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Teach Your Kids About Money!

Updated: Sep 16, 2021

Have you ever heard the term “economic outpatient care”? It’s a term coined in the book, “The Millionaire Next Door”,

and it refers to adult children, and possibly their children, who are still on their affluent parent’s or grandparent’s payroll. They have been lavished with cash outlays their whole lives without earning it themselves. They have come to expect the best of things at no cost to them, and become entitled to regular, supplemental, gifting and income. Their cash-gift-dependent behaviors continue in life as a result of this flawed reward system. They generally prefer not to work too terribly hard, and show neither motivation or ambition to get ahead. These “kids” may be younger or older adults, up to and into senior ages. They are usually not scared to ask for money for pretty much anything, though in many cases they are just supplied with it. At some point, you (the donor) have to ask yourself, am I really helping, or am I enabling bad behaviors and expectations, and do I want to continue to reinforce these?

Some examples of economic outpatient care include:

  1. Providing room and boarding rent-free,

  2. Continuing to fully pay for educations that never end,

  3. Giving interest-free loans, or loans without conditions,

  4. Loaning money where credit is (really) bad,

  5. Bailing them out of debt (often),

  6. Giving significant money gifts at regular intervals

These actions can cripple your own ability to accumulate wealth, erode your ability to retire on your schedule, or completely derail your plans during retirement. Even if none of this happens, and you can easily afford it, it can enable poor financial behaviors and dependencies, and cause dependents to lose a sense of value in money or family relationships. Plus you add the weight of these dependencies on your shoulders, meaning you may need to keep working to maintain this program.

By now you may have read part of the book in the link above, and maybe you’ve concluded that this is a rich person’s problem, not mine? But I’d argue it can subtely happen at any income level, and the problem is relative to other situations. It’s only the size of the rewards that changes, not the overall affect on behaviour. Whether you are giving in to your child’s every whim for a new toy when they cry, or gifting them the 10% for a house downpayment as soon as you are sold a hardship stories, it has the same detrimental effect on their adult behaviors and your pocketbook. They will likely come to expect it, or develop and hone those habits that get them what they want, like crying, complaining, or weaving a convincing tale of hardship. It’s hard to say no to family, but you need to learn when it’s the right thing to do. After all, if they had to find the cash themselves, or couldn’t get it through conventional means, you may find that they will decide by themselves they really didn’t need the money? They might adjust their money situations to save more or earn more so they can acquire it themselves? Changing these underlying behaviors to achieve a different, more desirable result is part of learning and growing.

My kids are all pretty thrifty. I know they get this trait from my wife, who is also very thrifty and doesn’t have a vain bone in her body. She frequently looks for bargains at garage sales and thrift stores, and buys quality things for $3 that were originally $100 retail. She doesn’t regularly use makeup, frequent beauty shops, or adorn herself in gold and diamonds. She doesn’t even own much jewlery. Neither of us do. Much of what she has she picked up as costume jewelery or occasional gifts. Much of what she owns has some sentimental value, attached to somewhere we lived, or is relatable to a life experience. She doesn’t buy herself a lot, and generally buys only things she needs with the very rare injection of shop-a-therapy. She is very conscious of her discretionary purchases and our budget. She’ll tell you tongue-in-cheek she acts this way because I’m too cheap (I prefer frugal), but my take is she was raised to be humble and learned at an early age to live within her means. We talk about money often, moreso in retirement, so we are on the same page with our spending and our values. At this stage of our lives, we’d much rather buy experiences, invest in our health, and strive for basic comfort, ... versus “stuff”. When we buy new things now, we will buy quality stuff and wear it out.

I’ve often reflected on some of our decisions with our kids based on the concept of “economic outpatient care”. We NEVER bought our kids cell phones or cell phone plans. This was totally on them if they wanted them. They baby-sat or worked part-time jobs to buy their own (affordable android) phones. And guess what? They also decided they could not afford monthly cell plans at the time and only bought cheap minutes and/or text plans! They protected those purchases many times by not answering their parents calls. Haha! They would, however, .. answer our texts. When the kids were young, we gave them modest allowances. Enough that if they saved half they could easily buy a new playstation, phone, bike, or otherwise. We went further and incentivized them to save, telling them whatever they had saved at the end of the year we would match. In the first year of this program one of the girls spent all their savings a month before the match date, to buy a new gaming console. Even though we reminded her this was a bad idea! It was a good lesson in how your wants can overcome sound financial logic.

We funded our children’s post-secondary educations, partly because we planned for this, and partly because we could. But we expected them to work summers and use their own savings to buy groceries, vehicle gas, and to fund their own entertainment during the school months. We paid their rent/utilites in the city but it was on a budget. We let them find it, and they would decide to share living quarters with friends or roommates to stay inside our budgets, or as a method to upscale their places. They decided to do this because the limits were clear. Two of the three got part time jobs after school to manage to the budgets and give them their “food and fun” money. We could afford to give our kids everything they wanted, but we never did. At what price would this really be done if you did? One of our girls got within a year of her degree but never finished. She decided it wasn’t for her after a negative practical experience. She moved in with her partner, they both went to work, and that was their choice. We were always very candid with our kids about the opportunities they had in life, and the potential consequences of giving up early or not following through. I’m sure they got tired of these discussions but we had them none-the-less. This included being very forthright about our retirement dates and when our support for these opportunties could end. So far we’ve stuck to our guns on providing ongoing educational support after retirement despite the odd tug at our hearts. It’s harder for me to resist, because my parents had big hearts this way, but not as hard for my wife. She was less fortunate growing up and always my anchor towards, “let them figure it out!”. One of them quit school, tried working and supporting herself for awhile, then decided to change vocations and just made it under the wire on our deadline for educational support. We funded her second effort at schooling too, which she completed and got her certification. I could never be overly critical of not finishing college, because I also quit after one year of University towards Engineering to go to work as a laborer. I later chose a trade path, slogged through 10 years of correspondence courses, and it all worked out for me?

Don’t get me wrong, we weren’t all hard-ass! Every now and then, usually during a visit to their school residences in the city, we would swoop in with a 2-week a supply of groceries from Costco, that they probably stretched out for a month. Or when they would come to visit us, I’d hide a couple $20 bills in the sun visor of their cars when they were leaving for gas money, unbeknownst to Mom. It was unexpected and random. In retrospect, one of the bigger gifts we gave them was a (used) car when they graduated, provided they had their driver’s licenses. One of them didn’t and despite our nagging her to get one, she didn’t. Again, that was her choice. She did get her learner’s though, and we offered to get her a motorized scooter instead so she could learn rules of the road. But it wasn’t cool enough at the time and she still said no. Years later she said she regretted it. My analogy on this was everyone needs or wants a new vehicle to be mobile and independent when they are starting out. This is also usually everyone’s first purchase in life. And to me, it is still the worst investment and start on your life savings you will ever have! Who wants to be in debt for multiple years for a new car? So what better graduation gift, a used car to quelch those early desires to be indebted for years when your earning power is at it’s lowest and/or you have zero savings. As l got older, I’d come to realize there are way too many uneconomical, underutilized vehicles in this world, way too many vehicles per household, and people have become lazier and make poorer choices in general because of them, but that’s a whole other topic!

I see economic outpatient care in practice, and the effects it can have on your adult children’s behaviors and relationships to their parents. These are parents who are very successful in their work and investments. Parents who would financially support their kids’ missteps in life. They would regularly bail them out of trouble, and turn the money taps on and off or up and down based on emotional baggage or the crisis of-the-day. Of course, the kids wanted life to continue being easy and consequence-free, didn’t try too hard to fix problems, and/or find work to get ahead themselves. It’s a tough cycle to break when you believe you are helping or responsible, though you are really enabling the behaviors you want to go away. The kids knew the help would always be there, especially if they made big mistakes or were struggling financially. Why would you ever try to avoid trouble or struggling financially in this scenario, when there are no personal consequences and the bail-out money was always available?

I built budgets in the past for our kids (and ourselves obviously) when they were going to school, and we reviewed them so they understand income versus expenses, fixed versus variable expenses, and the basics of tracking and forecasting. I have explained the effect of compounding savings with regular contributions and DRIPs in an investment account holding basic ETFs, and what those types of investments are and how they pay you. I’ve spreadsheeted the compounding effects to show them the growth over time. We’ve talked about the benefits of TFSAs and RRSPs and putting away 10% or more of your money into savings every year. I have tried to help them understand banks, credit, fees, and where the common money-traps are. I keep bringing it up now and again to use the “power of repeat” in hopes it will sink in better. Some day I’ll chat about my big, hairy, odascious spreadsheet that I have built myself to track and forecast all things financial, and why if you learn how to do anything with a computer, learn how to build spreadsheets! The power of data and information are huge, the evolution of my spreadsheet is really an evolution of my investment learning, and it has shaped my behaviours regarding present and future money strategies.

In the last few years, I helped all our daughters set up Questrade TFSA and RRSP accounts, within which they are currently tracking at around 20% return on their position costs. They are vested in 4 simple Vanguard index-tracker ETFs (VCN-Canada, VSP-USA, VEF-Global, and VRE - CAD REIT), with a no-brainer 25%-25%-25%-25% allocation, and an average MER (management expense ratio) of 0.09%. For comparison, the same type of fund sold to you in a financial institution may run you 0.5-1.5%, depending on your shopping prowess and/or financial leverage. That’s an annual $90 fee on every $100k of your money with the Questrade approach, versus an annual $500-$1000 per $100k with the actively-managed fund provided by a financial company or bank! Some of the specialty, actively managed funds can run up +2%. I should know ... they had me in these for 20+ years! PS these outfits tend to give you fee breaks the more you accumulate, because they still make more in fees due to economy of scale. For example, a $50k portfolio charging a 2% MER is same as a $100k porfolio charging 1% MER. The perception of lower fees isn’t always lower costs, the fee tiering can be confusing, and you tend to worry less about fees until you have a sizable portfolio. That’s the wrong time to think about it.

We have told our kids now we won’t be buying them “stuff” for their birthdays or Xmas any more, and that instead we will seed that money into their investment accounts, and in turn show and teach them how to make it grow over time so it’s available when, and if, they ever need it. They have since started streaming their own cash into these accounts when they can affford it. To me this is also a form of smart gifting and tax management, as they cannot use up their TFSA-RRSP allowances anyways. They have now surpassed the amount they’d need to buy a good, replacement, used car. They have also past the standard 3-6 months of income that everyone should have in an emergency fund.

I read somewhere, “one of the best gifts you can give your children, is to be financially secure in your retirement, so they don’t need to worry about you or support you”. Well, ... the reciprocal is also true. “Make sure your kids become financially independent of you!”

*** Teach your kids about $$$ ***

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