3 Common Pitfalls
We’re here today to talk about three common pitfalls that can jeopardize your family’s wealth – and how you can avoid them.
To successfully pass on family wealth, it is crucial that you and your heirs understand these potential dangers, and work to root them out if your family has fallen victim to them. We call these dangers Entitlement Rut, Enabling Behavior, and Misplaced Trust.
First, let’s look at Entitlement Rut. When a generation loses touch with the sacrifices that another generation has made, it can lead to an attitude of entitlement. This can easily sap their motivation, limit their contributions, and discourage their desire to learn financial smarts.
We sometimes hear parents tell their adult children, “I’m leaving you plenty. You won’t have to worry about money.” Parents intend this to be comforting, but it often gives their children inflated ideas about how much they can expect.
Even if the heirs can sustain themselves on their inheritance, larger-than-life spending will result in a rapidly eroding estate, not leaving much - if anything - to their own children, your grandchildren.
To avoid the rut, involve your kids in your financial decisions. Remind them where the money comes from. Potentially invite your children to attend meetings with financial advisors. In addition, gratitude and generosity can be antidotes to entitlement.
Second, let’s talk about Enabling Behavior. Parents never want to see their kids hurt or in pain; we want to protect them from making bad decisions. Ironically though, by protecting our kids, we often prevent them from experiencing the challenges they need to build up their own grit.
Enabling Behavior is similar to the Entitlement Rut, but it is the parents’ problem rather than the child’s. Some examples of Enabling Behavior include:
● A child running up thousands of dollars in credit card debt, and the parent agreeing to pay it off.
● A child convinces their parent to go in on an investment with them. When the investment tanks, the parent never gets paid back.
Or
● Parents consistently buy their children big ticket items, never allowing the child to save and manage long term goals.
If people come to expect consistent handouts, they don’t gain needed lessons in financial literacy. Enabling Behavior can actually set up the people you love for making more mistakes—and bigger mistakes—down the road.
But when your children are forced to take on the responsibility and consequences for their choices, you’re pushing them to be more thoughtful, careful, and smart about how they use their money. And that is loving!
Finally, let’s talk about Misplaced Trust. Putting your trust in the wrong person is one of the most dangerous financial behaviors you can fall into. These aren’t just people who show up on the front pages like Bernie Madoff: People take financial advice all the time, whether it’s through a news story, an uncle’s tip about a hot stock, or a colleague’s “winning strategy” that he tells you about at the water cooler.
But it’s rare that a financial tip will take into consideration your age, station in life, financial goals and needs, and current financial position. What if you have to fund enormous medical bills? What if you have children in college? What if you also need to fund your retirement?
You need a working knowledge about how an investment recommendation fits into your whole picture before following anyone’s advice. Then you can start quantitative analysis and stress testing, and you can make informed decisions.
Anyone can fall victim to these dangers, but financial smarts and healthy values will help you deal with many of the biases and behaviors that can otherwise jeopardize your financial decisions.
For guidance on protecting your estate and helping your family avoid dangers and pitfalls, please reach out to our team so we can help you make informed decisions.