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.
