Photo: Nolan K.
As the new year comes upon us, we are making resolutions to save money for ourselves and our children. Saving money and spending less is the 3rd most common New Years Resolution.
When Andrew Hallam, in his book Millionaire Teacher, says that parents are often inspired to set aside money for their children’s future when investing for the future. Setting aside money is very different than encouraging a child to earn, save and invest. He further says that giving money promotes weakness and dependence. Teaching money lessons and promoting the struggle promotes strength, independence and pride.
Thomas J. Staney and William D. Danko, in their book The Millionaire Next Door, call giving your adult children money “Economic Outpatient Care”. They state that “many parents feel compelled, even obligated, to provide economic support for their adult children and their families.”
There are a few downfalls to giving your children money for the sake of spending.
1. It Builds Dependence
The families that give money, that is given to be used to be spent and not invested, develops financial dependence. The children who also develop this dependence have less net worth and their annual income is also less. “And, in general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.”
2. Spending Becomes an addiction.
Children who receive the money are looking for the next injection of money to maintain their lifestyle. It becomes a hamster wheel lifestyle because they continually require income to cover their needs. They are unable to buy their happiness and they are more motivated by showing off their new toys than becoming better or learn new skills to accumulate wealth.
3. They’re trapped by Mental Accounting
In behavior economics, people will create mental accounts for money. A study, stated in the book Why Smart People Make Big Money Mistakes, suggests that we will spend $50 we are given as a bonus more easily than $50 we have been told was owed to us in salary, but mistakenly withheld.
It’s the same money, same person giving them the money, but you are more like to spend one check than the other. This is the same thing that has happened to the children. If they are freely given money, they will spend it without any thought of saving.
I hope this inspires you to teach your children how to to save and invest in their future instead of having you support them financially.