In the world of personal finance, there are a few common refrains that have been repeated so often that they’re practically considered religion. How many times have you been told to make a budget, pay yourself first, search for ways to save money, or to buy a used car? How about avoiding expensive mutual funds, making sure you buy a reasonable house, or having an emergency fund?
I’m guessing everyone reading this has heard those things before. There’s a reason why they’re suggestions that dominate our space — they work.
Another common mantra is how foolish it is for parents to financially assist their adult children. This likely comes from the book The Millionaire Next Door, by Thomas Stanley and William Danko. According to the authors, most millionaires they interviewed shared a few different traits, including owning their own businesses, a tendency to embrace frugality, and careers in blue collar industries.
These millionaires also shared a couple of other important attributes. They were almost always self-made, and they almost never financially helped out their adult children. According to the millionaires of the book, creating a situation where adult children depend on their parents for cash is a pretty terrible idea. By giving adult children a source of steady unearned income, Stanley and Danko argued, these millionaires will all but ensure their wealth won’t last beyond the first generation.
The more I think about this, the more I’m convinced that Stanley and Danko are wrong. Here’s why.
Inheritance and sharing wealth
Hopefully, everyone reading this has the same attitude about potential inheritance as I do. It would be nice if my parents or grandparents would leave me a little something, but it makes absolutely no difference in my planning, savings rate, or any other financial decision I might make. I plan my life for a retirement without help.
But say we have a set of parents are in their 70s with $2 million in savings. They manage to earn 4% each year, giving them an income of $80,000. They’re frugal and live in a small house, with no interest in traveling or anything else remotely expensive. They couldn’t spend $80,000 per year if they tried.
Meanwhile, their son has lost his job. He’s done everything right, dipping into his emergency fund to cover expenses and has cut back on all sorts of stuff. He knows he’ll find another job again, since he was a good employee.
In that situation, why exactly is it a good idea for the parents to hold onto their cash? According to Stanley and Danko, a cash infusion by the parents in this situation would be the surest way for both parties to end up in the poorhouse.
But in reality, giving the son part of his inheritance right in the middle of his unemployment can turn a stressful situation into one where he can sleep well at night. It makes all sorts of sense to take money that will never get spent by the parents and give it to someone who could actually use it.
Paying for university is another great example. In today’s era of record-high tuition, crazy student loans, and advanced degrees becoming more of a necessity, it’s nuts for a parent to hoard cash while their offspring struggles under the load of tens of thousands in student debt.
I’m not saying parents should open their wallets for everything their children might possibly want. Perhaps there should be restrictions, like paying for tuition while the student takes care of the cost of room and board. Or maybe the parent only reserves financial aid for when the child has been laid off.
There are even ways for parents to help their children without just giving them the cash. They can hold the mortgage on a first house, giving a below market interest rate. They can invest the seed money into a small business, or even pay for grandkid luxuries parents might not be able to afford.
I’m convinced that many Canadians are over saving for retirement. It pales in comparison to our under saving for retirement problem, but there are still thousands of Canadians who feel like they won’t have a secure retirement unless they can be in the position to never touch the principal. By embracing that attitude, many Canadians are hoarding billions that could be put to better use today.
I think every parent wants to raise children that are financially independent of them. But the better way of doing that isn’t to withhold funds completely. Rather, parents should give strategically, with the expectation that financial assistance won’t be commonplace. It’s a good solution to a complex problem.