I opened my first bank account before I was 16 years old. I ran a small mowing business and needed a bank account to store my growing earnings. My parents took me to their bank and the bank allowed me to have a checking account. My parents showed me how to write checks, deposit money, and balance the account. I felt so grown up and responsible. After getting my driver’s license, I obtained a gasoline station credit card to help me gain personal credit. I always paid off my credit card balance monthly with a check.
After graduating from university and starting my first job, I decided to buy a new car. I did not have enough money to cover the full amount, so I borrowed from my company’s credit union. I was so worried about owing money that after I received money from my grandmother’s will, I paid off the car loan. After my first loan experience, I only borrowed money three times to purchase homes. My first home mortgage took 13 years to pay off. My second home was sold after 7 years before I was able to pay off the mortgage. My third home mortgage took 4 years to pay off. I could have continued to make mortgage payments and invested any excess cash in higher yielding equities, but I wanted to be debt-free. Even though I understood the financial theory of leveraging money, I wanted to be financially independent and debt-free.
As I reflect on my personal financial decisions, I realized that I was a conservative risk taker. I diversified my financial portfolio rather than placing all my investment capital into a few growth businesses. I did not highly mortgage my home to potentially capitalize on the risk spread. My financial comfort level was the longer-term approach that had less downside at the cost of less upside. I followed the same approach in energy trading. I built a diverse portfolio of trading options that produced a stream of earnings with lower volatility. I did not bet on the absolute price of energy except for very small positions, roughly 1%. Perhaps this is why I was able to continually meet financial targets and slowly grow trading net income. I was fortunate to work for a company with a risk appetite like my own.
I recently stumbled upon a new term: “nepo-investors,” defined as children whose parents gave them a financial lump sum when they became adults. This allowed some young adults to have early capital to do with as they pleased. A recent UK study found that these young adults spent the money first on cars, followed by properties, investments, and savings accounts. Almost one out of five UK adults (19%, around 9M people) have received parental money when they reached adulthood. Was this beneficial to the young adults who received money from their parents’ saved earnings?
It appears that receiving “free” money doesn’t mean that the receivers manage the money well or develop good financial habits. A Wealthify research study showed that the 81% who were not nepo-investors have better financial habits than nepo-investors. Habits are not instantaneously formed; they are developed over time. Even after taking university-level classes in economics, cash flow analysis, investments, finance, and accounting, it took years of experience for me to understand risk taking, responsible budgeting, and personal finance skills. I made mistakes, missed opportunities, and timed trades poorly. Handing young adults a lump sum of unearned money may feel like a loving way to assist your children, but it is more likely to do your children more harm than good.
If you are fortunate enough to be so wealthy that you can easily afford to pass money along to your young adult children, then hear some sound advice from Sting on his own children: “They’re not sitting there waiting for a handout at all, and I wouldn’t want to rob them of that adventure in life; to make your own living.” This advice does not mean that you should not invest in your children’s college education or financially assist during a health or job loss crisis. These types of financial assistance are not nepo-investing.
I openly admit that young adults live in a different world than my generation. It was easier to purchase a first home in the 1980’s than the 2020’s. The job market for university graduates was easier to enter 40 years ago as employers invested and trained new employees with a focus on their long-term development. Looking back, I was too quick to help my children when compared with what my parents did with me. The difference between generations is that my parents were not financially able to assist me except during my university studies while I was able to financially assist my children post-university.
The Apostle Paul, writing in 2 Thessalonians, counseled against idleness, and not earning your own living: “Anyone unwilling to work should not eat. For we hear that some of you are living in idleness, mere busybodies, not doing any work. Now such persons we command and exhort in the Lord Jesus Christ to do their work quietly and to earn their own living. Brothers and sisters, do not be weary in doing what is right.” (2 Thess 3:10b–13, NRSV)
Loving your children may be exhibited by not having them become nepo-investors. It may be more loving to help your children open their first bank account with money from their first job, counsel them about investing, and give them examples of your financial successes and failures. Perhaps your children will love you more when they achieve their own financial freedom gained through their hard work and excellent financial habits developed through witnessing their parent’s habits. Imitation is the best form of flattery.
