The Millionaire Next Door - Economic Outpatient Care

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This reading session of The Millionaire next door presented some very interesting concepts.

Economic Outpatient Care (EOC)
This was the general theme of this session. The short version is that economic assistance that wealthy parents offer their kids actually hampers their own financial independence. The example used throughout this chapter is the couple referred to as M and L. The husband is a teacher making about 60k per year, the wife is a stay at home mom. They receive large financial gifts from the parents each year of no less than the 10k amount allowed before taxes.

EOC
This chapter actually expanded further on these ideas. It highlights a number of interesting statistics:

• EOC’s come from self wealthy parents
• In general, the more support the parents lend the children, the less wealth the children accumulate
• This is believed to be because it is much easier to spend other people’s money
• 45% of millionaires pay for their grandchildren’s private school tuition
• 60% assist their children's home down payment
• 17% make house payments for their children
• 30% of these children live in a home worth over 300k, while having a household income of 60k or less

This last item is shocking. That means that if the parents are not providing support, the family really could not afford this house. This is a guaranteed way to force dependence.

What's Wrong With This Picture
There is something to be said about providing gifts for your children, the gifts just have to be of the right type. These is a correlation between millionaires and children in high income potential fields (medicine, law, etc). In general they agree that paying for education is a valuable contribution. While this is a huge step up, the kid still has to put in the effort to earn the accolades.
Spending on gifts on the other hand is not considered a value add. Gifts can be habit forming, especially cash gifts, if they are used to finance luxury items, this causes a reliance on continued gifting. Also, this kind of spending has a direct correlation to developing a high consumption lifestyle. There is also a correlation between kids receiving financial gifts and a logical separation of wealth, these recipients feel their parents wealth is theirs. The worst part is that people who get “EOC” invest less… much less, about 65%! That is a huge difference between the 2 groups.

A Teacher and an Attorney: A Case Study
This was interesting, the author spoke with two brothers similar in age. Henry was a teacher, who earns 71k a year, and his brother Josh is an attorney earning 123k. If you were to guess who has a higher net worth, who would you guess? Logically, you would think the person who earns more, would have a higher net worth, however, the teacher has a much higher net worth (834k vs 553k). This could be due to any number of things, but one potential answer is being an attorney tends to have some social pressure around spending. Most people you work with are buying nice things, and to keep up you may to. Also, having a nice car is a signal to potential clients you are good at what you do. A teacher does not have these pressures.

Teach Your Children to Fish
Now we are getting back to the core of why I am pursuing these books. This chapter covers some ideas on how you can pass this to your children without ruining their earning potential.

• Teach them to be frugal
• Spend on their tuition
• More independently children receive less in assistance from their parents
• Strengthen your children's weaknesses, do not avoid them

They also list a case study where a daughter of wealthy parents wanted to start her own business. Her parents thought that if they supported the business financially, she would be able to focus on growing and be more successful. However, they provide over 60k a year to the business (which on its best year earned 50k), and the daughters spending habits do not reflect that of a new scrappy business owner. Basically, there needs to be a drive to succeed, removing the financial risk is not conducive to developing a hunger to succeed.

Affirmative Action: Family Style
This chapter highlights two different types of housewives. I am going to tread carefully on this one, but the points the author makes are interesting.

Type A Housewife:

• Tend to marry high earners
• Active participants in household budget, tends to know tax law
• Acts as peers to parents when it comes to finance

Type B Housewife:

• Tend to marry low income earners
• Heavily dependent on their parents income
• Always will be viewed as children

Of the two, a type A housewife provides a very valuable service towards the families income, even when not traditionally earning an income. They stay educated an make sure they are making sound financial decisions. They will often assist with their parents end of life planning because they know about tax law (especially estate tax). There was another interesting note, that women are far more likely to receive an inheritance than men.

What are your thoughts about this section of the book? I would love to hear them in the comments section below!