This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Monday, November 26, 2007

Millionaire Next Door Review Pt. 3: Economic Outpatient Care

Posted By Paul

This is my third and final posting in my review of The Millionaire Next Door. There is a lot of interesting information in this book, and so far of all the books I've read on finances, this book best captures my philosophy on how to handle money.

One chapter in this book that I thought was really interesting was about "Economic Outpatient Care" or EOC which just means giving money to your adult children (and grand children).

The book views EOC as both natural (isn't one goal of accumulating wealth to provide for your children so that they can have advantages that you didn't have?) and potentially dangerous.

Why dangerous? The authors describe that sometimes the most well intended gifts often hurt your child's ability to get their financial life together. That instead of giving your child an advantage you are essentially enabling them to start a pattern of living beyond their means.

For example, let's say you have enough wealth that you can afford to help your adult child buy a nicer house in a nicer neighborhood than they could normally afford. Good right? According to the book, maybe not.

The problem is that let's say by helping your adult child into a $500,000 house when they could normally afford a $250,000 house you are also prematurely forcing them into a $500,000 house lifestyle. That even beyond the mortgage and insurance and property taxes, that having a $500,000 house will probably have an impact on other aspects of their lifestyle.

For example, they may need to pay for landscaping fees to keep the yard looking nice because they don't want to have the only house in the neighborhood with a few weeds in the yard, or they may spend on a nice car because their old car looks out of place in their neighborhood.

The point is that often these well intended gifts set off cycles of consumption beyond their child's means.

Also, the book takes a strong stand against cash gifts to adult children. To quote the authors:

"We found that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent."

The authors view cash gifts as a form of financial enabling. A way of teaching your children to remain financially dependent on you and to never mature financially. Especially if the gifts are given regularly and frequently.

So do the authors think that you should never share your wealth with your children? Certainly not. They give several examples of how to share wealth with your children constructively. The most basic one being to help pay for your child's education. The authors consider this sort of gift to be money spent "teaching your kids to fish" and that this seldom has negative consequences.

They go into great detail describing other common repercussions of giving your children Economic Outpatient Care. As a person that plans to have wealth and plans to have children I found this section of the book to be great food for thought.

1 comment:

Leah in Oregon said...

Great post, Paul. I've personally witnessed this happening, and you're right...the adult kids do come to expect the "gifts" and adjust thier lifestyles accordingly. My dad is fairly affluent, and has offered me cash gifts several times, but I've asked him to stop, as I take pride in providing for myself.