Saving for the next generation – why and how much?

I am not out of a wealthy family. So no inherited capital here, as Mr. Thomas Piketty concludes is the easiest way to a worry free financial life in the 21st century.

No money at all, or lots of money, we cannot escape the topic of how we go about teaching our kids about wealth, capital and money. Some will have none, and that in itself will be the first very important life lesson. Some will have a lot, and risk stigmatization and ridicule if it is lost on their watch. Some will have just right, and not be psychologically overly burdened, but still understand that it wasn’t created out of thin air.

I got a bit of allowances when I grew up. I had some on/off chores I had to do. Mostly my parents would forget, so not really anything that has traumatized me. More importantly though, I started earning my own money when I was around 13, working for my dads company. I was basically the cleaning lady in his blacksmiths factory shop, which did work for the agricultural industry.

My parents saved up for both me and my siblings. I think I had around 5.000$ in that child savings account when I moved to Copenhagen at the age of 20. (Thank you interest level of the 80’es.) I put the whole thing down as a down payment on my first apartment. My parents guaranteed, as a student budget was rather tight. Otherwise the mortgage company wouldn’t lend me the rest of the money. Had to make ends meet with roughly 300$/month the first 18 months of studying, until I could get a part time student employment job.

I now find myself at the other end of the chain, with 3 young boys who I both want to educate about money, but also want to help get a good start in life. I want to make sure that they understand that money is earned, capital is build through saving, and put to use as (hopefully) profitable investments. Where they get to start on that spectrum will to a large extend be decided by their parents willingness to labour, save and invest.

A lot can be said about motives for saving and potentially passing on wealth to your offspring. Some will want to spend every dime they own before they die, and if anything is left it will be because they miscalculated. Others have so much they cannot spend it even if they wanted to, and will basically almost be forced to pass on large amounts of capital. I am none of these places. At least not yet. Yikes.

However, I have decided that I will not and need not live an overly luxurious life, and hence I foresee that there will be some capital that will need to be passed on to the Minimal5 boys. Personally I would be very contempt if they could get a significant help in acquiring their first home. If there is more, fine. If there is less, well they will just have to labour a bit more on the corporate thread mill.

So how do you actually go about helping your offspring, taking all things in to consideration. Well there is probably not one single golden formula, as it depends a lot on the size of your capital, taxation environment of your country, your family situation in a wider context (single, married, divorced etc etc).

Timing is also important. You don’t want to pass on large amounts of capital to immature teenagers who will blow the whole thing on beers and strippers. Also, you don’t want to wait too long, as you risk it is no help at all, and just ends sitting there, like the Queen Mother and Prince Charles scenario. Wait all the way to the end, and for sure the taxman will also have his share. Planning People. Planning. Please.

In our family/household, we started giving allowances to the boys, when they were roughly about 6y/o I think. 4$ a week. Initially in cash, and with no chores or anything tied to them. In my opinion it is important to expose them to the concept of money and saving early on. We have added small chores later on. These days, as no one really have cash any more, at least in Denmark, we have opened a bank account for them, and they get the allowances as a weekly transfer. Don’t really know if it is because the money is now more out of sight, but my conclusion so far is that I have at least 2 hoarders. They hardly ever spend any.

Additionally we have opened a regular child savings account, which in Denmark is tax exempt when it comes to interest rate returns, and deposits are kept below approx 1.000$ a year. We transfer the max amount to them yearly. Funds are locked until 18 or 21 years. Hopefully this will help them when deciding on first housing option.

Just last week, we have decided to open a grand children account to them as well. This is an account similar to the above, but interest rate returns are in principle taxable. Reason for opening is obviously because their grandmother wanted to give them each 500$. Also, we foresee that there might be additional wealth transfers from the other side of grand parents, as there are bigger generational wealth transfer considerations there. We (Minimal mom and dad) have basically said that we would prefer that at least some of the money skipped a generation. (aka us.) Not all things can be planned though, and especially not when decision making resides outside your control.😳

What are your thoughts on these altruistic generational wealth transfers?

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3 thoughts on “Saving for the next generation – why and how much?

  1. The best way to appreciate money is to make it ourselves so we can appreciate the value or a dollar. My husband and I earn our own money (neither of us have inherited money) and we are hard working people.

    My daughter was given a couple grand when she was a couple weeks old from a distant wealthy family member of my husband’s. It was a very generous gesture and I’m not used to this kind of generosity. We invested this money in stocks and bonds for her but have yet to open a bank account for her. I don’t know how much money is the most ideal honesty…. my husband thinks a few million is a good amount for a family to work towards. I think a few hundred thousand is a comfortable amount.

    Liked by 1 person

  2. Great topic.

    As a new father to a currently 12 week old baby boy, I’ve been giving this subject a lot of though recently. In Ireland, I’m finding it difficult to open a broker account for a minor (anyone under 18). I thought DeGiro would be my best option but currently they don’t allow it (they’re working on it I’ve been informed). So until then, any cash gifts my son is given are put into an online savings account, but in my name. Opening up a bank account in his name is something that I’ll get around to later as there’s no great benefit in doing it straight away.

    As for your question of inter-generational transfers of wealth, I’ve no problem with them. I consider them “free money”. However, once received I believe they are to be invested wisely for the long term. At most, any dividend or interest from them can be used by the recipient. But ideally I’d leave the money compound and grow for minimum 20 years.

    Liked by 1 person

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