Read This Before Giving Your Adult Children Money
Dear Rich Lifer,
Don’t give your adult kids money.
We’ll share a few exceptions to this rule, but first know that giving your adult children money will hurt them and possibly cripple your retirement goals.
A recent report from Merrill Lynch and Age Wave found that parents are spending a combined $500 billion on their grown kids (ages 18 to 35) — double what they’re putting towards their own retirement.
According to the study, 79 percent of parents are helping their adult children in some financial way — whether it’s for their weddings, their cell phone bills or groceries.
If that’s you, we’re sorry but you have to hear this…
While cutting the financial cord can be tough, especially when you’re watching your kids struggle with debt — as the majority of millennials do — you can’t put your own financial future at risk.
And that goes for parents that have the means to support their kids, too. Let me explain.
One of our favorite books on the topic is The Millionaire Next Door, authors Thomas Stanley and William Danko…
They dedicate two entire chapters — 69 pages — to what they call “economic outpatient care.”
Here’s how they define it:
Economic outpatient care (EOC) refers to the substantial economic gifts and “acts of kindness” some parents give their adult children and grandchildren.
The book’s authors find two main consequences of EOC:
Those parents who provide certain forms of EOC have significantly less wealth than those parents within the same age, income, and occupational cohorts whose adult children are economically independent.
And, in general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.
It’s counterintuitive to think that giving your kids money will actually set them back financially. But it’s the truth.
The book also states that more than 46 percent of the affluent in America give at least $15,000 worth of EOC annually to their adult children and/or grandchildren.
A few other memorable stats listed in the book are:
- 43% of the affluent fund tuition for grandchildren
- 32% of the affluent fund tuition for adult children’s graduate school
- 59% of the affluent provide financial assistance for their kids to purchase a home
- 61% of the affluent don’t make their children pay back loans
There are more, but we’ll leave it to you to read.
The point Stanley and Danko are making is gifting your kids money can be dangerous. They summarize why it’s a bad idea in four specific points:
- Giving encourages more consumption than saving and investing. Stanley and Danko warn about gifts of house down payments.
- Gift receivers in general never fully distinguish between their wealth and the wealth of their gift-giving parents. Children might feel 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. Keeping up with the Jones’ by using credit is a recipe for disaster.
- Receivers of gifts invest much less money than do non-receivers. The book talks about “hyperconsumers”, only thinking of now. Your kids have come to expect that their financial needs will be met by you, so they stop planning for the future.
We see this all the time and it’s hard to bite the tongue.
Retirees are jeopardizing their children’s financial futures, and oftentimes their own, by trying to help out.
Exceptions to the Rule
Like we said, my general rule of thumb is don’t give your adult kids money.
However there are circumstances where gifting money can have a positive influence.
As Stanley and Danko said, providing financial support to your children to help them get an education or fund a business venture, can often lead to excellent outcomes.
We’d also add that helping your kids out of serious, and we mean serious, binds is another exception.
If your son or daughter screwed up and didn’t file their taxes correctly and owes the IRS money, don’t let your child go to jail or dig themselves into an even deeper hole. Work out a loan that can get them out of this bind.
But if this sort of thing keeps happening, then you’ll need to reconsider your course of action.
There’s no handbook to raising kids and there’s a lot of things your parents probably never taught you about building wealth.
If you were never given a dime as a kid, then this might all seem pretty obvious to you but that attitude can change quickly once you have some money to spare and kids.
Remember that it’s okay to say “no” to your adult children, even if it means they’re going to have to struggle to make ends meet.
Just know that they’ll be better off in the long run if you let them figure things out on their own.
To a richer life,
The Rich Life Roadmap Team