As many of our clients approach or exceed their version of financial independence, it’s not unusual that they turn their attention to whether and how they can provide some financial assistance to their adult children. In Sydney, in particular, many believe that the only way their children will be able to enter the property market is with a substantial helping hand.
While the desire to help our children is understandable, we suggest that clients should tread carefully when providing financial assistance. If not, best intentions could unwittingly produce some unhealthy expectations and behaviours.
We ask parents to closely examine what they are trying to achieve by providing financial assistance to their adult children.
Some typical motivations include:
– A wish to give a child a better life/to make them happy – the result may be the reverse of the aim if it delays the child taking personal responsibility for their situation;
– Achieving financial equality between children – this may be an unrealistic objective and is likely to lead to resentment;
– Giving children the standard of living they (and the parents) have become accustomed to – again, this may not be achievable and can lead to very dependent adult children; and
– Producing “financially mature” children – this requires providing incentives for children to take responsibility and stand on their own two feet, as soon as possible.
The nature of the financial support is critical
So, we categorise potential assistance as positive or negative in terms of developing financially mature adult children. Examples of positive support include:
– Helping to educate parents’ children and grandchildren. This is an investment in “learning to fish”, increasing the chances of the beneficiary becoming financially independent. In order to reduce the danger of creating “perpetual students”, we suggest that any assistance for post-graduate or subsequent degree study should be on a matching basis and contingent on reaching agreed milestones (e.g. passing each semester or year);
– Taking advantage of available tax benefits/savings incentives. Examples include the now defunct home savings accounts, co-contributions to superannuation and ensuring maximum advantage is taken of tax deductible super contributions. Such assistance provides enhanced long term financial security to adult children without directly providing funds for short term lifestyle purposes;
– Matching savings for a home purchase deposit e.g. $1 for $1 up to a pre-determined limit. It encourages the child to demonstrate a commitment and ability to save to obtain the assistance; and
– Matching contributions, again up to a pre-determined limit, for a well-conceived business venture.
On the other hand, potentially negative assistance includes:
– Any handouts that allow a child to enjoy a lifestyle that can’t be sustained without ongoing parental support. This amounts to “economic outpatient care”[i]. The potential detriment to the child, in terms of low self esteem and financial immaturity, is widely recognised; and
In cases where parents feel compelled to assist, in other than the positive ways described above, there are often preferred approaches. For example, rather than providing “no strings attached” funds to assist with the purchase of a home when minimal deposit has been saved and loan servicing ability is unproven, a better alternative may be to give rental assistance until a reasonable deposit has been accumulated.
Financial assistance shouldn’t obscure reality
While none of us wish to see our children flounder financially, particularly when we have the wherewithal to support them, there is a high risk that our best intentions may do more harm than good. If we want financially mature adult children, they need to take responsibility for their current circumstances.
If they are not satisfied with those circumstances, the motivation for change and determination to act has to be self generated. Ill conceived financial assistance may result in our children not facing up to the realities of their situation and becoming both deluded and perpetually financially dependent.
We would like for our clients’ children, in their later lives, to be able to look back and acknowledge their parents’ support. But we also believe it’s more important that these children have the pleasure of knowing that it was primarily their own efforts that determined the success they made of adulthood.
[i] Term borrowed from “The Millionaire Next Door”, by Thomas Stanley and William Danko, particularly Chapter 5.
Wealth Foundations (ABN 95 965 896 114) is a corporate authorised representative of Wealth Leadership Services Pty Ltd (Corporate Authorised Representative No. 319641). Wealth Leadership Services Pty Limited (ABN 36 121 535 993) is a licensed Australian financial services firm (AFS Licence No. 317369).