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Bank of Mom and Dad: smart saving for the future

May 09, 2021, 11:08 CEST
3 minutes

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  1. News & updates

The "Bank of Mom and Dad" works hard to save for the children’s future. But what will give the most return on investment?

Saving hundreds of dollars monthly for your children’s future, on top of your regular financial responsibilities, may not be a burden that parents can easily currently take on. Yet, pre-COVID, the majority of US parents - 65% - were planning or saving for their children in some form. But which type of financial assistance will give your young adult the best start in life?

College
While most parents assist in paying for college, the truth is that fully covering all costs during the college years has become very difficult. According to lender Sallie Mae’s 2018 report, “How America Saves for College,” parents anticipate covering about 29% of costs for college, with the rest met by assistance programs and loans.

But even if you can’t foot the complete bill for college – is it worth it? The short answer is yes. The average college graduate earns a salary that is over US $30,000 more someone with a high school diploma, according to 2019 research by the Federal Reserve Bank of New York. On average, the rate of return on college is 14 percent.

That said, help young adults to choose wisely: while graduates with majors like pharmacy and computer engineering can earn six figures, education, nursing, and social services graduates can be stuck with wages similar to workers who have not gone to college.

Report: Despite rising costs, college is still a good investment

Wedding

According to the Brides American Wedding Study, parents cover between 35 and 42 percent of the cost of their children's weddings, on average. Yet, to be frank, the only real benefit of contributing to your son or daughter’s wedding is their happiness. If they have dreamed about a big wedding, and you are able to help them fund it, you are contributing to one of the most important milestones in their life. Most young adults don’t earn much or may be burdened by debt, so a large wedding is out of the question if it needs to be funded by the young couple themselves.

That said, studies confirm that the less expensive the wedding, the more likely the marriage is to last. Perhaps it’s in the best interest of the young couple to avoid the ‘dream wedding’ and keep it small!

However, as a parent, it may pay off to foot the bill for your kid’s honeymoon plans. Researchers found that going on a honeymoon is significantly associated with lower divorce rates.

Dream wedding

Gap year
Before the pandemic, some young adults were choosing to take a gap year between high school or college, or even after they graduate higher education. The good news here, is that your daughter or son’s gap year does not have to be expensive, in order for it to be life changing. They can usually earn their own money to fund their plans!

In addition, taking a gap year can actually be viewed as an investment into their future that pays off in the short term. According to a Milkround survey, 88 percent report that their gap year significantly added to their employability.” That’s because “gappers” learn soft skills during their year away that will serve them throughout their life, including conflict resolution, time management, and perseverance.

Down payment on a home
One in five homeowners in the US report that they’ve received a gift or interest-free loan to help them purchase their first home. In fact, if the “Bank of Mom and Dad” were an actual business, it would be the 7th largest mortgage lender in the country, Legal & General found. And the advantages to helping your child purchase a family home are clear: a larger down payment means starting out with a smaller loan balance. This helps your daughter or son reduce the total interest they pay, creates a cushion to preserve equity if market values decline, and reduces monthly payments.

Also see

A simple Mother's Day wish list

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