retirement

Parents Who Pay for Everything Shortchange Their Kids

We've gone from being Helicopter Parents to Bulldozer Parents, who annihilate all obstacles in our kids' paths. And what do kids learn when we take care of everything in their financial lives? Certainly not independence.

The common measure of success for any parent is that their kids have things easier than they did. For the Greatest Generation, that might have meant owning a home in the suburbs, for the Boomers it meant that each of their kids would go to college, and for Generation X, perhaps it means that their kids will be able travel abroad or pursue a creative career. But as the trend has evolved, the pendulum may have swung a bit too far on the easement side of the responsibility-opportunity equation. And as parents work ever more assiduously to smooth out the road for their children, they may be removing important learning opportunities along with the speed bumps.

In many families, parents play a significant financial role in their children’s lives. This often continues as their children enter adulthood, and in some cases, extends quite a bit further than help with a house or a car. For college, many parents decide to pay outright for their children’s tuition, room and board. They may also pay for their books, phone and cable, and provide a monthly allowance too. These contributions are likely considered to be helpful, as they remove stress from their children’s lives, and ostensibly allow them more time to focus on their studies and philanthropic activities.

But the reality is that by directing these bills away from their children, they are removing the opportunity for them to learn about budgeting, comparative analysis and to build their own credit.

You can’t underestimate the value of research and budgeting

Let’s consider housing while the child is in school. By signing a lease for a child’s off-campus housing, the parent is taking away the chance to learn about the rental market — how prices change from one street to the next and from one building to the next. They would also miss an opportunity to manage a significant monthly expense and to build their credit by making their monthly rent payments. Other potential learning opportunities they would miss out on are negotiating the lease or, at the very least, understanding and meeting the terms — such as first and last month’s rent, the deposit and requirements like rental, utilities and employment history.

All these elements are lost if the parent coordinates and secures housing for their child directly.

And there are other ways to secure appropriate housing without removing all the responsibilities. One option would be to task the child with researching their housing options over the summer and putting together a comparative analysis of what their top three options would cost and how their location, amenities and safety features stack up. Another option would be to provide the student with a monthly allowance but establish their phone and cable bill in their name, so they could learn to budget and manage their outflows while building their credit during their time in school.

Another common mistake parents make is how they help their child acquire a car. It may seem like a wonderful gesture to give your child a car as a Sweet 16 present or for graduating high school, but by purchasing a vehicle outright or by keeping the title and monthly payments in their own name, the parents are really withholding a number of important financial lessons.

If a parent were to instead give their child a subscription to Consumer Reports and $20,000, the assistance would be immeasurably more valuable. With this approach, the child would be responsible for learning about the comparative value of the top choices in their price range, how they rank for fuel efficiency, resale value, maintenance costs and other real-world considerations. And better still would be having them visit a few dealerships to navigate the negotiation process and learn firsthand how the various option packages impact the price.

If a child had a set amount of money to spend, they would make a much more careful determination about whether they needed a touring edition or whether a second-tier model with all-wheel drive would suffice. Likewise, by giving the child the agency to select their own vehicle, and to do the necessary calculations to determine their down payment and monthly payments, the child will get unparalleled exposure to how financing and interest rates work, why credit is important and what a 60-month financial commitment actually feels like.

For older children, make financial education a priority

For some families, financial support for their children reaches well into adulthood. There are many family situations where adult children have their mortgage and car payment managed and paid for by a family office, financial adviser or a trust. Parents may provide their children with a monthly allowance as well — and with the significant bills paid through a trusted professional, the only budgeting the child is responsible for is managing discretionary expenses like dinners, travel and entertainment.

The downside of this type of support is that the child will miss out on the chance to build credit, learn how to budget or develop any real sense of financial responsibility.

A better plan to support your adult children is to provide them financial education about estate planning and tax planning and the impact significant purchases have on long-term goals. If a child does not understand these critical planning concepts, when their parents pass on, they will be completely unprepared to manage their inheritance, never mind preserving the family’s wealth for future generations.

While it might appear to be magnanimous, and even expedient to clear the way for your children to pursue their dreams with all the financial challenges removed from their path, if you don’t allow them to participate in their future in a meaningful way, you’ll really be setting them up for a mad scramble when the wealth is actually transferred. Fortunately, such chaos is preventable if you let them learn by experience and play an active role in paying for those essential components that will pave the way to for a smooth transition to independence.

About the Author

Matthew Helfrich, CFP

Partner and President, Waldron Private Wealth

Matt Helfrich is President of Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh, Pa. He leads Waldron's strategic vision, brand and value proposition and overall culture of the firm. Since 2002, Helfrich has served in a number of roles including: Chief Investment Strategist and Chief Investment Officer, where he was instrumental in creating and refining Waldron's investment discipline.

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