One word that we got to hear way too much of back in 2009 was “Bailout.” Banks, investment houses, auto manufacturers – it seemed like they were all either lining up for a bailout, or were having a bailout forced on them, by the U.S. government. Are you following that same bad example in your house? When your kids come to you with money problems, do you respond with a checkbook, or with a hug?
Being a parent is a tough job – we love our kids and want them to be happy. We hate to see them making mistakes, and suffering the consequences. However, we also have to live with our prime directive, which is to teach these kids everything they need to know in order to be successful adults, while they’re still in our care.
Having your adult children living in your basement with you is a sign that there’s been a failure in the system. There’s a lot of security in a bailout: “If you make a mistake, don’t worry, I’ll save you.” But there’s a hidden cost, too: “Now that I’ve come to your financial aid, I get to make the rules.” I guarantee that all parties would be happier if the kids had the financial means to live on their own. How did it ever come to this?
Here’s the answer: when your kids make financial mistakes, respond with love and empathy. If they ask for it, respond with advice. Don’t respond with a bailout.
There are natural consequences for our actions in life, and when these consequences are painful, we learn (deep down in our gut) not to make these mistakes again. If your kids always have a safety net under them, they’ll naturally feel no financial fear – just like the banking industry in 2008. This is the moral hazard of the bailout – it ironically rewards that same risky behavior in the future. Instead, you as a parent should be looking for opportunities to give your kids more financial freedom, knowing that they’re going to make mistakes, and they’re going to feel pain as a result. This is good, as it means that they’re learning. The trick is, you have to do this when they’re young, and those mistakes cost tens or hundreds of dollars, rather than bailing them out now and letting them make these same mistakes later at the cost of thousands or tens of thousands of dollars.
Have you ever stood back and let your kids make a financial mistake? I’d love to hear about what it was, and how everyone dealt with the consequences.