Do you ever wonder how much you owe your kids?
While the answer always boils down to personal values, I think the question is worthwhile to bring up. I know I could use your input because I always learn so much from your comments.
I live in a pretty affluent area. When kids get into expensive colleges, their parents usually send them there with no questions asked. And after these kids graduate, many with over $100,000 in student loans, they move back to the house because they can’t or won’t find jobs. And it doesn’t stop there. There have been a number of cases where fiscally responsible parents loan money to their kids to start a business without looking at the business plan. Or the kids borrow money for some other reason and rarely pay the parents back.
In short, what I see in practice is a very simple system. If the parents have the money (or have access to borrowing money) and the kids want to spend it, the money gets spent. Done deal. Very little thought goes into questioning if the expenditure is worth it. At least that’s what I’ve seen.
And I understand the process. When my own little angel got into some very pricey universities a few years back, my wife and daughter considered it a forgone conclusion that we’d be sending our little pumpkin to one of them, even though this was in the later part of 2008 and the economic world was basically falling apart. We went around and around on this.
On the one hand, we had the money. My wife thought that if we could pay the tuition, our daughter should go. I had other ideas. I was willing to spend the money we’d saved for her education. But I wasn’t willing to spend what we’d saved for our retirement. Could we have diverted those yearly planned additions from our retirement accounts to our daughter’s education? Yes. Should we have? I thought the answer was no.
In the end, our golden-hearted girl went to a state college, and she’s delighted with the experience. The purpose of this post isn’t to convince you that fancy colleges aren’t worth the high price tags – I’ve already written about that.
If you have the money, should you spend it?
Like many people, some members of the family thought that since my daughter got into the snooty school, it was our obligation to send her. I thought we should weigh the cost/benefit of this decision versus the alternatives. They didn’t want to consider any alternatives really. And every time I suggested we look at these issues, I was made to feel like a super tightwad (which I am). And that is the problem that I want to discuss.
I don’t care what decision you come to as much as I care about you being able to discuss alternatives. When it comes to money, let’s get rid of the sacred cows. Everything has pros and cons.
Let’s get back to the central issue of how much we owe our kids. My example illustrates the importance of having an objective conversation about the pluses and minuses of any decision you make. But what do you do when you have to choose between loaning your daughter enough money to open her new business at the cost of jeopardizing your retirement?
When are you being prudent? When are you being selfish?
Let’s say you figure out how much money you need to retire and determine that you need to save $20,000 a year to reach your goals. In this example, let’s say you’ve already saved up $200,000 and after a brief calculation, you determine that another $20,000 every year on top of the existing savings should be enough to get you past the retirement finish line.
Now your son comes to you with the idea of becoming self-employed. He “only” needs $75,000 in order to start his great business idea.
Do you have the money? Absolutely. Can you afford to “loan” it to him? Not if you want to retire. Making that loan will set you back an additional five years.
Now, you can see that on paper it’s an easy decision to make. But try telling that to your son – especially if your husband is all in favor of making the loan. I knew a couple who did this and lost everything. They lent their son their entire retirement nest egg plus the inheritance they received. Of course the young man tried hard to launch the business successfully, but it was not to be. He failed and ended up not only losing the money his parents lent him, but also ending up in debt to the IRS and the Franchise Tax Board to the tune of over $100,000.
Unlike most posts, I can’t give you a blanket answer. I don’t even know how much I owe my own kids. I do know that before I write a check, I have to consider all the alternatives. And even though it’s not very “PC,” that’s what I do. Where do you stand on providing support for your children?