Sunday, March 1, 2009

I Got It From My Mama: Family and Money

My dad came to visit this weekend and we ended up talking money. Unsurprisingly, my low-key lifestyle is mirrored in my parents. Unlike some of their friends, they own their home outright and have no debt. Although their retirement portfolios have taken a 30% hit, it's nowhere near the losses suffered by friends of 50-60%. My parents own and operate a couple of small businesses they built themselves over the last fifteen years and at this point they're one of the few in the industry remaining very busy. Their fixed expenses are about $500 per month (utilities, cable, taxes, et al.)

Knowing my parents are secure takes pressure off. Although my education was self-funded, I would rather control that on my own than worry about providing for my parents in old age. It could still happen, but overall they're making what I consider smart choices. I also really appreciate how candid they're able to be about what's going on. I never specify the amounts of my student debt, mostly to keep them from being concerned or feeling guilty, but they know the rate it's being paid off at and that I'm essentially solvent.

We talked about how it's going generally for the pre-retirement generation. My father relayed a horror story about some close friends. Names are changed to protect the fiscally improvident, in the spirit of my favorite Globe&Mail weekend personal finance column.

Meet Steve and Wendy. Wendy has a decently paying government job. Steve used to run his own company and was audited for expensing too many personal items through his work account - he estimates he'll be paying the penalty until he's 75 and now works at a hardware store as a retail employee. They don't own their home. If it wasn't for Wendy's job they could be bankrupt.

Steve and Wendy paid for their kids to go to school. Only one is using her degree, at a steady government job, but with a fairly low salary cap and a reasonable burn out rate. Let's call her Sarah.

Recently, Sarah got married. Her husband is an affable chap who didn't go to college and works in transport. Sarah's parents paid for the wedding, taking out a line of credit to the tune of about $20K. Among the expenses of the event, Sarah bought a $3K wedding dress (which, for the record, was no bias cut Vera Wang, from the pictures, if you see what I'm saying).

As a result, Sarah's parents now have: tax debt, a mortgage, a line of credit, and unknown retirement savings. Sarah has a $3000 dress.

I'm the same age as Sarah, in fact we graduated high school together, and her parents are maybe a year younger than my own.

I understand the feeling of wanting to do whatever possible for family, but what have Steve and Wendy done?

(1) Continued to indulge the unrealistic expectations of a child in her mid twenties whose household income bracket will not reflect the snap decisions she has become used to making (like, um, a $3K dress?)

(2) Further pushed themselves towards a lack of resources in old age, forcing their children to be able to support them or finally forcing a serious lifestyle downgrade

(3) Set a really bad model for living within ones means

Sarah, due to her career, will already likely have a downgraded lifestyle from that she grew up in. Add the obligation to support aging parents, which her younger siblings are even less likely to be able to do, and it's not exactly an ideal situation. Steve and Wendy were in a position to be far wealthier in retirement than my parents, who only really started to accrue any wealth (beyond home equity) in their late thirties.

Obviously, the purpose of writing this is not to condemn anyone to financial purgatory, but it causes reflection - what are the motivations that bring someone to the position Steve and Wendy are in? How are they avoided? If you know or suspect your parents are Steve and Wendy - how do you protect yourself from the fallout?

I think it's time for eggs benny and the weekend crossword.

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