Making Do With Help From Mom And Dad

by Julie Rains on 28 February 2008 19 comments

Ever wonder how the person with about the same salary as you lives in a fully furnished apartment, enjoys Caribbean vacations, and is setting aside money for retirement while you share space with an ever-changing roster of roommates, are hoping for a weekend stay at the beach, and are still paying off student loans?

It may be that your coworker, friend, or acquaintance is deeply in debt but it may be just as likely that help from Mom and Dad has moved this person from just making it to living well with few money worries. By my calculations, contributions for college expenses, transportation, childcare, vacation rentals, and weekly dinners could add up to over $400,000 to an adult child’s net worth by the time he or she is 35 years old.

I have long considered the advantages of wealthy families but after reading Linsey’s post on growing up poor and receiving public assistance, I started thinking about the financial benefits of having middle-class parents.

College Expenses

In today’s numbers, my parents' funding of my public university education put me ahead of my indebted peers. For example, if I invested $7,732 per year rather than pay off $60,000 in student loans at 4.9% over 10 years and earned 10% per year, I could have a $218,000 nest egg by 35.

Cars

Many of my friends had cars before graduation day, wholly or partially funded by their parents. I borrowed my parent’s car to go to job interviews and rode my bike nearly everywhere else.

When I did receive an offer for a real job, it was dependent on my having reliable transportation to and from work in a small town with no public transportation (I checked “yes” for transportation on the application with plans to purchase a car). Getting a loan wasn’t quite the snap I expected. My employer, a regional bank who signed me on as a financial analyst, wouldn’t lend me the money to buy the car (the credit department operated separately from human resources).

I thought that my parents could help me with the down payment. But after paying for 3 college educations and funding 2 weddings within 10 years, my parents didn’t have extra cash by the time I, the youngest, finished college. I had saved $500, which helped. 

My parents did have a relationship with a bank, where I encountered a loan officer who empathized with my predicament. She made the loan with my dad as a co-signer. His credit and my savings gave me the start that I needed.

If my parents had given me a $20,000 car on or just before graduation (again in today’s dollars), I could have invested my car payment (annual cost of $4,735 based on 5.9% interest rate over 5 years with 10% investment return) and increased my net worth by over $82,000 at age 35.

Housing

With my new car, I was ready to start my new job. I didn’t have enough money for a security deposit on an apartment or rental house but that didn’t matter. My relocation package allowed 30 days in a hotel, so I saved my first couple of paychecks to fund my launch into the real world. Housing costs in this area were relatively low and I found a roommate at work so my upfront cash needs were minimal.

Contrast my situation with that of a co-worker’s. Her parents didn’t want her to waste dollars on rent so they gave her money for a down payment on a house. Though I can’t recall the details, she may have been able to rent space to a roommate, further elevating her financial status.

Still, her parent’s decision, though sensible, didn’t strike me as particularly wise. We lived in a small town with inexpensive, though limited, apartments and houses for rent. Real estate prices weren’t rising very fast – in fact, they were stagnating due to high interest rates.

I wish I could say that the gift had thwarted my co-worker’s self-reliance but I don’t think it did. Still, her homeownership made her separate from the rest of us. Did it rob her of the sense of satisfaction of succeeding on her own? Maybe, it did. But, more importantly, she may not have learned how to live with less comfort and more creativity.

Here are some things I remember from my close-to-the-financial-cliff days:

Fun

  • Near-weekly hiking trips in the Blue Ridge Mountains
  • Impromptu parties
  • 15 people in a beach house rented from a friend of a friend because we were too young (under 25) to rent from a property management company

Finance

  • Light bulbs going off in my and my friends' collective 20something brains that paying the minimum payment on credit cards would keep us indebted for years
  • Thrill of cable television at someone else’s house
  • Realization that savings was better than furniture
     

Wisdom and social interaction aside, my colleague's net worth may not have been boosted much by her parent’s generosity. Though $80,000 could have gotten her in a 3 bedroom-2 bath home in our town in the early 80s, interest rates were double-digit (10-13%) so that her monthly payments were likely over $500 and even with a roommate paying $100-200 per month, she could have paid less to live in an apartment (during this time, I paid $112.50-$150.00 for my share of an apartment in the boonies and then a rental house in town; note: small-town living is not exciting but can be very inexpensive). If my co-worker had pocketed and then invested the proceeds from the sale of her home in an amount equal to the down payment (after our employer had been sold to an out-of-town company), she’d be about $45,000 richer at age 35.

Gifts of Cash, Stock, and Furniture
Since then, my husband and I have received some gifts from our parents: a loan from his parents to help us through a cash flow crunch right before we bought our first house; college funds for my sons and some furniture from my parents after my mom received an inheritance; and two gifts of cash and stock from his parents. Combined, the gifts total about $18,000 over 20 years. And, if I needed more, I had quick access to support.

Financially Self-Made?
You may be thinking that, having paid your way through college, establishing your own credit (something I should have done in college), saving for your first house, and never taking a dollar from your parents that you are financially self-made. But there are other ways that Mom and Dad may have helped or are still helping.

Consider the value of services that they may provide (estimates):

Services

  • Childcare: $150/week for 52 weeks=$7,800 per year starting at age 28; by age 35, your net worth boost is over $47,000 per child. 
  • Sunday dinner: $25/week (considering family members and friends that you may bring along) for 52 weeks=$1,300 per year starting at age 21; by 35, you’re ahead by $45,000. 
  • Room and board: $900/month for 12 months each year should cover housing, utility, and some food costs; live at home for 5 years beginning at age 21 and you are $171,000 richer by 35. 
  • Vacation home rental: $2,000/year for 9 years beginning at age 24 lets you grow your nest egg by $39,000.

They may also offer you used, big-ticket items such as cars and furniture, or they might make payments on your behalf for your children’s preschool tuition, private school tuition, and college fund. Ranging from a few hundred dollars to several thousands of dollars, these gifts may allow you to reduce your spending and save for the future.

What should you do with this information? Here are some ideas:

  • Thank your parents.
  • Refuse gifts if you think that your parents may not be able to afford them without sacrificing their futures (you’ll have longer to earn and watch your investments grow).
  • Realize that the financial playing field isn’t level. 
  • Help someone else who is just getting started. For example, I served as a credit reference to the utility company for the first cousin of a friend who had since relocated, letting the cousin (who I talked to once on the phone) get wired with no cash outlay.

Some of you may have been completely on your own at 18 years or less but many of us have had help of some kind until 21 years or more. I don't have a trust fund but I see now that I started real life with an advantage. 

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rstlne's picture
rstlne

My parents paid for college. That's probably their greatest financial contribution because I graduated from college with no debt and was able to build wealth right from the beginning.

Guest's picture
Looby

My parents paid for uni (although it is considerably less expensive in the UK). They also paid for my flights home last year (I live in Canada) because they wanted to see me and I couldn't comfortably afford them at the time. I think partly because my older brother is still living at home, paying very little in rent, they feel they should continue to help me out. Also they make considerably more than I probably ever will based on my occupation
I appreciate knowing they are there if I need them, and always have, but I think for too long I used their generosity, so I'm saying no more often, although I think they'll at least contribute towards my next plane tickets home otherwise they might not see me this year at all.

Guest's picture
Ginny

However, I agree with Suze Orman: the best gift parents can give is for them to save enough money to fund their own retirement and old age before giving financial help or gifts to adult children.

Guest's picture
vh

What you describe comes under the heading of cultural capital. Your parents have social and intellectual advantages as well as buying power that they can and should pass along to their children.

Given the outrageous costs of housing, of automobile insurance (especially for young men), of basic education (a bachelor's degree today is comparable to my generation's high-school diploma), and the low pay most young people can expect to earn, there's really only one way we boomers can hope to see our kids stay in the middle class: that's to continue to help them well into adulthood. Tossing the kids into the icy water to sink or swim may (or may not) have worked for earlier generations, but just now it's not a wise policy.

Assuming your children are reasonably responsible (not doing dope, drinking, spending insanely, or otherwise diving off the deep end), this is not foolish altruism, controlling behavior, or "spoiling" them: it's just common sense.

Guest's picture
vh

What you describe comes under the heading of cultural capital. Your parents have social and intellectual advantages as well as buying power that they can and should pass along to their children.

Given the outrageous costs of housing, of automobile insurance (especially for young men), of basic education (a bachelor's degree today is comparable to my generation's high-school diploma), and the low pay most young people can expect to earn, there's really only one way we boomers can hope to see our kids stay in the middle class: that's to continue to help them well into adulthood. Tossing the kids into the icy water to sink or swim may (or may not) have worked for earlier generations, but just now it's not a wise policy.

Assuming your children are reasonably responsible (not doing dope, drinking, spending insanely, or otherwise diving off the deep end), this is not foolish altruism, controlling behavior, or "spoiling" them: it's just common sense.

Guest's picture
jw

Wow, there is so much in this post to consider. You certainly could have made this a series!

My parents helped pay a sliver of my total tuition, but the benefit of not having my college education funded is that I worked HARD in school. I went to a school in another state, and knew that if I didn't do well in school and stay above ground financially, I'd have to go back home, which I didn't want to do. I had a LOT of motivation. Close friends of mine who had their college tuition funded by their parents? I don't know that any of them invested the difference. I do know that one of them failed every class one semester and the parents still don't know. It seems like such a waste of the parents' money.

With so many siblings, when we attended weddings growing up, my father would ask us if we liked how nice the wedding was. We'd all nod our heads. Then he'd tell us that we'd probably have to pay for it ourselves. So us kids would be only too pleased to help clean up after the reception. We'd come home with cheesy wedding decorations with our hearts set on using them for our own wedding! My parents did help out a tiny bit with my wedding, but I didn't grow up expecting them to foot the bill, so it was a pleasant surprise.

I think the most important thing that my parents gave me that has lead to my financial success in life is education in personal finance. They taught me well about credit cards before I was old enough to apply. They taught me about building up a good credit report before I even started college. I knew the value of compounding over time. I knew that when I got out of school, I'd have to start saving for retirement.

I was fortunate enough to fall in love with a field that pays pretty well, so I am only too happy to see some siblings get more financial assistance than me. They're hard workers, too, but in fields that don't pay as well, and live in areas with a higher cost of living. I love your advice about helping someone else get started. I am trying to help a sibling who just left the military find a house, and am willing to be a co-signer to help secure a mortgage and get a decent rate.

I don't have any children, but I really wonder how I would approach helping them out financially. I am far better off than my parents were, but I have seen too many examples of children who got too much help from their parents and therefore still don't know how to manage basic finances in their 30's.

Myscha Theriault's picture

This is indeed a thorough and informative post, Julie. Love the financial comparatives.

Julie Rains's picture

I had considered the idea that I had a better grasp of how things worked than some of my peers -- and got much better insight into my middle-class behavior when I lived alongside of those who held hourly positions at factories (my apartment). I seemed to know intuitively that a college degree was nearly essential but didn't guarantee anything; that 2 can live nearly as cheaply a 1; that waiting to buy something was better than buying on credit; that you can outspend any income; you gotta save. It is difficult to measure the contribution of cultural capital (basic knowledge of financial systems) on financial status; it is even trickier to separate the two: the contribution of cash/gifts and financial know-how. My main point is that middle-class children (me, for example) may underestimate the value of our parents' cash/gift contributions. 

As far as weddings, my sisters and I all had non-country club receptions: one at a relative's house; the other two at the church. One was catered; the others my parents catered themselves.   

I will mention though that when I graduated (during a recession) that employers valued experience over talent and knowledge; so new grads nearly always made significantly less than their parents. In my part of the world, the opposite seems true: knowledge of recent grads is valued over experience and new grads often make more than their parents (I have heard this multiple times; also know a woman who mentored a college student, whose starting salary was well over her own pay after years of successful experience in the workforce). But add in high cost of housing and student loan debt, and we may be even -- sure that's open for debate though.  

Before anyone co-signs, I'll mention that the cap on my obligation for the utility bill was $100 and if the cousin didn't pay, I was sure my friend would have paid me back. So, be generous but don't go crazy with the co-sign thing.  

 

Guest's picture
G

We live pretty well, but save a ton, and always have. We have friends who live way better than we do but get tons of money from the parents to support the lifestyle (The kids are now in their 40's!). This money seems to be the parents retirement money, and it is going to total luxuries!! (Like fancy remodels and landscaping.)

I just think its wrong. These parents send the wrong message and the kids better grow up, cause soon they may have to support the parents, and none of them will have any savings.

Just a rant. I do think if parents can afford college and perhaps a house down payment, that is okay, but only if the kids step up and do the work needed to get to that point.

G

Guest's picture
Jason

Unfortunately, I had quite the opposite experience. I was raised by a single mom with no help from my biological father. We struggled off and on for years, moving from apartment to rental house, back to apartment. My mom did the best she could, and now that I am a parent I'm not quite sure how she did it.

I took student loans for my first two years of college, and paid my way for the last three (it took me that long because I changed majors). Upon graduation I also started paying back my student loans. My mom still works, so we don't get much help on child care.

Even thought I didn't get much financial support from my mom, I got a ton of life experience on perserverance and work ethic - two things I've used to further my own career. So in many ways, I did benefit from the experience.

My wife had a similar upbringing, and we are determined to break the cycle to provide a slightly softer landing for our kids after graduation.

Guest's picture
Olivia

My parents didn't have much, and spent as they went, so to speak. (If there was more they spent it, less they didn't.) It was always a given that after high school we made our own way. I worked for two years before starting college and paid "rent" to my folks for some of that time before moving to school. The biggest lesson? Work hard. Another, save when you're earning (once getting into my field I didn't, and regret it now). Third, actively teach my kids so that they are prepared for the real world.

Guest's picture
Lucille

After my two older sisters had huge very expensive weddings, when I got married in my 30's my dad asked me point blank to do something low key. He admitted while he had the money at the time both weddings really drained their finances. This actually was a huge relief for both of us. I assumed they were going to expect a huge formal event per my sisters, something I had no desire to plan and endure. I was leaning more towards going to the courthouse and having a cocktail party. Huge formal weddings really are not a required thing these days since usually both people are a bit older and have their own lives in contrast to the 50's where few women worked.

As far as college I had to self fund but there were more than willing to give me a place to live and free food, even after they partially retired and had moved into a townhouse.

We can't afford to pay for our kids college. But what we found might work just as well, we are trying to plan our next move to coordinate with our oldest starting college. We can do a lateral transfer via work and move to a larger city, something we really wanted to do anyway. Tuition is a bit lower there to begin with and he can have a free place to stay, again lowering his costs.

Guest's picture
Jonathan

One major Millionaire Next Door lesson was that successful people do not subsidize their adult children in order to give the children a lifestyle that is beyond their economic means. My parents paid the lion's share of college for 3 out of their 4 kids, and that was only because one of us chose not to go. But that was it. No law school tuition, no car assistance, no regular supplements to our paychecks when we had crappy entry level jobs. I know only a handful of people in my Gen X age group who bought houses without substantial gifts from mom and dad. I will most likely have to ask for a loan, but it's only because I'm a few grand shy of covering 20% DP plus closing costs for a decent property and I will pay them back - I wouldn't even dream of asking if I had nothing in the bank and wanted to own a home.

Guest's picture
Guest

I posted on the public assistance blog about public health insurance and my worries about kids who are scarred by the experience. My folks were teenagers when my brother was born. Their parents paid for their undergraduate degrees, bought them cars, paid for childcare.... My parents still live with that safety net and still make foolish financial decisions.

OTOH, as I mentioned, I worked at age 10 to pay for school lunches. I moved out of the house at age 16. I "paid my own way." In fact, when I was 18 my parents couldn't make their car payments, so I took care of it for them. Even so, I've never thought for a second that I didn't have financial help, both tangible and intangible.

In addition to the crappy insurance I buy from the state at a higher rate than the private insurance I used to have, I have a zillion other sources of help.
* Grandparents almost completely clothe my children with overstocks and garage sale items.
* My boss's flextime allowance means I don't pay for childcare.
* Gifts of cash for holidays and special occasions. In fact, all gifts offer some sort of material comfort.
* National Guard status means I can shop tax-free on base and get discounted financial services through USAA.
* Don't publicly funded services count? Schools (my children's, my own, my state college), roads, civil servants, student loans/pell grants...
* My parents essentially threw me to the financial wolves at a young age and so I've been much more money savvy than they have been (though maybe not as savvy as I could have been with instruction).
* Death of parent resulted in modest inheritance.
* First time home owner loan gave me a lower interest rate than others qualified for.
* Learning from friends, trading services (like babysitting) with friends, generous pals have picked up the bill for us at dinner (which we've reciprocated), clothing/toy swaps... in fact, friends have helped me get through a recent health scare when my insurance crapped out (as did a family member who got a doctor to see me for free when my PCP wouldn't see me at all).

I don't believe anyone, not for a second, who thinks they didn't have help getting where they are. There are a thousand ways we get help every day from some source outside our own homes.

Guest's picture
johnk

This is a good post about why we need full public education funding through college. College is the main way that working-class and poor people can escape their economic class. (The other way is for one generation to enter into one of the well-paid trades, and then use that money to fund their children's education. This is a two-generation strategy.)

By making college free, class mobility would be improved, and society is helped. Funding it already seems to be normal behavior in middle-class families.

Julie Rains's picture

@guest "I don't believe anyone, not for a second, who thinks they didn't have help getting where they are. There are a thousand ways we get help every day from some source outside our own homes." Very true though some of the help you have received you have done something for...paid taxes and received services; serve with the National Guard, shop on base, etc.

@johnk: Even middle-class families are having trouble paying for their children's college now; tuition rates have risen dramatically since I was in school. Just as a side note: my dad attended college on the GI Bill and my mom benefited from the generosity of family friends who paid her college bills.

 

 

Guest's picture
Guest

I would like to add one idea on how you can thank your parents. Treat them to nice dinners. Treat your mom to a spa day. Treat them for a vacation getaway if you can afford it. Maybe it's cultural (I'm Chinese) but my siblings and I are now all working full-time and treat our parents often.

Guest's picture
Jaylin

Thanks for the post, it is very interesting to me because my parents have help me financially, and I try to make sense of my feelings about it. My parents always lived frugally and taught my sisters and I about the technical-number-crunching aspects of personal finance, but also about the cultural ideas of mindless consumerism, entrepreneurship, etc.

My parents agreed to pay for my college education, but on one condition. They would pay my tuition only after I graduated with a degree in hand. So, I took out student loans in my name, but on the day after graduation they paid off my student loans w/ no interest. This way, I couldn't screw around campus for 3 years on their dime and amount to nothing. I don't agree that you have to pay for school yourself to get good grades or actually appreciate the experience. For example, I graduated early as a double major even though my parents would have paid for more.

*Luckily my parents did approve of my majors, but if I wanted to major in Art or Sociology per se - they would NOT have paid for anything.

My parents recently gave me money for a down-payment on a condo. They wanted to help me get ahead and I wanted a safe/stable long term place to live instead of bouncing around and signing new leases every year. They wanted me to buy a place more than I wanted to because I knew of the day to day responsibilities of home-ownership. (They are well versed in investment properties. In college, they bought a 3 bedroom house and I was the landlord. It was a huge hassle.) Anyways, because I had lived in the same city for 2 years and found a promising career-related job and was approved for a mortgage, we moved forward. We looked at many properties, waited for the market to cool, and finally closed on a condo. I got a first hand review of the importance of credit, mortgage terms, and how to calculate property taxes, insurance, condo fees. I make the monthly payments now and everything seems to be working out. When/If I want to sell, they will get 40% of the final selling price because their down-payment was 40% of the buying price.

Guest's picture
partgypsy

This is a topic that is close to my heart. My parents were fair to me, in that they raised me and they paid for college (I also had a 1/4 scholarship). They gave me 500 dollars a semester in living expenses during the 4 years of college (i.e. books, housing food, etc). The rest I had to make up myself by work and not spending any money!
After college I wasn't given any additional financial assistance. There were definitely times such as during graduate school I felt twinges of low esteem at not being able to go out to dinner with other students, or them having new shoes or living in nice apartment complexes because their parents were helping out, but all those experiences are part of who I am, and I have the satisfaction I did it myself.
Ironically my parents helped out my other siblings (in particular my older brother) much more, he was the "progidal son". It caused alot of emotional strife in our family because even if you don't want to, subconsiciously it is hard not to equate money with love/attention/care. In the end I am the most financially well off of my siblings. All that help actually hindered their ability to become self-sufficient.
The rules I took from my own experience is: be fair with the way you treat all your children (don't disproportionately help one child much more than the rest) encourage my children to get scholarships/grants for college, and try my darndest to make up the difference (I've seen how hard it is for young people to make it starting out with huge college loans and it breaks my heart). After graduation make it clear I am not a bank but am there emotionally for them.
We'll see how it goes in 20 years!