Saving & Investing Wisely – Part II:<br>Teaching Your Adult Children To Save

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
May 30, 2006

IN THIS ISSUE:

1. Savings Down, Debt Up

2. Some Common Obstacles To Saving

3. Should You “Bail Out” An Adult Child?

4. Suggested Ways To Teach Adult Children To Save

5. Your Example Might Be The Best Teacher

Introduction

This is the second in a series of articles designed to help you with teaching your children and/or grandchildren to save and invest wisely. Part I – May 16 in this series, which dealt with teaching younger children to save and invest wisely, was evidently quite popular as I received many responses from readers thanking me for discussing this subject.

This week, I will discuss how to help your ADULT children or grandchildren become better savers. You might not think it is necessary (or even your business) to teach your adult children to become better savers. Yet we face a savings CRISIS in America as I will point out below. And as I stressed in Part I of this series, I believe it is our OBLIGATION as parents to teach our kids to save and invest wisely.

You would think it would be easier to teach your adult children to save wisely, as opposed to a younger child, but in fact the opposite can actually be true. While you have a virtual monopoly of influence with your younger children, there’s a lot of competition for your adult children’s attention. Spouses, friends, co-workers, the media, etc., etc. all compete for your adult child’s attention and influence their views – and not always in positive ways, especially when it comes to saving and investing. Peer pressure is huge among young adults.

This pressure also occurs at a time when your adult children may be reluctant to seek your parental input in an effort to show that they have become “independent” and are able to manage their financial affairs on their own. Thus, influencing your adult children’s saving and investing may be far more challenging than dealing with younger children.

On the other hand, there are times when parents or grandparents inhibit or sabotage their adult children’s journey toward saving and investing wisely. As we will discuss as we go along, it is often a bad idea to bail your adult children out of bad situations. In many cases, the best help may actually mean NOT helping them financially. You’ll see what I mean later on.

You might think that an article on teaching your adult children to become better savers is unnecessary, since today’s young adults have available to them more financial information than ever before. The problem with all of this input is that it can lead to “information overload.” With so many conflicting opinions bouncing around about saving and investing, it’s hard to determine which are good information and which are hype. This is why it is a good idea to maintain a dialogue on saving and investing with your adult children.

And one last point before we jump in. The suggestions that follow will be useful not only to those who have adult children, but also for those who are adult children. There are some adult children who will read this and realize that their parents could benefit greatly from this series on saving and investing wisely. You are free to share this information as you see fit. So, let’s get started.

First, Some Depressing Statistics:

In my first article in this series, I discussed how to teach young children to save and invest. Unfortunately, recent savings statistics indicate that our current crop of young adults were not taught these lessons when they were young. Either that, or the advertising and credit card industries have been very successful in replacing the need to save with the need for material goods.

In my May 16 E-Letter, I noted that some parents may feel uncomfortable teaching their younger children to save, and this is even more the case when it comes to their adult children. Parents tend to assume their adult children are getting this information on saving and investing from other sources. Yet only seven states require high school students to take a course in basic finance in order to graduate. Another 15 states require a general economics course, but these rarely discuss personal budgeting, wise use of credit and the need to save money.

The result is, we have a savings CRISIS in this country. Let’s look at the numbers again from Part I in this series on saving and investing wisely:

“In the first half of 2005, the national savings rate fell to ZERO, down from a high of over 10% in the early 1980s. By the end of last year, the national saving rate had fallen into negative territory, -0.5% according to the Commerce Department. The Commerce Department calculates the savings rate by taking the difference between after-tax income and all expenditures.

Every three years, the Federal Reserve conducts an in-depth consumer survey called the Survey of Consumer Finances. These surveys glean lots of data on trends in consumer saving and spending. The latest report for 2004 found that only 40.8% of all households actually save on a regular basis, and in reality, that number may be high. In addition to the negative savings rate, the American Bankers Association reports that the average US household has over $8,000 in credit card debt. Credit card abuse by college students is epidemic.”

A recent A.G. Edwards press release provided some additional grim statistics highlighting the poor rate of savings in the US:

Americans are poor savers when compared to other countries. In fact, the US savings rate is the lowest in the industrialized world. According to the Organization of Economic Cooperation and Development, the 2005 US savings rate of negative 0.5% compares to 11.6% in France, 10.6% in Germany, 6.7% in Japan and 6.0% in the Netherlands.
According to a recent survey, only 66% of Americans have any kind of retirement savings, and nearly one-third of employees who are eligible for a 401(k) do not participate.
According to a study by the Pew Charitable Trusts, half of American households nearing retirement have $10,000 or less in an employer retirement plan or IRA.

This isn’t even the worst part. Not saving any money is bad enough, but today’s Americans are engaging in negative savings (i.e., “debt”). The subject of credit card and other personal debt is sufficient for an entire E-Letter (which I will likely do later in the year), so I’m going to keep the focus of this article on saving. However, a few debt statistics are worth mentioning:

Over the past decade, credit card debt among 18-24 year olds rose by 104% according to a report published by Demos, a nonprofit research organization. This age group spends an average of almost 30% of earnings on debt repayment.
According to the same study, credit card debt among 25-34 year olds increased by 55%, to an average of $4,088, with 24% of income dedicated to debt repayment.
Young Americans now have the second-highest rate of bankruptcy, just after those aged 35 to 44. In the 2/3 of young households that earn less than $50,000 per year, almost 20% are considered to be in “debt hardship,” where over 40% of income is required to service debt (including credit card debt, student loans and mortgages).
According to a 2003 Harris Interactive poll, 40% of Americans say they live beyond their means.

In my opinion, these statistics are even more grim because the young generation of today is not likely to enjoy Social Security’s “safety net” in the same form it is today. While I have written extensively on Social Security in the past, let’s suffice it to say that as the Baby Boomers hit the system, it will become more likely that Social Security will undergo major changes.

When my firm counsels young people about saving for retirement, we tell them to NOT factor in any Social Security benefit. That way, if Social Security provides reduced or needs-tested benefits in the future, they will have planned for that contingency. If not, then their Social Security benefit will be in addition to their nest egg. Either way, they are planning for a secure future.

Typical Obstacles To Saving

While the debt crisis applies to virtually all age ranges in the US, today’s adult children often have an extra hard time making ends meet, much less saving any money. One of the factors that contributes to their overextended situation is that many new college graduates start out “in the hole” because of large college loan debts. One source I reviewed said that soaring tuition prices combined with decreasing federal student aid means that college students are graduating with close to $20,000 in debt on average. Graduate students can average more than double this amount.

Housing costs are also a larger part of a young family’s budget than in times past. The increases in real estate values that have provided so much wealth for the Baby Boom generation to spend have also increased the cost of housing (rent and mortgage) for young families. Add to this the recent increase in gasoline costs, and you soon get to a point where young adults are swimming as hard as they can just to keep their heads above water. It’s like I heard one twenty-something say, “We would like to save for the future, but it takes all of our money just for food, clothing and shelter.”

Before making too much of these statistics, it is important to remember that “living on a shoestring” is often part of a young adult’s experience. Beginning a new job usually means starting out at the bottom where pay is low and hours are long. Young adults often have their own children at this point in their lives as well, and we all know how expensive they can be. So living on a budget and making ends meet is just a part of young adulthood.

Yet the most important thing for young adults to know is that it is critical to save as much as they can, as soon as they can. While they can’t always control factors such as pay, housing costs and college loan payments, there are some areas where they can take action to convert spending to savings. I have listed below a few areas where young adults sometimes get into money trouble that can be avoided:

Continuing Their Parents’ Lifestyle – Some young adults find it difficult to dial back to a lower standard of living on their own than the one they enjoyed while living with their parents. While the parents had to work all their lives to get a nice home, nice cars, satellite TV, money to travel, etc., some college grads want to continue this lifestyle on their entry-level pay. This sometimes leads to young adults moving back home after graduating from college. In other cases, however, it can lead to overspending using credit cards. I know this may be difficult for some young adults to take, but life does go on if you opt for a $1 cup of coffee at a convenience store rather than a $5 mocha latte at Starbucks.
Keeping Up With Friends – I recently read an article in Investment Advisor magazine entitled “Toxic Friends.” The article discussed saving and investing issues that sometimes arise when people fall under the influence of friends whose advice might not be all that good. One example was when young adults try to keep up with their more affluent friends.

It’s difficult for many young adults to resist peer pressure and adjust to the fact that they may not be on the same level as some of their old college friends or co-workers. While there are always young adults who have money from inheritances or other sources, I suspect that sometimes all of the friends are equally cash-strapped, but none will admit it. So, they continue to spend freely to show their friends how successful they are, all the while digging themselves deeper and deeper in the hole.
Impulse Buying – The constant barrage of credit card offers often leads to young adults having a number of cards with combined credit limits in the tens of thousands of dollars. This newfound buying power can result in items being purchased that are not essential. I’m sure I could draw some response by mentioning men in a Home Depot or women in a shoe store, but let’s suffice it to say that credit cards offer the ability to buy some things that would never even be considered necessary if payment had to be in cash.
Lack of Budgeting Skills – As I noted earlier on, many adult children have never had any kind of financial education. Even if economic and business courses were taken, these do not always provide practical advice at a personal level. While today’s younger generation will spend hours or even days researching which computer, TV or other gadget to buy, they often overlook the many sources of personal financial help.

Perhaps this hesitance to seek out financial information is because they think they should know this, so they don’t feel it’s necessary to review this elementary stuff. Or, maybe actually finding out how to budget may place restrictions on their purchases that they may not like. Whatever the case, many articles I have read indicate that many young people of today are not only ignorant of basic financial matters, but they have no interest in learning them.

The above discussion of challenges faced by young adults in relation to saving money is by no means exhaustive. However, it does address most of the basic issues that hamper young adults’ efforts to save money.

Should You Bail Your Adult Children Out?

Before going into the various ways to address the issue of savings with your adult children, I want to cover one of the biggest financial discussions that occurs between parents and adult children. I’m sure that many of my readers can identify with the telephone call from the adult child that starts out, “Mom and Dad, I need a really big favor…I’m in a financial jam and I need to borrow some money.”

Virtually every resource I reviewed in regard to parents bailing out adult children said the answer should be “NO,” and I’m sure many parents agree with this advice, at least on an intellectual level. The problem, as we all know, is that you cannot always separate the emotional issues from the financial ones when dealing with a child, no matter what their age. Yet in most cases, parents do not do their adult children any favors by bailing them out of a bad financial situation.

From a strictly intellectual standpoint, bailing out an adult child from a financial bind can be harmful to both the child and the parent. From the adult child’s standpoint, being bailed out can mean that he or she never learns from their mistakes. It doesn’t matter whether the child acts prudently or not, as there is always the parental safety net.

Gary Buffone, Ph.D., author of “Choking on the Silver Spoon: Keeping Your Kids Healthy, Wealthy and Wise in a Land of Plenty” notes that children who receive more money from parents typically accumulate less than those who receive fewer handouts. In other words, being bailed out too often can result in a child’s not becoming economically self-sufficient.

From a parent’s standpoint, some psychologists say that repeatedly bailing a child out continues a feeling of dependency, which can lead to resentment on the parts of the parents and child alike. Unfortunately, some parents see this as a method of controlling the adult child, making the handout contingent upon desired actions by the child. This can lead to resentment on the part of the adult child as well as a feeling of being manipulated.

Handouts to one adult child can also lead to resentment from other siblings who have not been helped along by the parent. Imagine the feelings of adult children who sacrificed to work themselves out of a bad financial situation when they see a sibling get bailed out by the parents. This doesn’t make for harmonious holiday dinners.

At the same time, there are some times when helping an adult child might be the best thing to do. Unfortunately, knowing where the line is between legitimate help and enabling dependent behavior can be difficult. Based on my experience and research, it appears that it can be OK to help out adult children if expenses arise from an unexpected emergency expense. An example of unexpected expenses might be emergency medical treatment, car repairs or other unforeseen expenses that might be beyond the reach of an adult child without having to go into debt.

Based on the level of maturity of the child, and a commitment to saving, it may also be appropriate to give adult children one-time help that can help put the child on a firmer financial footing, if you are in a position to do so. One-time help might include paying off college loans (if any), a down payment for a first home, or assistance in launching a business - but only if the child also puts up part of the money.

In my March 14 E-Letter about the “Pension Crisis,” I discussed that another way for a parent or grandparent to help an adult child start saving would be to enable them to participate in their employer’s 401(k) by covering some everyday expenses. Because of the power of compound interest over time, helping an adult child participate in a retirement plan at a maximum level could pay huge dividends down the road, especially if the employer provides matching contributions.

Just as there are times when financial help may be OK, there are other times that I think it is probably not appropriate for a parent to help a child. For example, I don’t think paying off credit card balances in order to save a credit rating is a good thing to do. It might be best for the adult child to suffer the consequences of an impaired credit rating for a while in order to better learn the value of having a clean credit record. I also don’t think it’s best to finance an adult child’s efforts to keep up with the Joneses. This not only sends the wrong message about financial stewardship, but also about the importance of material possessions.

We all know how tough it is to turn down a child when they are in need, and adult children are no different. The key is to know when you are actually doing more harm than good. If you can bail an adult child out of a bad situation and you are confident they will learn their lesson, then it may be appropriate to do so. However, if the exact same situation comes up again, then the only lesson the child learned is that you will bail him or her out every time they make unwise decisions.

In any event, if you decide to bail out your adult child, you should also have access to their financial information – and I mean complete information. A child who earnestly wants to improve their financial situation should not have any problem allowing you to see his or her checkbook and budget, but a child who is spending unwisely may not be comfortable under this scrutiny. This alone may prevent future requests for assistance for frivolous reasons.

How To Teach Adult Children To Save

If your adult child is not a good saver, all is not lost. The important thing to remember is that you have to approach adult children much differently than you would younger children. Adult children have tasted independence, may be highly educated and, let’s face it, sometimes think they are smarter than you are (but we know better, don’t we?).

Add to this the fact that they are likely married or have a serious relationship, are likely far more tech-savvy, and have a host of friends, co-workers, etc. who may actually provide disincentives to saving, and you come to realize that you likely have to compete for your adult child’s attention in regard to money matters.

That being said, let’s discuss some ways that you might approach your adult child regarding saving:

The first and most obvious thing to do is talk about it. It seems that financial topics are sometimes taboo among members of the same family. It is also important for this communication to be a conversation and not a lecture. We all know how kids turn off their listening devices when they hear a lecture, no matter what their age.
Communication about finances should also be a sharing of information, not a one-way street. However, parents are sometimes hesitant to disclose all of their financial information to their children. Just remember that it is usually easier to get someone to share their personal information if you share yours first. That doesn’t mean you have to show them your financial statement, just enough to get them to open up to you.
Don’t worry about not being qualified to talk about financial matters with your child. We’re talking about how to save money, and that’s about as basic as you can get. If you know how to save money yourself, you should be able to easily communicate that to your adult child.
Help adult children set savings goals and participate in monitoring their progress. Weight Watchers has been successful by providing positive reinforcement for desired behavior. The same idea will work with your adult child as they reach their savings goals.
Encourage investing as early as possible. Adult children may run off a list of reasons why they can’t start investing right now. However, the power of compound interest is strongest when savings and investing are started at an early age. For example, if a college graduate starts saving $100 per month at age 22, he will have accumulated over $232,000 by age 65 assuming 6% compounded annual earnings. If the same individual waits until age 32 to start saving $100 per month, the accumulated value at age 65 will be only about $120,500 assuming 6% annual compounded growth. (The 6% return is for illustration purposes only, is not guaranteed and does not represent any actual investment.)

Teaching By Example

Perhaps the best way to influence your adult child’s financial behavior is by providing a good example. This includes not only sharing methods and strategies for saving, but also includes discussing some of the obstacles to saving that I have noted above. Wisdom that comes with age knows the folly of living beyond ones means and keeping up with the Joneses. You may have lived through the same learning process, so share that with your adult child.

If you have been a diligent saver and have a secure retirement, share with your adult children how you arrived at this achievement. Don’t assume that they automatically know this because they grew up under your roof (I have first-hand experience with this). Help your adult child to lay out a plan so he or she can have the same peace of mind as they near retirement.

One of the best things about teaching through your own example is that it’s hard to argue with the results. You may recall that in Part I of this series, I referred to how my father provided an example for me to follow when it came to saving money. I am sure that his “leading by example” is a major reason why I have the personal commitment to saving that I do.

I am confident that the same can be true for your adult children. Seeing an example of the benefits of saving and investing, and talking about it openly and frequently, can go a long way toward helping your children become diligent savers and wise investors on their own.

Conclusions

As with younger children, I believe parents have an obligation to continue to influence their adult children to become serious savers and wise investors. As discussed in Part I of this series, it can be uncomfortable to discuss financial matters with your children, and especially your adult children. If you established this dialogue when your children were younger, there is no reason for it not to continue into their adult lives, even if they are married.

If you did not establish and maintain this dialogue when they were young, it is not too late to start. Obviously, it can be harder to establish this financial dialogue when your kids are adults and on their own, but it can be done and should be done.

Above all, you don’t want your adult children to make the same mistakes you did. You don’t want them misled by the financial media and perhaps their peers. If you want some additional information and resources to help your adult children understand the importance of saving, you may also want to give them a copy of my November 23, 2004 E-Letter where I discuss the basics of saving and financial planning.

And finally, if you do open up this dialogue, there is a good chance that you will also learn some helpful tips from your kids. It can work both ways!

Talking to your kids, adult or otherwise, is always a good thing.

Very best regards,

Gary D. Halbert

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