This question comes up when the authors of The Millionaire Next Door discuss the concept of “Economic Outpatient Care“. Simply put, Economic Outpatient Care, is the *help* parents tend to give, in the form of economic gifts, to their children - in the hopes that such gifts will help the children accumulate more wealth and make them financially independent.
The authors then report that small children who are helped by cash gifts from their parents early on, grow into adults who are financially less responsible than those who do not receive cash gifts. Moreover, when they grow up, these children (the ones who received cash gifts) usually display a lack of initiative, low productivity, high consumption, and typically tend to develop a dependency on the cash gifts from their parents.
When it comes to adult children (although you can extend it to children of any age), this is what The Millionaire Next Door says:
The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.
This is a statistically proven relationship. Yet many parents still think that their wealth can automatically transform their children into economically productive adults. They are wrong. Discipline and initiative can’t be purchased like automobiles or clothing off a rack.
It may seem counterintuitive at first, but it becomes clearer if you think in terms of motivation. Once you start getting money without doing anything, where would be the motivation to work hard for it? If your depleting savings are immediately replenished by a healthy donations, where would be the motivation for the development of frugality and sensible spending habits?
This reminds me of a dog story that happened a few years ago. A family we knew had this particularly vicious dog that had a habit of barking nonstop at people who knocked on their door. One day, when we visited them, the dog started barking like crazy - so, the dog’s owners asked me to feed some biscuits to the dog to make it stop barking!! To me that didn’t make any sense at all - it was like rewarding the dog for barking. Once the dog realizes that it gets a treat for bad behavior, where is the motivation to stop barking? Needless to say, the dog still barks at people who knock. 
Anyways, enough digression. The point is that undue financial gifts may reduce the motivation for your children to be economically productive. It makes them think that they are financially fit - which in turn makes them spend more. So, giving them more free money may in fact make your children poorer in the long run.
The book points out four specific characteristics of children who receive economic subsidies from their parents:
- Economic gifts lead to greater consumption and less savings.
- Children who receive gifts tend to view their parents’ wealth as their own.
- Usage of credit is greater among children who receive economic gifts.
- Those who receive financial gifts tend to invest much less than those who don’t .
Think about this the next time you pull out your wallet to bail your children out of financial difficulties. This doesn’t mean that you should never help your children at all - it means that you should make sure that you challenge/encourage your children enough to think/work towards finding their own solutions to their financial problems. Don’t let the smell of free money divert them into a complacent attitude towards managing their money wisely.
Towards ensuring that you raise your children into economically successful adults, here are ten things that the book recommends:
- Never tell children that their parents are wealthy.
- No matter how wealth you are, teach your children discipline and frugality.
- Assure that your children won’t realize you are affluent until after they have established a mature, disciplined, and adult lifestyle and profession.
- Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.
- Never give cash or other significant gifts to your adult children as a part of a negotiation strategy.
- Stay out of your adult children’s family matters.
- Don’t try to compete with your children.
- Always remember that your children are individuals.
- Emphasize your children’s achievements, no matter how small, their or your symbols of sucess
- Tell your children that their are a lot of things more valuable than money.
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I agree with a lot of your points, though I think the research is probably skewed and varies greatly depending on type of gift, age gifts are given, etc.
Say you inherit $2MM or that your parents buy you an expensive home/condo when you graduate from college. Sure those kids might be spending more than their peers because a) they dont’ have to struggle to save for a house or whatever it is they want, and b) they are probably getting paid a lot more than the average person. And sure, they might be SAVING less, but they might be getting much richer–since the appreciation on those assets is considered a gift.
Anyway, I totally agree you shouldn’t let your kids know how wealthy you are. My parents managed to do just that–I never even knew I had money set aside for college, and I spent my middle and high school years becomming obsessed with personal finance and the idea of compound interest.
By college, I found out I had an account set aside for me for college (which far exceeded the cost of colelge), but my values and habits were already ingrained. As a result, I’m using my “gifts” to purchase rental real estate, to max retirement accounts, and to own my own home, things I wouldn’t otherwise be able to do at my age. I think too it’s important to note that my parents would never give me ongoing income or any other gifts–that one account is it to manage how I please. If I spend it all, that’s it for me. That knowledge motivates me to grow the money rather than squander it.
But that was only possible because my parents grew up poor and maintained work ethic and frugality themselves even after they made/inherited lots of money. We also lived in a rural area where no one spent (or had) lots of money. But I think in general it’s near impossible for rich parents convince their kids they don’t have $$. Parents can’t shop a Neimen’s, watch sports games from the suite, vacation at the Four Seasons, and live in a $1MM house while sending the kids to a school that costs $15K a year while still maintaining their lack of means.
I think the best most wealthy parents can do is to deny their kids financial gifts of any kind (except perhaps undergrad college education) until a designated mature age such as 35.
Meg: You are correct - the research may be skewed quite a bit because, at some level, this book primarily deals with the relatively “financially affluent” folk. There are specific examples in the book about people gifting several thousands of dollars - per year - to their children for various reasons. Plus, like any survey, it has dependencies on various factors age/location/history etc. So various parts of the advice will appeal differently to different set of people.
Thanks for sharing your story - it’s an excellent example of how parents can successfully put this to work.
That’s the big one:
1. Never tell children that their parents are wealthy.
I can’t tell you how many times I’ve run across kids like that when I was growing up - they just get a chip on their shoulder… The parents aren’t doing ANYONE a favor then; but it is never going to stop… It takes all kinds…
Nice blog.
I have to say, the EOC part of MND really rang home with me, because I got a good amount of it until I finally decided it was time to be fully financially responsible. This was after I graduated from law school, and until then, it seemed kind of natural that my parents would help support me. It was kind of scary to cut off that source of support, even if I didn’t intend to use it.
I think that’s a key part of EOC. There’s nothing wrong with parents giving their kids money as long as there’s no expectation. My in-laws periodically hand us checks, but I’ve never included them in our income stream b/c I don’t want to assume that we will be getting money from them. If they want to give us something, great, and it goes into savings/investments. But they don’t owe us anything and we don’t expect anything from them.
We are very interested in hearing about your efforts to bring financial literacy to children, and help them be aware and secure their futures.
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Hmm… Motivation is key in life. I think economic gifts are fine as long as the lessons of hard earned money are taught. Giving economic gifts as reward is much different than just bailing kids out when they are in trouble. I think most parents don’t spend enough time educating their kids of the values that they possess.
Speaking from experience,I have to admit that I am a bit spoiled occasional gift from my parents, and I generally agree with this post.
Well, I’m not sure if I completely agree with #5. My parents gave me a $100 for each semester when I got straight As all through middle school and high school (although it didn’t happen often! :p).
But I guess the point I’m trying to make is that it might be good to offer a significant gift or amount of cash as a reward for doing good things. I think it gives them a good idea of what hard work exactly is.
I think this has less to do with parents giving children money vs. the parents being a good role model.
Money can be given as long as the child understand and actually sees his or her parents being frugal.
My parents really let me see how to deal with money when they sat me done one day and showed me EVERYTHING financial.
They told me how much they were making, how much they had saved, and their retirement plans and all that stuff.
And so from there I could see how money “worked”
While I agree with most of the points in the article, particularly the points about gifts to children (especially at the young adult age), I think Carl’s got a great point. My father attempted to emphasize the investment aspects of financial planning as well as being a good moral role model. It is difficult to tackle lessons of investment with children if parents don’t disclose significant aspects of their own finances. I showed an interest (more than the sibs) at a pretty early age, so my father freely discussed any aspect of his finances. For me, this was invaluable.
I’ve been the fortunate recipient of gifts from both parents and grandparents. I think this has worked out ok because they were always completely unexpected. Actually I think it’s the expectations that make the difference.
This is a very valid question many parents have to face. What should we do and where should we stop.
My wife and I have repeatedly drummed into our children that all we would give is a sound education up to a bachelor level. Then we are going to “jolly” and disco away our savings. I think this is treated as a joke now. But we are sure the message will sink in.
My wife and I also believe formal education is insufficient, so we shall also try to include some other “life skills” training that we can send them to.
Plus of course, our own family values.
Great post. I enjoyed it.
“Hmm… Motivation is key in life. I think economic gifts are fine as long as the lessons of hard earned money are taught. Giving economic gifts as reward is much different than just bailing kids out when they are in trouble. I think most parents don’t spend enough time educating their kids of the values that they possess.”
I completely agree. Also, kids are going to emulate their parents behavior. Education, and having your own finances in order are key.
I’ve read the Millionaire Next Door. I wasn’t particularly impressed.
Also, I don’t think the problem is giving kids money in and of itself.
My parents started a mutual fund for me when I was younger, but I was involved in the process. (My uncle was a broker.) I followed him for my “child to work” day and learned all sorts of things about finances and insurance.
I always recieved a cash gift from my grandmother on Halloween and my birthday. I also had my own savings account and when I was old enough (15) my own checking account. I learned to balance my checking account, appreciate interest, etc.
So, it’s not the money. It’s not the rich parents. It’s not being *taught* what to do with money when you get it that’s the problem and “spoils” the child.
Really good and really interesting post. I expect (and other readers maybe :)) new useful posts from you!
Good luck and successes in blogging!
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