They can be the best of times; they can be the worst of times. They are the transitions experienced by parents and young adults in the process of moving from financial dependence to financial autonomy. Life planning facilitates these transitions and the reorganization of relationships they frequently require.
As William Bridges, author of The Way of Transition: Embracing Life’s Most Difficult Moments, points out, it is important not to confuse change with transition. Change is a shift in your situation: you move to a new home, get a promotion, buy a new car. A transition, on the other hand, is the process of letting go of the way things have been and taking hold of the new way they are becoming. In between letting go of the old and taking hold of the new, there is a chaotic interim zone where things are not the way they used to be but also not yet the way they are going to be.
This column examines the role of the financial adviser in this chaotic interim zone. The three most common scenarios the planner is likely to encounter are: (1) both the parents and the young adult share the goal of financial autonomy, (2) the parents’ goal is to help the young adult achieve financial autonomy, but the young adult prefers to maintain the status quo, and (3) the young adult’s goal is to achieve financial autonomy, but the parents prefer to maintain the status quo, which keeps the young adult financially dependent.
The young adult’s transition from financial dependence to financial autonomy is one of life’s most important transitions and greatest challenges. It is a key developmental transition, because without financial autonomy it is difficult or impossible to accomplish other goals. Jeffrey Arnett, a developmental psychologist who coined the term “emerging adulthood,” reports that studies of young people ages 18 to 29 in a variety of regions of the United States among a variety of ethnic groups, consistently identify adulthood with three criteria: (1) accept responsibility for yourself, (2) make independent decisions, and (3) become financially independent. Without financial autonomy, independent decisions and acceptance of responsibility are difficult. Failure to achieve financial autonomy results in a lack of confidence in one’s abilities to respond to life’s challenges.
Back to Basics
When the parent and young adult share the goal of financial autonomy, the financial adviser is confronted with the difficult situation of facing the least and the most challenging of tasks. Although parents and child seek the same goal, the adviser’s career path has involved years of mastery of more and more complex financial information and techniques, and the task now involves getting back to basics. The adviser may be comfortable employing statistical-based behavioral approaches, such as Monte Carlo simulations, in financial modeling, but what about a basic discussion with a 25-year-old about creating and living within a budget, or what a FICO score represents?
The first step is to assess the financial knowledge of the young adult. In some families, allowances, budgets, and part-time jobs have provided needful lessons about money. In other situations, the parents (or the family office) have provided all the funds and there has been little financial education.
One very successful situation that comes to mind involved a young engaged couple, Susan and Jerry, in their mid-20s. Jerry’s parents introduced them to a fee-based planner and agreed to pay her fees for one year. The planner’s first step was to have the couple maintain detailed records of literally every penny they spent for a month. She then showed them how to use Quicken to create a budget and placed them on a 100 percent cash economy. Paychecks were deposited to a single checking account and cash for the next week was withdrawn and placed in a check-sized expanding wallet with multiple partitions that were labeled “entertainment,” “market,” “gas,” “clothes,” etc. Cash was used because, in the words of the planner, “You can feel the money leaving your fingers,” which is not the case when a check is written or a credit/debit card is used.
Jerry and Susan maintained records of what they were spending and met weekly with the planner, gradually expanding the time between meetings to two weeks and then monthly. This program was followed for one year, at which time the couple again began using checks and credit/debit cards. Today, they have been happily married for seven years, do not fight over money, and within the first five years saved enough for the down payment on a home. In a recent conversation, Susan commented, “My husband and I share common goals and there is always a commitment to save.” She added, “I am the way I am (frugal) because it gets me somewhere.”
Aligning Parent-Child Ideals for Financial Independence
Parents and child are not always on the same page. In some situations, the parents understand the importance of financial autonomy but the young adult prefers the status quo, often because of the fear and anxiety encountered in the interim zone. Allowing the child to linger in this zone represents a dead end. In such a scenario, the adviser needs to help the parents take steps that move the young adult along economically and psychologically. The key is to wean the young adult from family support and limit rescuing.
In Silver Spoon Kids: How Successful Parents Raise Responsible Children, a book I co-wrote with my husband, we discuss the example of Christina and her 25-year-old daughter, Jessica, who Christina was supporting at a level of $6,000 a month so that she could attend graduate school full time and not have to work. Christina’s financial adviser suggested phasing out support payments over the next five years. Jessica was hysterical. How could they do this to her? How could she support herself? The financial adviser helped Jessica develop a budget, using the techniques discussed above. By the end of the five-year phase out, Jessica was delighted that Christina had forced her to learn to stand on her own two financial feet. Jessica had her graduate degree, a full-time job, and was entirely self-supporting.
The most difficult situation arises when the parent is satisfied with the status quo but the young adult is not. According to Deborah Nadel, a psychiatrist in Los Angeles, in this situation, the financial planner should encourage the adult child to take more responsibility for financial obligations while still maintaining a connection to the parents. The goal is to gradually shift the nature of the financial relationship while maintaining a family connection. When this shift occurs, contact between the adult child and the parents feels healthier and more the child’s choice. This may cause some initial strain, but if done in a kind and loving way, it is likely to lead to a healthier interaction and ultimately opens the possibility for enhanced personal growth.
In the words of 31-year-old Mary, who chose a career to obtain financial autonomy even though her parents were content with providing support, “When they were supporting me, I always cringed when I bought something expensive. What if they disapproved? When would it not be okay? It was an amazing feeling to be able to buy a new car and have no one else’s opinion count since it wasn’t their money.”
Vanessa, 24, works at an entry level position in a field she loves. She is supported by her parents, who are fine with maintaining the status quo. However, they view the fact that they support her (and the family office pays her bills) as giving them carte blanche to comment on various aspects of her personal life, usually followed by the comment, “Well, we support you financially.” As Myra Salzer, author of Living Richly, points out, family money often comes with family baggage attached.
As a first step on her road to financial autonomy, Vanessa has begun to work with a financial adviser to create a realistic budget, which she will present to her parents. If approved, the money will be deposited to her account monthly and the family office will no longer pay her bills. In addition, the budget will include a gradual phase out of financial support, at the end of which Vanessa will be expected to be self-supporting.
Ultimately, the two transitions—young adult financial autonomy and parental oversight of the process—can prove to be the best of times. With awareness of precisely how these transitions occur, and sound management from a financial adviser, the best is yet to come.