Small Business Owners Educate Younger Generations on Wealth Management

You’ve built a successful family business. Now make sure you teach important financial lessons to your kids and grandkids so they can keep it growing.

If you’re like many portable restroom operators I’ve met, you barely had enough money scraped together to buy that first slide-in vacuum tank for the back of your pickup truck. You built the business up from an idea, a lot of sweat and sore muscles, and a loan from your understanding Uncle Henry.

That’s what they call living the American Dream. You found out you can still build something out of nothing and it’s been a gratifying, albeit challenging and sometimes frustrating experience. And looking back, you wouldn’t have it any other way. Your determination has yielded a business you can either sell to support your retirement some day or pass down to your kids.

Managing money was never a problem for you. Heck, for years you probably never had enough to worry about “managing’’ it. It was managed right out the door every month in operating costs like employee wages, fuel, equipment and insurance. Now that you have a nice little pile of cash or investments, you will use your wits to hang onto and hopefully grow it.

Many PROs I know had the benefit of being hungry at one point in their lives, and that’s given them a healthy perspective when it comes to handling money. They’ve built a business, and now the challenge is to make sure the next generation understands they can lose cash a lot faster than they can make it.

Sustaining wealth

Your kids probably haven’t wanted for anything. They get new clothes on their backs, everything they need is provided for them, and your wallet looks like a magic cash machine that spits out $20 bills. You feel blessed to be able to provide for them.

But you also need to teach them how to build and sustain wealth, or risk seeing the nest egg and business you‘ve worked so hard for slip away. So say financial experts who share the message that most families lose accumulated wealth over three generations and the younger generation has to start over. It’s estimated that nine out of 10 family fortunes will be lost this way.

“The third-generation rule is so true, it’s enshrined in Chinese proverb: ‘Wealth never survives three generations,’ ” John Hartog, of Hartog & Baer Trust and Estate Law, says. “The American version of that is ‘shirtsleeves to shirtsleeves in three generations.’ ”

Hartog, CPA Jim Kohles, of RINA Accountancy Corp., and Haitham “Hutch’’ Ashoo, of Pillar Wealth Management, share three tips for families with businesses to pass along the money managing values that built the business in the first place:

Give them some money now and see how they handle it

Hartog says the first-generation wealth builders often don’t bother to teach their children about financial responsibility. The time to change that is now, by giving the kids a sum of money and watching what they do with it. Then you can work on communicating better about your values or take steps to protect future generations from financial ruin.

“I had a client who gave both children $500,000. After 18 months, one child had blown through the money and the other had turned it into $750,000,’’ Hartog says. The first child will receive an inheritance in a restricted-access trust to protect the funds.

Be willing to relinquish some control

Kohles says business owners often don’t give future generations enough control to make decisions. That can leave them ill-equipped to continue building revenue when it’s their turn to run things.

“We don’t give our successors the freedom to fail. If they don’t fail, they don’t learn, so they’re not prepared to step up when the time comes,’’ he says. Giving some of their wealth away now better prepares the younger generation for managing large sums of money and potentially avoids draining assets through burdensome estate taxes, according to Kohles.

Hold regular “family wealth meetings’’

Why is it that parents don’t always include their children in discussions about their own money management? There shouldn’t be any fear of introducing children to your financial advisors and talking about how funds should be invested for future growth. Ashoo advocates for ongoing family wealth meetings and giving money to the second generation to seek out more successful business ventures.

“The best way they’re going to be able to help preserve the wealth is if they understand what goes into creating it and managing it,” he says. “Not only the work, but the values and the risks.’’

Lessons sink in

While I’m hardly sitting on a family fortune, I started early teaching personal lessons about the value of saving and investing to my two sons. I imagine I learned to be careful with my money from my parents – raised during the Great Depression. I’m thought of as “thrifty’’ or “Scotch’’ and I’m the brunt of many jokes for wanting to know where my last dollar is spent.

We talk a lot about investing around our house. I explain the value of compounding interest, dollar cost averaging, stocks, bonds and mutual funds. I participate in a stock club – where a group of investors manages a small portfolio for education and entertainment – and have taken my older son along to meetings. I also direct a few retirement accounts of my own, researching investments and making trades.

Including the boys in our family financial discussions was a conscious decision, and the effort is starting to pay off.

Last summer, my eldest high schooler got a job as a dishwasher at a local restaurant. When the job ended and he returned to school in the fall, he surprised me by asking if he could put most of his earnings into a Roth IRA, a retirement account where income can grow untaxed over the years. I asked him if he wouldn’t rather keep the cash for spending money.

“Well, you always told me the earlier I could start a retirement account the better, and if I save this money now, imagine how much money I could have when I’m 62 years old,’’ he explained his plans. Not only could he start a Roth account, I told him, but also I would match whatever he saved there in a second cash account at an online brokerage that he could manage by himself.

Hopefully he can grow both accounts into a big pile of money to help support me in my old age.


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