Closing the bank of Mum and Dad

    In October 2016 The Australian published a column by social commentator and KPMG partner, Bernard Salt,  detailing the reason that he believes young people can’t get on to the property ladder – their weekly jaunt to the local hipster café for some smashed avo (avocado) on organic, five grain, sourdough toast.

    Apart from giving the world the eponymous hashtag #avogate, Salt’s article has opened up a whole new war between generations that shows no signs of abating.

    Australian Bureau of Statistic figures states that nearly one in three young adults in Australia who have moved out of home will return to live with mum and dad before turning 35 (possibly along with a partner and/or a couple of children). Many reading this article may see proof of this statistic in their own living room.

    In addition to the adult children living at home are those with a loan from the bank of mum and dad. According to finder.com.au, one of Australia’s largest comparison websites, one in six Australians get financial help from their parents to get a foot on the property ladder and a whopping 86% of parents provide financial help to their adult children.

    So where did it all go wrong? When did the narrative become a story of us versus them? And how much financial support should parents provide their children?

    The back story

    Baby Boomers (Boomers), born between 1946 and 1964, were typically raised by parents who had experienced the Great Depression. Therefore, Boomers learnt from the best-of-the-best at how to manage their money: save for a rainy day and live within your means.

    Compounding this schooling in sound financial management, it may also be argued that Boomers were blessed by a solid economic and fiscal environment. When this generation reached maturity they had access to jobs, traineeships and real estate opportunities not available to the generations to follow. They benefited from an active job market, relatively low real estate prices, and had the opportunity to build their wealth during Australia’s longest period of financial growth.

    The generations following the Boomers have experienced a financial upbringing vastly different to their parents. The generations coming to maturity now grew up during the rampant consumerism of the 1980s and 1990s in which elaborate holidays, brand name garments and the latest tech were considered a right, not a privilege. Indeed, the generations following the Boomers were taught that Sunday brunch at the local café is the norm, not the exception.

     

    So how should parents financially support their children/grandchildren?

    Under 10 years old

    Teaching younger children the value of money through real life situations and examples will help them understand how wealth is created and financial freedom earned.

    At this age, teaching children the value of saving money versus spending money is important. Pocket money may allow you to introduce the concepts of generosity, saving and ‘wants vs needs’. Some approaches include

    • The 50%, 40%, 10% rule – Save 50%, Spend 40% and donate 10% to your children’s favourite charity.
    • Three jars – For younger children, use three jars for saving, spending and donating and help your children decide how much money to put into each jar. This method helps you children understand the difference between saving and spending.
    • Investing – Consider investing a small amount of your child’s pocket money.
    • Unpaid Work – Encourage good citizenship at home and in the community. Doing and helping others is part of being a good person

    However, the lessons don’t stop there. Any childhood expert will tell you that in these formative years it is not what you tell your children, but what you show them. Earning an income is a great privilege, one that a number of Australians aren’t afforded due to circumstance. Teaching your children the value of earning an income and respecting the opportunity to do so will not only prevent them from taking it for granted, it will also help to build an honourable work ethic.

    10 – 18 years old

    The teenage years are often when piggy banks turn into bank accounts, and weekend jobs supplement or replace pocket money. With this new responsibility comes greater opportunities for children to take charge of their saving and spending habits.

    Work with your children to articulate their short-term and long-term goals and how much they’ll cost to achieve. Remember to make their goals SMART, that is:

    • Specific
    • Measurable
    • Attainable
    • Realistic
    • Time-Based

    The decade spanning your children’s late teens and early 20s is a time of establishing independence. Use this time to help your children set up savings plans and investments. By doing so early in their majority, you are giving them the opportunity to take advantage of their youth to accumulate and compound wealth. As Albert Einstein is often erroneously quoted as saying, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’  While the source may be inaccurate, the sentiment is certainly not.

    In their 20s

    While compound interest is the friend of the saver, so too is the enemy of those in debt. Help your children understand the dangers associated with debt, and if they should ever find themselves in debt, work with them to establish a plan that makes paying it off their top priority.

    While no parent wants to encourage their children into debt, the biggest purchase of many Australians’ lives – and the associated 30 years of debt – often takes place in early adulthood: buying their first property.

    Take a look at the pullout box for some common ways to help your children enter the property market. Each strategy has its own advantages and disadvantages which need to be evaluated carefully. Helping your children might seem like the right thing to do, but it is also important to encourage economic independence and responsibility. Your financial adviser may be a great resource to help you to explore the available options so that you find the solution that best suits your family’s circumstances.

    In their 30s and beyond

    Parenthood doesn’t stop when your kids enter their adult years. Many things may affect your children’s finances over the course of their lives: marriages may break down, jobs may be lost, and once again your children may look for your help.

    This has given rise to a demographic referred to as “the boomerang generation”, referring to their knack of returning to live with their parents again. Additional household inhabitants inevitably ensure that expenses like electricity, groceries, water and gas will go up.  Many parents in retirement follow a precise budget and these increases can be significant.

    The other key variable is the length of the stay.  What may seem only a modest impost after three months will likely have a significant financial cost by the three-year mark.

    However, if you can have a frank and open conversation about money and have laid the ground work throughout their childhood, you and your children may be in a better position to face any of these challenges head on with a financial intelligence that will help them rebuild – while not eating into your retirement savings or damaging your relationship.

    Regardless of your child’s age, the greatest favour you can pay them when teaching them about money is to lead by example. Children emulate you, even at times when you aren’t paying attention. So, be conscious of how you’re spending your own money and educate them on how you make financial decisions.