There was a special investigation in the New York Times a few weeks ago about how Donald Trump’s father engaged in suspect tax schemes to transfer his wealth to his children. In this report, it became clear that with Donald Trump, failure did had no cost to him, his wealthy father would always bail him out and cover his debts. This enabled Donald Trump to take enormous risks with his business ventures, some of which succeeded, a lot of which failed (he doesn’t talk about these ones).
As parents, we want to help out our kids as much as we can but there is a fine line between giving them a leg up in life and enabling them to live a lifestyle that they cannot afford. Or in Donald Trump’s case, make reckless business decisions knowing there would be no repercussions. With Generation X being the first generation to be less well off than the previous one, their Baby Boomer parents are giving more money to their adult children than ever before. But are you actually helping your children?
If your children grow up with everything they need, they get used to that kind of lifestyle. But what if they cannot afford this lifestyle as an adult? They moan to their parents about having no money and because you earn a good income and want to help your children, you give them money. You enable them to continue to live a lifestyle they cannot afford by funding it.
Take the story of Michael & Claire. They run a successful import/ export business and earn a high income. They have always given their kids Johnny and Marie whatever they wanted. Marie worked hard in school, went to college and became a doctor. She continues to work hard running her own GP practice and has built up her own personal wealth. Johnny never felt the need to work hard as he was given whatever he wanted. So he is now in a job that doesn’t pay very well and doesn’t offer much future prospects. As he is unable to maintain his lifestyle on his low wages, his income is supplemented by his parents; pocket money if you will.
Dr. Marie gets no money from her parents. Michael & Claire feel they don’t need to give her any money as she is wealthy herself. Johnny needs their help though as he’s not as fortunate as his sister. While their intentions are good, they are causing problems. They are enabling their son to continue to live a lifestyle that he cannot afford and put in little effort in having a good career. Meanwhile, Dr. Marie gets no money from her parents so she sees herself as being punished for working hard and becoming financially independent.
Enabling children can have an impact on generations. First of all, Michael & Claire are giving money to Johnny that they should be investing. So when they do want to stop working, they have not built up as much wealth as they want. If they have brought their children up with all they want, it is likely they live an expensive lifestyle, so they will require a substantial amount of money to continue to live this lifestyle. They are also acutely aware that they have to pay for their son’s lifestyle as well into retirement, so they need to fund for two households instead of one.
There’s the impact on Johnny. He’s spent his whole life with no pressure of having to work for anything or what it is like to go without now so he can have something in the future. He has never learnt how to stand on his own two feet and be independent of his parents.
Then there’s Johnny’s children. They too will grow up with a sense of entitlement and see their father not working hard for it and they will want that lifestyle. But as Johnny is not working hard like his parents, there is no high income or wealth to fund his children’s lifestyles are they get older. They are all reliant on their grandparents money and ability to earn.
There is no problem with helping out your children but you need to strike a balance. There is a big difference between helping them get a head start in life through a once off payment for something big (house deposit) deposit than effectively paying for their day to day living.
It is important to let your (adult) children find their own way in life. If they chose a career that won’t fund their lifestyle, let them make the decision themselves of either living a cheaper life or go find a job that will fund the lifestyle that they want. It is only by standing on their own two feet will they achieve independence. When they have made these decisions on their future life, then is a good time to step in and help out with them getting a deposit together.
If you have any questions, drop me an email at steven@bluewaterfp.ie