August 2010

Economic Outpatient Care

by mike on August 27, 2010

 

Follow my principles and you are likely to become a millionaire.  Most people look forward to blessing their children when they accumulate wealth.  What a great way to spend some of that money you have worked hard for, right?  It depends on what you define as being a blessing.  Training your child to grow up and be a productive, contributing member of society is the best way to bless them.  Does providing your child, especially your adult child, with financial help cause them to be productive?  The authors of “The Millionaire Next Door” take a look at the answer to that question.  They call it “economic outpatient care”: wealthy parents giving financial gifts to their adult children.  Let’s take a look at the effects of providing economic outpatient care.

            The first thing to keep in mind is that very few millionaires received any economic outpatient care (EOC) from their parents.  They were “self-made”.  They worked hard, spent little, and saved a lot.  In fact, the more dollars adult children receive from their parents, the less likely they are to accumulate wealth.  The opposite is also true.  The less money adult children receive from their wealthy parents, the more likely they are to accumulate wealth.  That seems to be a strange phenomenon, but let’s take a look at why that is.

            There are four reasons gift receivers are less likely to accumulate wealth than non-receivers.

1.)  Giving causes more consumption than saving and investing.  The perfect example of this is when affluent parents give their adult children money for a down payment on a home (which 59% of the affluent do).  It will often cause the children to purchase a home in a neighborhood that is way to affluent for their income.  In fact, 30% of households who live in houses valued at $300,000 or more have incomes of less than $60,000 annually.  How is that possible?  Economic outpatient care is how it is possible.  The problem is that it causes extra living expenses to try and keep up with the rest of the neighborhood.  They feel like they have to have better kept yards, nicer furniture, better vehicles, etc. 

2.)  Most gift receivers have a hard time distinguishing between their wealth and that of their parents.  They often view their parents wealth as extra income.  More than 46% of the affluent in America give at least $15,000 in EOC annually to their adult children or grandchildren.  The receivers often view this money as income to spend.  After all, it is much easier to spend other people’s money.  The sad part is they become dependent on that money to sustain their lifestyle and would be in deep trouble if the plug was pulled on the gifts.  One more interesting fact: 2 out of 3 people who receive large cash gifts say that they are completely self-made, that every dollar they have they have earned. 

3.)  Gift receivers are significantly more likely to live on credit and have a high amount of debt.  This is not a way to become a millionaire.  Paying interest is money you could use to invest instead.  The receivers of EOC often use credit as a way to finance their lifestyle in between cash gifts from their parents.  Again, they cannot afford the lifestyle on their own, so they have to go into debt to sustain it. 

4.)  Receivers of gifts invest much less money than non-receivers.  In fact, gift receivers invest 65% less than non-receivers.  It is due to their high consumption lifestyle. When their money is being spent on things, there is none left to invest.

You may be asking how a wealthy parent can be a blessing to their adult children.  First and foremost, teach them to be frugal.  If they become used to a high consumption lifestyle as a youngster, they are going to crave that same lifestyle when they are supposed to be starting out on their own.  Second, teach your children to be independent and responsible.  That means not stepping in and doing everything for them.  Let them live and learn.  If you want to help them financially, pay for their education.  You could also provide seed money to start or enhance a business.  Those two things can be launching pads for them to produce on their own. 

            The bottom line is that it takes courage to accumulate wealth.  It takes courage to start a business.  It takes courage to be in a position where you are paid directly based on your performance.  Starting a business or working in a performance-based job are great ways to accumulate wealth.  When a wealthy parent tries to insulate their children from any failure or pain, it squelches any courage they may have.  If you want to help your children and be a blessing in their life, coach them how to be successful and then let them do it on their own!

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