Where Parenting and Financial Planning can Collide
Estimated Time To Read: 2 minute(s) 34 seconds
More and more we’re hearing about parents who have placed themselves under considerable financial stress and even compromised their retirement prospects because they choose to continue to support their children well into their 20s – and even beyond.
This appears to be a world-wide trend that is on the increase, and there is little reason to doubt that this is reflected to some degree or another in our own country. Here’s some food for thought:
- A survey of financial planners by Independent On-Line (IOL) quoted one planner as saying “parents are becoming rescuers of their offspring” while another attributed the phenomenon to low entry-level salaries, tightening credit extension and high property prices, which make it difficult for adults in their late 20s and early 30s to set out on their own.
- Forbes magazine recently reported on a survey in the U.S that concluded that as many as 59% of parents provide financial support to their adult children.
- A similar trend has emerged in the UK. A study found that 41% of young adults aged between 18 and 25 are failing to sever the link to the parental purse strings. The survey revealed the ways parents contribute to their children’s finances include helping with bills and contributing to the cost of trips and holidays.
In our experience and observations, we’ve become in awe at how quickly financial dependency sets in. It can be as little as two months from the time the parent makes a first payment towards, say, a car, rent or medical aid. If for some reason the parent forgets to pay the next instalment, he or she can expect an urgent WhatsApp. The risk in helping a child is that they might automatically see this as a baseline in their income, and work from there.
What we as financial planners want to highlight is that dangers exist on both sides. Are the parents putting themselves in a potential financial predicament in the long-term by supporting their adult child, or are they doing the child a disservice and making him or her dependent on them? A number of factors seem to be in play:
- Parents have done well financially, measured by both income and wealth. (Property prices have risen sharply over the past 30 years, and stock markets have been strong).
- In many cases, there seems to be some form of subconscious guilt among parents who have worked extremely hard in their careers to achieve wealth.
- Parents have had much closer relations with their kids than any parents before them.
- Children from high income homes have been given most of the things that they ever asked for. Parents have not been able to hide behind the line they were given when growing up: sorry, we can’t afford it! Money doesn’t grow on trees!
- Millennials show off their success to their friends, not by assets, but by the experiences they have. Building up assets early is not important to them.
So how do we deal with gifting and loans?
- Make the gifts randomly in terms of amounts and timing. This will discourage feelings of entitlement or reliance.
- Don’t attach any strings to gifts. Give them freely and don’t use them as a tool for manipulation.
- If you want or need to lend money, do so with a properly drawn up contract.
- Encourage your adult child to only give or lend to their friends or family, if it is within their means.
These can be choppy waters to navigate and if this is something that you are currently experiencing know that you’re not alone and many families are in similar circumstances.
As your financial planner, it is important for us to be able to work together with you to assess and consider all the potential consequences that a situation, such as those we’ve outlined here, can have in terms of impacting your financial independence. We can then recommend the necessary steps to ensure the best possible outcome for your financial future.