The problem with the bank of mom and dad
An anonymous poster at AskMetafilter wonders should parents finance grad school?
Should parents help their children pay for grad school if they can afford it? My parents are divorced, but both are in households considered in the top 1% of the US in terms of income and net worth. After limited financial assistance from them during undergrad, I am getting no help at all for grad school. Am I out of line to expect that I should?
The discussion at AskMetafilter features some outstanding comments, most of which note that “no, you shouldn't expect your parents to help”. But what do the financial experts say?
In The Millionaire Next Door (my review), authors Thomas Stanley and William Danko devote two entire chapters — 69 pages! — to “economic outpatient care”, the substantial financial gifts some parents give their adult children (and grandchildren). Their research indicates that “the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more”.
The authors note that some forms of economic outpatient care, including subsidizing an education and funding business ventures, have a strong positive influence on the recipients. (They teach the children “how to fish”.) But most financial assistance simply creates a cycle of dependence:
What is the effect of cash gifts that are knowingly ear-marked for consumption and the propping up of a certain lifestyle? We find that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.
Stanley and Danko write about four specific ways in which cash gifts to adult children create problems:
- Giving encourages more consumption than saving and investing. Stanley and Danko warn about gifts of house down payments, in particular.
- Gift receivers in general never fully distinguish between their wealth and the wealth of their gift-giving parents. They believe they are entitled to the things their parents have, and feel resentment if the wealth is given to somebody else.
- Gift receivers are significantly more dependent on credit than are non-receivers. They use credit in order to sustain their lifestyle of consumption between gifts.
- Receivers of gifts invest much less money than do non-receivers. The authors claim that gift receivers are “hyperconsumers”, only thinking of now. They have come to expect that their financial needs will be met by their parents, so they don't plan for the future.
Obviously, not everyone who receives financial assistance from their parents will fall into this trap. But often accepting such gifts leads to trouble.
What's the Solution?
If your parents are wealthy, whatever your income (and whatever the level of assistance you receive), always live below your means. Don't use financial gifts to fund your lifestyle. If you have considered giving your children economic outpatient care, “teach them to fish” instead.
I've known people who received financial assistance from their parents or grandparents. Most of these people have struggled with money in some way. They spent too much. They didn't feel the need to take a job. They put off making financial decisions because there was no need to do so. Last fall, for example, an affluent friend received a $25,000 gift from his grandparents. Rather than invest the money, he bought himself a new car. (There was nothing wrong with his old car.)
I've never felt comfortable discussing these issues with friends, but I've watched with concern, hoping that they would change course, that they would recognize that their dependence on family money was leading to an unsustainable financial future.
My parents never gave my brothers and me any significant financial assistance, but they did something nearly as damaging. By encouraging the three of us to join the family business when we were young, they prevented us from taking responsibility for our careers. We didn't have to participate in the workaday world because our places were set aside for us. We didn't receive cash gifts, but the effects of nepotism were essentially the same. Only recently have the three of us begun to recover from our slow starts and to take responsibility for our careers.
I'm not saying that you shouldn't take money if a family member offers it to you. But if you do accept such gifts, be smart with the money. Don't use it to fund consumption. And, unlike the poster at AskMetafilter, never feel that you are obligated to your parents' money.