By Andy Schwartz, CFP®
Principal & Co-Founder of Bleakley Financial Group
“I can’t afford it.”
Whenever I hear a young person utter those words, it’s music to my ears. No, I’m not a middle-aged ogre delighting in the social setbacks of the young. By turning down a night out with their friends, these young people are making several important financial decisions: prioritizing their spending, making a sacrifice and standing up to peer pressure. These are all important skills they’ll need on the road to financial responsibility.
Many young people never learn these important skills because their parents never taught them. Somewhere along the way, it became unfashionable to have realistic financial conversations with our children. It never occurred to many people that they could simply tell their children “we can’t afford it.” Those simple words are the foundation to establishing strong financial habits.
If you want your kids to be fiscally responsible (for their sake as well as yours), start to rethink how you handle certain life milestones.
1. Leaving the college decision process to 17-year olds
For some reason, Americans have lost all sense of value when it comes to college selection. Most parents feel like they are obliged to send their children to the best – and often most expensive school they can get into. We are leaving large financial decisions that will impact the whole family up to our 17 year old children. We don’t let our children shop for our cars or our homes, but somehow we feel compelled to leave this one up to them. A $300,000 after-tax decision should not be left in the hands of a child.
Yet parents are loath to set realistic expectations. They don’t want to disappoint their children if they have their hearts set on a private school – no matter the cost. There is also social pressure on parents and students. Combine these dynamics with unlimited borrowing options and you have over one trillion dollars in outstanding student loan debt. A burden for parents and their children.
Another way forward:
If you have only saved $120,000 for college and the private school your child wants to attend is $280,000 over four years, then you have to start making some tough choices. You have to sit down with your soon-to-be collegian and explain the economics. Borrowing from your future retirement is a bad option for you and a poor lesson for them. There are good options within your budget and they may be able to improve the options by working summers and weekends and by borrowing a little money. Make sure they understand up front what carrying $100,000 of debt will look post-graduation.
We need to help our kids understand that their college experience will be what they make it and the actual geography won’t much matter. There are also studies that show little correlation between college selection choice and future salaries.
The most important thing is to set expectations early. If your child has realistic expectations at the beginning of the process, it will be easier for everyone to make the appropriate decisions when the time comes.
2. Throwing a storybook wedding
Marriage is one of the biggest adult milestones there is, and parents naturally want to send their children into wedded bliss with a grand affair—the dress, the ballroom, the flowers, the cake, the whole thing.
The average wedding now costs nearly $30,000 and rises each year. The price of some weddings can rival that of a home in some of America’s poshest neighborhoods. Even worse, nearly a third of brides and grooms go into debt to pay for a wedding. And not to be too cynical, but remember that 40% to 50% of marriages end in divorce. Given those odds, is a lavish wedding a prudent investment?
Like paying for college, it’s often parents who feed unrealistic expectations. They may be afraid to disappoint their children or they might fear the scorn of their own peers if a wedding isn’t up to snuff. Whichever it is, parents aren’t being honest about what they can afford, and they aren’t helping their children start their married lives off on solid financial footing.
Decide how much you want to pay for your child’s wedding. Then, write a check for just that amount. This way your children won’t nickel and dime you for extras when wedding creep sets in. If they want a more opulent spread, that’s up to them. Or they may decide that working within the budget is the better decision.
And if your children opt for a low-key backyard gathering, then there’s a nice chunk of change waiting for them for other pursuits like a down payment on a home or starting a business.
3. Keeping adult children on “the payroll”
A parent may have started paying for a child’s cell phone when they were in junior high, but now that they’re gainfully employed and living on their own, it’s time to cut the cord. A cell phone bill here, filling up the gas tank there, a little something toward rent and before you know it, you’re out thousands of dollars of month supporting your adult children. In fact, half of parents who financially support their adult children are putting their own retirement savings at risk.
It’s natural for parents to want to help their kids, especially when they’re just starting out. But is the act of generosity a thoughtful gesture or an expectation? Parents aren’t doing their adult children (or their future selves) any favors by always picking up the tab.
As they test their wings, adult children may very well fail. And many parents worry that their children won’t be able to dust themselves off and try again. They may rack up tens of thousands of dollars in credit card debt or ding their credit scores with poor financial decisions along the way.
And all of that is a possibility. But it’s better to learn these tough lessons out of the way when they’re young, not when they’re 60.
Do this instead:
As your children get ready to leave the nest, review basic budgeting with them (or if you don’t feel up to the task, schedule a session with your financial advisor to have this talk). This will teach them how to live within their means and save for the future.
Just because you’re cutting off the cash spigot, it doesn’t mean an end to your generosity. Give unexpected, thoughtful gifts, not monthly expenses.
The best gift you can give your children is your financial security. Neither you nor they want to be destitute in your old age. Lavishing them with expensive gifts and overpaying for big ticket items like college and weddings puts that in jeopardy—not to mention their own.
Teach them these lessons when they’re young, and they’ll stay with them long after you are no longer there to bail them out.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual