By Gabrielle Sills with Marlis Jansen
One of the concerns we hear from clients is that their kids won’t spend their money as responsibly as our clients would themselves.
This worrying about how people spend money is nothing new and has come up many times, in many ways.
Economist Milton Friedman, for example, famously said that there are four ways to spend money:
- “You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.”
- “Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.”
- “Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!”
- “Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.”
Friedman’s point is largely that people are more careful about spending their own money than other people’s, which is certainly right many times.
Business travel is a good example. When I was at a large corporation, I was definitely guilty of booking more convenient, but more expensive, flights for work trips.
And we’ve all seen how kids ask for multiple toys in a toy store, but then can suddenly become quite frugal when it’s their own allowance they’re spending.
Friedman’s point about government spending is also a common one we hear from clients: that they’d be happy to pay higher taxes but struggle with what they see as poor execution and lack of accountability within the government for spending that money.
But being that we’re in the business of families (and not politics), we’ll focus on the family implications in this article. Many families we work with worry that their children and inheritors will not spend the money they’re receiving with the same attention, care, or caution that they would exercise themselves. But, fret not, for in our experience, such disregard is not a foregone conclusion.
What Friedman got wrong
Let’s focus on Friedman’s third and fourth points. Friedman assumes an indomitable level of selfishness that determines we’ll always be less careful about spending other people’s money than our own. There are of course many examples of where this theory is spot-on: business expense accounts, government waste, and the caricature of a trust fund baby to name a few.
But there are many exceptions to this characterization, where people — inheritors — spend “somebody else’s money” with great care.
One of our favorite examples is one we wrote about, in which a family’s “Granddad” set up an educational trust several generations ago. To this day, the family members treat and honor the assets and Granddad’s memory with the utmost respect. One of the beneficiaries wrote:
“Another reason the trust has been effective is that family members don’t try to overuse it. Although you can legitimately apply to the trust for any education-related expense (professional development, supplemental courses etc.), most family members choose not to apply after the trust has paid for college. There is a sense of gratitude for what has been received and a desire to let the resources serve the next person.”
We have seen this many times, where beneficiaries of trusts treat the gifts they’ve been given seriously and with gratitude, even more so than money they’ve earned themselves. So how do they do it?
The spirit of the gift
When it comes to trusts and other financial gifts, creating circumstances that foster stewardship among beneficiaries is key to avoiding Friedman’s pessimistic scenario.
Jay Hughes would tell you that the answer is in the spirit of the gift.
In his book “The Cycle of the Gift,” Hughes explains that:
“The spirit of the gift encompasses the intention of the giver, the life of the gift itself, and the generative flow from givers to recipients by which recipients become new givers in turn… A gift without spirit is a transfer: the movement of a lifeless object from one person to another, a figure from my accounting column to yours.”
It is this distinction — between a gift and transfer — that so often determines how a recipient treats a monetary gift. By instilling a gift with spirit, recipients can honor that spirit; but by stripping a gift down to a transfer, it becomes likely that they won’t.
In the educational trust example we just shared, the beneficiaries’ Granddad had instilled his gift with spirit. The recipients understood that Granddad valued education and that he “was eager to provide young people in his family with the same.” They all knew that he was inspired by his aunt, a professor at Columbia University, who generously offered to pay for his MIT education and thereby changed the trajectory of his life. This combination of clear communication of his values and a clear intention for the gift yielded among these recipients a reverence for their Grandad and desire never to squander or misuse his gift.
Replicating this family’s dynamic is possible for any of us. In our own work with families, one of our main goals is to help each generation articulate their own values so that they can communicate them out to other family members and their communities. Doing so makes it easier to instill any gifts they choose to give with a spirit that can outlive the people who are giving it.
Ask yourself:
- If you are considering leaving money for your children as part of your estate plan, have you considered how you would communicate the spirit of that gift?
- If you have access to money that was earned by someone else, do you spend and manage it in a way that honors them?
- If you are a beneficiary of a trust, do you know how the grantor of that trust intended for it to be used?
As an Economics major and fan of Milton Friedman, I appreciate his views on rational decision making. But maybe he’s too much of a cynic. By taking certain steps when we share our gifts, we can expand the pie and let those gifts help our recipients, strengthen relationships, and live beyond the moment of transaction.
