Even though I’m not a parent, I find the topic of intergenerational wealth fascinating. It makes perfect sense to me that parents want to help their children succeed. Parents with wealth are able to give their offspring a boost with so many of the costs of starting adulthood. This week though, I was surprised to hear about parents who are starting down payment funds for their newborns.
My first reaction wasn’t that the parents are nuts, nor that they are helicopter parents. I didn’t even think that the parents were trying to deprive their children of the opportunity to achieve something on their own. Instead, my first thought was that it made sense to start saving at birth. Not even 50 years ago, eyebrows went up when learning that non-wealthy parents paid for a child’s post-secondary education. Kids who wanted to study after high school had been expected to pay their own way through school by working summer and part-time jobs. Today, I can’t think of a single parent in my circle who isn’t financing their children’s post-secondary education through RESPs, co-signing loans, or cash-flowing the tuition bills. My parent-friends all realize that their kids cannot earn enough money from summer jobs & part-time employment to pay for undergrad and graduate degrees.
Over time, more and more parents realized just how expensive a post-secondary education would be. They determined that one of the best ways to help their children become successful in life was to pay for their studies beyond high school. No parent has ever paid their child’s tuition because they believed that doing so would somehow hinder or limit their child’s opportunities for a quality life.
So when I hear of parents who want to save for their newborn’s eventually down payment, I’m not at all surprised by the idea. To my mind, it’s the next logical step in helping one’s child become economically established. Houses are incredibly expensive! Back in the day, a person aimed for a mortgage that was no more than 3 times their annual salary. Those days are long past. When house prices are such that a first mortgage can be 8-10X one’s salary, it’s very realistic to think that it may take 25 years to build a down payment.
Parents who can save for their children’s down payments will do so. They realize that if they don’t do this now, then their children might be priced out of the future real estate market later. Of course, if they’re wrong and their children can acquire a home on their own, then so much the better. The money is still available for something else…maybe the foundation of the anticipated grandchildren’s education fund?
The other aspect of parents saving for their offspring’s down payment is that such actions contribute to the very wealth inequality from which the parents are trying to protect their children. Parental financial contributions reinforce the divide between those who have financial resources and those who don’t. In 20-25 years, the children with down payments funded by their own contributions and those of their parents are going to be better positioned to buy a property compared to children who don’t have the benefit of parental money.
Bridget Casey talks about this phenomenon in her article about the Funnel of Privilege. Essentially, the privilege allows young adults to start investing for their future without the burden of debt. By starting down payment funds in their child’s infancy, wealthy parents are positioning their children on the property ladder sooner. Being handed a down payment means that someone need not spend years saving money from their paycheque to simply by the first property. Instead, that same money would be spent building equity sooner rather than later.
Parents help their children. This has been true since the dawn of time, and I expect it will be the governing order of things until the end of days.
I’ve mentioned before that my parents saved all baby bonus cheques and a portion of money from their paycheques so that they could pay for my brother and I to attend university. I have 8 years of post-secondary, while my brother has 9 years under his belt. I will never complain that my parents’ gift has ever diminished my life and I know that I’m far better off than I would have been without my education. My parents did the best they could, but they were nowhere near able to also save for our first down payments. My brother and I had to save for those on our own.
Did my parents help contribute to the increase in wealth inequality by directing their wealth towards ensuring their children graduated university without debt? Or were they simply taking the natural steps to make sure that their children had the best shot possible at having a successful life?
Wealth begets wealth. It is natural for parents to want what is best for their children. Helping a child to achieve a home is simply the next step for parents who have the money to make such a contribution. These are the seeds of intergenerational wealth.