April 5, 2019

Does my child need this? Helping parents with the difficult challenges that arise when it comes to kids and spending

The recent college admission scandal has brought to light a subject many financial planners are all too familiar with: parents will sometimes go to ridiculous lengths to support their children. While the headlines may be dominated by the Hollywood names involved in college admission schemes, parents taking unreasonable financial risks for their children is an issue lurking just beneath the surface in many families.

The question, “which of these items (at various price points) should I spend money on for my child?” hit me the first time we purchased a car seat. My wife and I stood in the aisle at Babies R Us and pored over the different safety features available to protect our soon-to-be-arriving son, making a series of decisions and concessions based on price, weight, ease of use, etc. There were a wide variety of spending options available, all of which played on our needs, fears, and credit card limits — a pattern that has repeated itself as we have purchased bicycles for our children, enrolled them in schools, planned excursions, joined sports teams, etc.

There is no shortage of things for parents to spend money on for their children. Unfortunately, parenting does not always leave a lot of time for researching, budgeting, and engaging in long-term financial planning. As a result, in our role as financial planners, we see lots of parents making spending decisions for the betterment of their children that act as a detriment to their own financial wellbeing. (In a sense, my wife and I can be included in this category, as our children’s educational costs have had a negative impact on our ability to save for retirement. Fortunately, we made this decision with our eyes wide open to the economic impact — we’ll both be working a few extra years, so thankfully we love our jobs and our kids.) Understanding the trade-offs involved in these decisions (and then owning the ultimate choices) is a critical piece of financial planning.

One of the largest expenses for which parents need to plan is, of course, college. Standard planning involves looking at current rates for tuition, room, and board, and then inflating these numbers to account for potential cost increases between now and when the child turns 18. This gives mom and dad a sense of the cost for junior’s freshman year of school. Multiplying by four years provides a savings target, and financial planners can help parents turn that lump sum into a monthly savings goal. Whatever is not saved often comes out of the parents’ assets while the child is in school and, in many cases, the parents are left paying off loans after the student has finished.

Parents who undertake this sort of arrangement, in which they pay the full costs of college, need to understand and be prepared for the trade-offs they are making. There is not much of a trade-off for families with sufficient assets to cover the costs without impacting living standards. For other families, however, the trade-off often involves some combination of mom and dad working longer and/or accepting a lower standard of living. This can be a difficult pill to swallow, and the resulting stress can lead to infighting, especially in families with multiple children who have achieved differing levels of academic success.

College planning is the largest — but not the only — area in which we see parents spending money on their children while weakening their own financial position. Children that “boomerang” back to the nest can be a drain on family finances, as can be: helping children with down payments for homes, investing in a child’s business, and supporting children as they battle personal problems.

All parents make sacrifices for their children for a variety of noble causes, and there are no easy answers when it comes to children and spending. We encourage parents to carefully review their own financial plans, so that they may make informed decisions about the commitments they are making for their children. The planning team at Arnerich Massena did not coin the phrase, “you can borrow money for your kids’ school, but you cannot borrow it for your retirement,” but we sure find ourselves saying it to a lot of people.