I was asked to do some radio interviews today. Some research funded by the Coventry Building Society showed how much money parents are actually likely to pay for children for things like a deposit on a house, university fees, weddings etc. – things that happen after the children have become adults. Interviewers wanted to know whether it was a surprise that the amounts were incredibly high, why the parents were (in the main) surprised and unprepared for how high the costs were, and what parents could do about it.
Here’s a summary of the main points.
- Most parents naturally want to look after their children. That doesn’t alter just because the children are “grown up”. Since the last World War, the UK has gone very much towards owning property not renting it (unlike most of the rest of Europe) and a far greater proportion of people go to university. So there tend to be greater financial demands on parents. At the same time less people leave school, get a job and start contributing to the household at 14 (they have to stay at school and there aren’t many jobs) and the parents don’t tend to work all their lives, retire at 65 and promptly die – so there is a lot longer to provide for both parents and children, and less money coming in.
- For the 20 years or so up to 2008, it was thought that house prices would always go up (although that was always a questionable attitude). It was also assumed that credit would always be easy. So it didn’t seem to matter that parent’s weren’t prepared, if the house you’d bought for £50,000 was now worth £400,000, there was no problem borrowing £50,000 to support the children, to get them through university, to give them a hand to get on the “property ladder” themselves.
- So that’s part of the reason for one surprise – it isn’t so easy to get the money at short notice. And we need more than we expected.
- Another suprise is in the reason that we need more than we expected. One psychological tendency of people is a difficulty with ‘deferring gratification’ – we tend to focus and spend money on what we want now, not think of future needs. It’s the same sort of thing as sitting on the sofa, eating chips or ice cream and watching TV, instead of having a salad and going for a brisk training run. We know that (with food) the ice cream is nice and the run unpleasant, and we know that (with money) an extra pair of shoes or a better phone is more fun than a savings account. Of course, in twenty years, we’ll be fat, unfit, have a heart condition and diabetes, and we won’t have any money (although we will have more shoes than Imelda Marcos and will have 27 phones). But that is 20 years away – and what we want, we want right now.
So what do we do about it?
- First of all, paraphrase JFK
- Ask not what I can do for money, ask what my money can do for me
In other words – stop keeping up with the Jones’s, forget about “must make money”, start thinking about your money as a tool and use it to get what you really want.
- Secondly, remember another effect, called the ‘money illusion’ in psychology, that we’re not good at allowing for inflation or compound interest. Small savings in early years end up being worth a lot more than big savings later on, but we don’t usually recognise it.
So even if you can only put away £5 a week or something, in 20 years that will be worth a lot more than saying – “it’s only £5, it isn’t much, I’ll leave it until I can save a decent amount”. If you leave it 10 years, then even if you save masses from then on, you’ll still have more at the 20 year point if you started saving earlier and didn’t increase the amount than if you left it later to start and saved a lot more each week or month.
- Thirdly, we tend to keep to our status quo (which is not to do with the band!). If we think ‘I’ll save next month’, our status quo is not being a saver, we never save. However, if we start saving now, next month our status quo is that we are a saver, so we continue saving and are much better prepared for any future commitments.
You will have habits like that. You will habitually put the same arm into a jacket when you put it on, you habitually put on your shoes in the same order each day. Humans are like that, it saves a lot of effort making decisions every day. And if your mind set is “I will save at the end of the month, if I have some money”, you won’t save, because you won’t have money left to save after you’ve spent, and you are not a saver. If you decide, “I’ll save now” you might end the month eating beans on toast because we can always spend what we’ve got left after saving, but you will save. And from then on, you are a saver, that is your habit, and that means you’ll put money away.
What you’ll use that money for is up to you – but if you think about your values, it will probably be on something important, like your children’s education, rather than something that is nice at the moment, like a bag of chips!