Often, our clients tell us stories about how they used to get by on very small amounts of money when they were younger, and their struggles of getting ‘set up’ for life. We love hearing the stories of the run-down apartments, $2-meals and dodgy old cars. But we’ve noticed a pattern with some of these clients. They recognise and understand the value of ‘doing it tough’, but they find it really difficult to watch their children go through the same thing.
Sometimes there’ll be $20,000 less in their bank accounts at the end of the financial year and when we ask them what it was spent on, more often than not it was given to their children.
We’re not saying this is bad – we’re just saying that in some situations it may be more appropriate than others. We know how tough it can be – so we have dedicated two episodes to this topic. Today we’ll look at when to give money to your kids; and in Episode 97 we’ll look at how to give money to your kids. Notice that this episode is called ‘when to give money to your kids’, not ‘don’t give money to your kids.’
So, let’s start with the first point. From our perspective, we want our clients to think about their situation a little before giving their children money. We want them to ask: is this money going to benefit my kids in the future?
For example, giving money to your kids for educational purposes will help them in the long run. If they are at university and need a little assistance with living costs or tuition fees, you would be helping them in their long-term achievements.
If they are getting ‘beer money’ from you weekly, that is not helping them in the long-term.
Another factor to consider is whether giving them money will improve your relationship with them. Teaching your kids to stand on their own two feet is one of the best gifts you can give them, so a constant stream of incoming money might not be the best approach – nor bailing them out every time they have overspent.
Clients should also consider the difference between giving money to adult children versus younger children. For the most part, adult children should probably be able to manage their own finances. Of course, this varies on individual circumstances.
One positive thing people can do is give their kids an amount of money proportional to what they can earn. An example would be matching younger children’s earning dollar for dollar, or saying to your grown-up children “okay, if you can save $30,000 for a house deposit, we can help with the last $10,000 as a loan so you can put the deposit down faster.”
When giving money to adult children, one thing worth noting is the age of the parents. When clients come to us at 55 or 60, they usually have a lot more to save before they can retire with the amount of super they want to have. So that 20 or 30 grand they are siphoning to their kids each year is a huge chunk of money that could be earning them a whole lot of compound interest in their super.
We often recommend that clients sit down with their kids prior to giving them money and have a discussion around their own financial needs. When people explain to their kids that the $30,000 a year they are giving them could be the amount they need to retire with the super balance they’d like, usually the kids are decent enough to opt not to take the money or pay it back as soon as they can. When you've only got 10 years of working or 260 pay checks left, you should consider whether you can really afford to give your 27-year-old child this chunk of money.
However, we also know it’s tough to watch your kids suffer financially. And sometimes, there is external pressure from friends, grandparents and others. This pressure is even more reason not to cave, though. We know it’s not easy. But when Grandma says, “Poor little Johnny, he’s got no money, why aren’t you helping him out?” you have to look at the scenario objectively. If ‘little Johnny’ has a beard, chances are he should be sorting out his own finances.
Having said that, we’re all human. And when it comes to the guilt factor, don’t forget that just because you're not giving your kids money now or in the near future, doesn't mean you won't help them out again later in life. And at some stage, there’ll be an inheritance.
So, when ‘little Johnny’ asks you for a quick thousand bucks for a new phone, remember that one day he’ll be getting all your money in the form of inheritance. And that might make it just a little bit easier to say no.
Dallas Davison, Michael Hogue and Ali Hogue.