One of the standard questions we financial planners ask when we first meet our clients is whether their children are independent or not. It’s a closed question – the answer is that they are either dependent or independent.
However, in reality, it’s not as simple as that. Children only gradually become financially independent and tend to move through several stages of dependence and independence. And some never become financially independent at all.
This change is related to the seven stages of financial independence, which we have considered before – Stages of Financial Independence.
In the initial phase, our children are completely financial dependent upon us, as they have no income, so parents must cover all of their costs. This phase does come to an end though, when they start to have an income, but are still living at home – at which point, they may be saving and/or contributing to the household budget.
The next phase is when they leave home, which is hopefully, followed, by them not requiring any parental subsidy. My recent experience is that parental assistance is needed, at least, in the early months of leaving home, particularly in the time until the first salary payment lands in the bank.
The next phase is when the child has built up an emergency fund and is no longer likely to need to be bailed out by parents if something goes wrong.
Some level of dependence continues beyond this, with many children being unable to purchase a home or get married, without parental assistance. This can continue for quite some time, so I’m told! Some level of dependence often continues beyond this –with grandparents often being called on for free childcare so that both members of a couple can continue to work. And, of course, grandparental contributions towards school fees and the cost of university are not uncommon.
It is true that some children remain financially dependent on their parents for most of their lives – after all, it’s not uncommon to hear of children relying on an inheritance to be able to afford their own retirement, or to pay off a mortgage.
Fortunately, the great majority of children move quickly towards financial independence and many are able to help their parents financially in later life. Much of the support we give our children, in later life, is because they are the people we most want to help out. Of course, spending money on our loved ones is probably the best way of saving inheritance tax!
The question we financial planners should be asking is “How dependent are your children on you financially?” I’m looking forward to hearing your answer!
Philip Wise | email@example.com
Managing Director and Chartered Financial Planner