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When my son was born, my bank kindly reminded me that students would no longer get government scholarships to pay tuition, therefore I – as the parent – should prepare to have a nest egg for 40,000 to pay for his future education. This expectation from the bank surprised me somewhat, as I (in my opinion) had been financially self-supporting during my student years, but yeah having scholarships helped me a lot – so let’s talk about continued financial support for children.
“Money isn’t everything but it sure keeps you in touch with your children.”
— J. Paul Getty
Economic Outpatient Care
As a parent, you always want to take care of your children. Perhaps as a child you expected your parents to always take care of you. But how long should this continue for, and is it always a good thing or would financial ‘tough love’ to teach some independence maybe be better?
In “The Millionaire Next Door” authors Thomas J. Stanley and William D. Danko introduced us to the term Economic Outpatient Care, which is a term describing continuing financial aid from (grand)parents to their (grand(children (long) after they’ve become adults. This of course isn’t exclusive to the millionaires, and it can take different forms, such as:
- Periodic gifts such as tuition or maybe an allowance
- (Huge) one time financial gifts, such as a car of even a (mortgage-free) home.
- Free housing and/or food (in the extreme, economic INpatient care)
Now, let’s have a look at the good and bad sides of this economic outpatient care, considering only fully capable adults, as any kind of specials needs could cause an entirely different kind of balance to consider.
The Good
As I talked earlier about Tax free gifting, providing children with a (one-time) financial gift can help them to achieve big life goals, with the added benefit of reducing the tax-burden on your estate. In addition, there can be a huge benefit for children to receiving start-up capital to fund their business worry free, and perhaps become the first customer to show the companies viability. These situations stimulate (financial) life achievement and can inspire your children to reach higher goals than might be possible without your aid.
Similarly, providing for your children while they are pursuing a degree – either with tuition or other means – allows them to focus more on studying instead of their (often needed) part-time jobs. It has also been shown that recent graduates that don’t have to worry about worry tend to earn more over their life time as they can be picky where they start their career, an anchoring point for every next step, whereas those with an immediate need for cash tend to take whichever job they can find.
So there is without a doubt some good in financial aid to your children, even into adulthood. But the key take away here is that these are situations can accelerate their journey, financial and/or career wise, allow them grow as a person – and not unimportant, they are temporary or even one-time things!
The Bad
I think it is safe to say that children that grow up with parents that spend lavishly tend to get accustomed to that level of spending – combined with less incentive to perform – it is no wonder then that “The Millionaire Next Door” talks about wealth being gone in most families within two generations.
“The Millionaire Next Door” sums it up nicely by noting that the more money adult children receive, the fewer they accumulate, while those who are given less money accumulate more.
Contributing to this observation is that a reliable stream of parent money will prevent children to learn to overcome adversity. Struggle is a great source for growth, these children will never know a reason to struggle, and therefore will have less growth – and subsequently less opportunity to turn personal growth into financial gains.
Instead, they become hyper consumers, life above their means and to maintain this lifestyle they will be prone to debt. This lifestyle inflation, gets them in to financial obligations forcing them into a negative spiral of ‘Keeping up with the Joneses’ – a big house, with big mortgage – and tax bills, that needs a new big car every 3 years etc. etc.
The real problem comes when the money stops. What happens then? If there is no free meal any more, the big mortgage – and tax bills, and maybe a few loans and all the other bills will still keep coming – this won’t end well, but the struggle will finally come (with perhaps no time left to grow). In fact, the Dutch National Institute for Family Finance Information (NIBUD) states that adults that have not learned to manage money as a child are twice as likely to be behind on paying their bills and three times as likely to have trouble to pay bills.
If adults don’t learn that life is expensive and that they should deal with it themselves by sticking to a budget, buying a house within their means, and appreciating what they already have they might develop a victim mentality and never work to improve their life. They might feel entitled to their parents money, in fact “The Millionaire Next Door” highlighted that the latter is a reason why these kind of people feel wealthy – because they count their parents’ wealth as their own, even though they’ll not have any money left to invest for the future themselves.
In conclusion, for a child to have financial support without any boundaries or restrictions there will be no opportunity to grow up to be a financially responsible adult and can only suffer in the long run (unless perhaps the parents have more money than the children can spend).
The Ugly
But this is not the end of the bad news, no – not just the kids, also the parents can suffer if children keep being financially dependent on them. One aspect that is less visual in the Dutch society, certainly not unimportant, but extremely fragile in systems like that of the U.S. is the risk of destroying your own retirement. While student loans are available plenty, no one will loan you money to pay for retirement – so don’t sacrifice retirement contributions or taking money out of a retirement account, with a heavy penalty, in order to finance your children’s future. To use airplane safety instructions, put the oxygen mask on yourself, THEN you can help others.
Another risk for the parents is an increasing trend in the recent decades the so-called boomerang kids – where adult children move back into their parents’ home to receive economic inpatient care. A situation mainly caused by financial – and relationship troubles (which can often be traced back to financial troubles again). While this might be an ideal situation (temporarily) – it is important to realise the extra costs that this might bring. This includes, extra groceries, increased use of utilities – increase municipal taxes that are dependent on the size of the household and also the loss of government financial aid (Dutch ‘toeslagen’) if the child increases the household income beyond the eligibility threshold (if you were eligible before). Take these things into consideration and make appropriate financial agreements with your child.
Lastly, if you spoil your kids – you’ll be raising your grandchildren. If you want to spoil your grandchildren, you’d better raise your children. Raising adults that can barely take care of themselves will not be the ones suited to raise the next generation – eventually you cannot hide from your responsibility and you’ll have to choose which generation you will be wanting to raise. I guess it should be obvious that it is best to raise your kids and enjoy spoiling the grandchildren!
The Balance
Financial support to your (grand)children can be a great tool to set them up for a bright future – but the importance on putting boundaries cannot be stressed enough – limit the quantity and duration and clearly communicate the expectations that this support creates. It should be support to aid ongoing effort – not remove responsibilities from the child.
The main responsibility for the parent is to teach by example – children do what we do, not what we say. Therefore, it is important to live well below your means, and show that financial independence is more important than displaying high social status.
My Take
When thinking about this, I compare it with my good debt, bad debt comparison from my net worth post, feeling that the same comparison is true for financial aid to your children. Paying tuition is good support, allowing unchecked shopping trips is bad support (student loans vs. credit cards). “The Millionaire Next Door” also states that millionaires are willing to spend resources on education. – similarly gifts to start a business might also be beneficial – but make sure their kids have skin in the game, why would their kids work hard, if they have nothing to lose?
I think it is nice of my bank to warn me 17 to 18 years in advance to get the money ready for educational expenses – however as I have mentioned before, the Netherlands does have a wealth tax, meaning that, depending on how much money I keep aside for myself, I would also be paying taxes over this amount of money for years to come – 529 college savings account like in the U.S. don’t exist here! An example of the limitations of the Netherlands copying the ‘bad’ parts of the U.S. economy without counterbalancing them with the ‘good’ parts. This does mean I have to take a tax bill into consideration before accumulating this much cash on the side-line – waiting for my children to (perhaps) get a degree someday.
That being said, Dutch law mandates parents to support their children financially until they’ve reached 21, while being an adult starting 18. Making me obligated to maintain their lifestyle, including education, food, shelter if they need it. Which of course is not a harsh obligation to carry – but good to know!
In the meantime, I do strongly believe in the monkey see, monkey do behaviour and try to show the best example in the hopes that my offspring will be better than me in finance and beyond – and perhaps they won’t even think about needing my support.
It’s very informative and fun article to read! my take on, i should have lived with my parents after graduate while earning some cash so i would have enough money for early retirement. How can i calculate how much money i need for retirement so i can spoil my children and grandchildren now?
Hi Marjolein,
Thanks for your question! Check out my download section to find the Retirement Grid to find out how much you can spend to still be able to retire at your desired age. I hope this gives you the answer you’re looking for!
Find it here – http://financialphilosophies.com/retirement-grid