ranging from “Why can’t we give a PlayStation as a birthday return gift?” to “Why do they stay in such a small house?” need to be answered on an age-appropriate basis. Remember that children learn intuitively from your actions rather than your words.

Transparency with your children is a difficult thing to achieve, especially in our society where money-related discussions are considered “dirty” or taboo. But this is something worth considering since it can bring rich rewards in terms of improving relationships within the family and lead to better handling of money.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; Twitter: @harshroongta

(A slightly different version of this column first appeared in the Business Standard on August 22, 2022)

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