How to keep your wealth in the family
South Africa has the most dollar millionaires in Africa and is one of the fastest growing ultra-wealthy populations on the continent, according to the latest Knight Frank Wealth Report.
According to the report, South Africa had 661 ultra-rich individuals worth over $30m (about R439m) in 2018, while its dollar millionaire population grew 4% to 52,926. The report also states that South Africa will remain the largest wealth hub in Africa, with a 32% share of the ultra-wealthy population in five years’ time.
But are the wealthy and their offspring guaranteed to stay rich for generations to come?
No matter how big or small your fortune, the experts agree that you need to protect it from being squandered by the next generations.
They say the road to wealth creation is not easy, teaching future generations to sustain it can be even harder. It is much easier to start early and work at it for longer than wait too late and take the risk.
“The reality is most people who do make it up the income and wealth ladder in the country are the first to do so in their family - the first to graduate, make a decent income or to buy a property,” Rariva Ramdhani, advice specialist at Old Mutual Wealth, says.
However, she warns that even if you are the first in your family to upgrade your standard of living, this wealth is often lost by the second or third generation due to lack of communication, trust and even preparation of future generations to preserve the wealth built up by their parents or grandparents, no matter how small.
“The first step in preserving wealth in a family is to have a clear family charter as a roadmap to help you develop your unique financial strategy for your family,” Garth Curry, portfolio manager at Sanlam Private Wealth, says.
To prepare your offspring to preserve and build on what you've built up, you have to start with the golden rule of budgeting and doing it together as a family.John Kennedy, regional head at Citadel Cape Town
Curry adds that in his experience, families who prepare and coach the second generation for the money they will inherit tend to retain up to 96% of their funds, while those who don’t squander about 70% of the value of the wealth they inherit.
To prepare your offspring to preserve and build on what you have built up, you have to start with the golden rule of budgeting and doing it together as a family, saving on your lifestyle and building on shared decision making in the family, John Kennedy, the director and regional head at Citadel Cape Town, says.
He adds there are three basic elements to building a family charter:
- Building up suitable savings and investment plans that are outlined in advance to ensure family members never make decisions to withdraw at a time of financial difficulty based on emotions but instead weather the storm for the long-term benefit;
- A suitable plan on how to distribute what you have built up in property, a business or savings that stipulates upfront how it will be shared and manages the expectations of future generations;
- A succession plan that ensures that large amounts built up in investments or a valuable business is managed correctly either by the family directly, in a trust or by financial planners.
“By putting a governance structure in place, families will be able to protect their assets and overcome the potential risk of future generations not being good stewards of wealth,” Kennedy adds.
Once you have established the family charter, you need to take on the daily task of upskilling your children or any other future beneficiaries of your wealth in financial management so that they have the mindset to preserve the assets you have built up, wealth advisers PSG Wealth say.
- Talking openly when your children are around about your family finances like a budget, your salary or income increases and your expenses. This removes the mystery around money and helps develop smarter spending habits;
- Play money games like monopoly with your children. Learning about money in a fun way is a good start to get younger children conscious about their finances and what money can do to improve their lives;
- Make your kids responsible for achieving a goal with their own bank account or a savings kitty. This gives them a sense of ownership of their resources and teaches them the importance of saving and planning for what they want;
- Avoid the “open wallet” policy even if you can afford to give your kids what they want. Providing limits teaches them to be patient for what they want and to delay gratification;
- Give your children an allowance that is age appropriate and aligned to chores. You can even give a raise every quarter or year as they take on more responsibility. This teaches them the value of working for money; and
- Use praise and tough love to encourage your kids to make wiser financial decisions with their money. If they save more than they have set out to in a particular month give them an incentive like contributing an additional 10% of the overall amount to the savings. But if they squander their kitty on things like sweets and chips, use tough love to not buy them that expensive toy or clothes or cellphone they’ve wanted for the last three months.
Above all else PSG Wealth says you need to live by example as children learn and follow what you do and not what you say.
Yvette Seepe, an articled planner at Chartered Wealth Solutions, says it takes discipline to keep the end goal in mind to preserve the wealth. However, it’s not about being so frugal with yourself or family that you do not enjoy the fruits of your hard labour.
“You need a balance between future growth aspirations and using your finances to make your life more fulfilling now,” Seepe says.