Jennifer writes in:
My parents have been giving me $1,000 a month since I graduated from college three years ago. When my career first started, I really needed that money as I was an unpaid intern for several months at first while I built up my resume, then my first job paid less than minimum wage. Now, I’m making pretty good money. I talked to my parents about the money and they basically said that they can afford it easily and they want to make the hard parts of life easier for me. Still, I’m concerned about being dependent on that money. I’ve been reading a lot of personal finance books and many of them especially The Millionaire Next Door are pretty adamant about it being a bad idea to receive financial gifts from parents as it makes you complacent and opens the door to bad financial choices. What’s the best approach to take here? I don’t think telling my parents to stop the money makes sense, but I’m not sure.
I agree with these books that continuous financial gifts can make people complacent and put them in a position where they’ve adopted a pattern of outspending their true income. If that regular gift ever goes away, then they’re in a very painful position.
You have a big advantage, though. You’re aware enough of your financial situation to see that this is a potential problem.
Many of the people mentioned in those books that receive regular financial gifts treat them fully as part of their salary and often still end up living beyond their means, even including the gifts. They don’t realize that those gifts are tenuous and when the gifts go away, their life is going to quickly become financially problematic.
So, what’s the best way to handle this situation?
The best approach is to live your life entirely without those gifts. Exclude those gifts entirely from any calculations or thinking you do about your financial situation.
Instead, channel those gifts entirely into an investment account somewhere and then forget about them. Live your life as though that money doesn’t even exist.
What do you do with that money, then? You wait until you actually need it for something genuinely big or life changing. Use it as seed money for a business or as a tool to retire early. Use it as a giant extra payment to get rid of your mortgage (I suggest not using it for a down payment as it will just allow you to buy a home that you can’t really afford yet).
You should also consider that you have a significant chance of using that money when a truly major emergency happens in your life. It could be the money you use to get things in place if you or a loved one has a major health crisis or another disaster befalls you. Having that money in place will make all of the difference.
The key is to live as if that money does not exist. Pay your bills and manage your debts without using that money at all. That money should not have any impact on the day-to-day financial choices you make in your life.
Naturally, it will have some impact on your long-range planning. You can’t completely ignore that money. However, you should still work toward your long-range goals as though that money doesn’t exist and then only use it to finish off your goals. You should do the work to get yourself most of the way to whatever your goal might be.
Given your situation, I can’t think of a more responsible way to handle that extra money. Rather than supporting an unsustainable lifestyle, it turns a sustainable life into a powerful one.