The Bank of Mom & Dad

0:00 the Bank of Mom and Dad is now one of the largest financial institutions in the world a 2019 study revealed that American parents represented the seventh biggest mortgage lender in the country financing over 47.3 billion in the year before that's particularly impressive since a lot of parents are not loaning the entire purchase price of a property but are instead just loaning their children a down payment so they can get another even bigger loan from an actual bank now there's probably something to be said about our lack attitude towards taking on endless debt here but the Bank of Mom and Dad is not only in the mortgage industry a survey conducted by savings.com found that parents were on average funding their adult children to the tune of $1,474 a month to cover basic living expenses like groceries medicine and gas money was also lent or

0:47 gifted to cover cell phones and even vacations and with rates like these bank customers are sticking around even millennials who are now over the age of 30 at minimum were still loyal clients to the Bank of Mom and Dad receiving just under $900 a month on average now I don't know about you but my mom and dad aren't giving me $900 a month so clearly that average is being influenced by a lot of people who are given a black card with the bank at birth but there is actually a more concerning trend here parents are on average contributing significantly more to their adult children than their own retirements mom and dad's financing has also become a lot more complex with equity releases finance guarantees networking trunched benefits and of course serious terms and conditions if there is a run on this bank we might end up in a situation where parents can't

1:36 afford to retire and children can't afford to grow up more than 50% of 18 to 29year-olds are still living with their parents without your mom's support what are some of the things that you probably wouldn't be able to have uh I would definitely not have a place to live i would not have gas for my car to get here i would not have food in my mouth when he needs something I send it my friend he lives in La Hoya he has like a $300 a week allowance on average California parents believe their children should be financially independent by the age of 24 so there are really three groups that lose in this whole arrangement parents who are increasingly supporting their children later into life the children of families who can't afford to support them and even though it's much harder to feel sorry for them the Nepo babies themselves

2:21 whose financial assistance often has a lot of strings attached so the inherentocracy might not be good for anybody but clearly some people are worse off than others around half of young adults over the age of 18 don't receive any financial support from their parents at all either because their parents can't afford to they don't have a good relationship with them or because they are dead losing this support network can and does statistically do more financial damage than just missing out on direct deposits balancing a job studies ambitions and comfort is incredibly difficult for someone just starting out in most parts of America to get a job you need a car to get a car you need money or to take out a loan to go to school is more loans to get a place to live you need to buy furniture and put down a security deposit and you are still probably going to want to eat in the first two weeks before your paycheck comes in starting from zero means that

3:11 the only option for the seed capital of life is highinterest debt even just having a place to sleep and a car to borrow is a massive head start over this kind of situation even the most modest of safety nets can also let you take on some more calculated risks straight after college I took an internship at an investment bank i had to live in an expensive city with no real savings and no guarantees that it would eventually lead to a full-time position but I was able to do it anyways because I knew in an absolute worst case scenario my parents would cover a plane ticket back home and let me stay with them until I was back on my feet even seemingly small advantages like this can be the difference between getting a high-paying career or missing out on it to take the safer but less lucrative option this is the same reason why successful actors or business people overwhelmingly come from stable backgrounds because being able to take a risk is

3:57 a luxury a lot of people can't afford peter Teman an economist from MIT has claimed through his now infamous research that breaking the cycle of poverty now takes 20 years at minimum with absolutely nothing going wrong he noted that the quality of your nepotism really depends on what your family was doing back before the 1970s when productivity growth started to outpace wage growth before this time people on professional incomes could amass equity in asset markets and real estate relatively easily which built up a secure foundation over time hourly wages ended up buying less and less and debt became more available for people without assets it became a tool to keep up and for people with assets your debt became their equity the only reason homes are so expensive today is because people can get loans to buy them either from a real bank or the bank of mom and dad

4:44 the analogy is that starting a fire from scratch is really really hard and even the slightest bit of rain can destroy even the most dedicated efforts starting a new fire with a little flame taking from an existing fire that has been burning since the bright sunny days of the 1970s is much easier and even pretty bad weather probably won't put it out once it's going so yeah nepotism is overpowered i know that's probably not shocking to you but the real problem is what this has been able to cover up so far so it's time to learn how money works to find out how to fix it and what happens if we don't this week's video is sponsored by ODO odo is a complete business management platform that brings together everything from sales and CRM to inventory accounting and even a full website builder all in one place with ODO you only use the apps you

5:32 need and everything just works together no tech headaches no juggling a dozen login we recently gave how many works library a full revamp using odo built a new internal site streamlined our production process and made everything way easier to navigate their website builder is surprisingly powerful and actually fun to use you can create professionally looking pages without touching code and link them directly to your workflow whether it's sales scheduling or content management and we have another project we're working on them that's going to be announced soon so if you want to simplify your setup or build something from scratch give ODU a try hit the link in the description to test out any app for free no credit card needed the means and methods by which wealthy parents can help their children have grown considerably in complexity and some of them have

6:18 been made possible by tailored products from the actual financial industry home equity conversion mortgages otherwise known as reverse mortgages have slowly become one of the most popular ways for the Bank of Mom and Dad to raise capital they work like this if an elderly person past working age has a paid-off house but no way to earn an income they can go to a lender and get a cash out mortgage using their home equity the industry standard normally caps this at around 30% of the home's value someone who owns a $450,000 home could get a loan of $150,000 now with no way to actually make the repayments on this loan the lender doesn't actually expect any money back instead the debt just grows and grows with interest until the homeowner sells the property or dies the bank then gets first dibs on the proceeds from the sale plus any interest that occurred over

7:04 the years these products were particularly popular between 2000 and 2008 as tapping home equity became a popular tool to fund lavish lifestyles or to invest in other properties famously this all ended super well and everybody lived happily ever after anyway while reverse mortgages are still not as popular as they were back then thanks largely to much tighter regulations they are still creeping back and they now represent more borrowing overall because houses have become more expensive the financial sector loves these loans because they on average have significantly higher rates and fees than typical home mortgages because they are a more bespoke financial product but despite all of these problems there are two reasons why they are becoming more popular again the first reason is that people simply need money according to data from the Fed even

7:49 people who have had a lifetime to build up assets still overwhelmingly have most of their net worth in their family home you can't sell a portion of your home like you can a stock portfolio and living expenses have become particularly bad for old age services again I know this isn't shocking to any of you watching but the second reason behind the growing popularity of these loans is that it has become increasingly popular for parents to refinance their house and give cash to their children as an early inheritance it's a trend growing so quickly that banks like Merryill have their own planning teams for it now to be fair for the families that do have the assets to do this there are three big advantages to doing it this way the first is simply that they get to actually see their money getting enjoyed by their children rather than just guessing what they will do with it once they are dead but there are also more pragmatic reasons as well money for young

8:37 adults just starting out in life is going to have a bigger impact on opportunities than a larger inheritance received later the average age someone receives an inheritance is now 51 years old which roughly makes sense as the average life expectancy minus the average age that people have children that age used to be early 40s as people live shorter lives but with an aging population the regular passing down of assets is happening later and later a University of Pennsylvania survey also found that people receiving inheritances later in life generally got significantly more money as their parents statistically had more time to build wealth to pass down way too long though and it drops down again as financing old age care can get really expensive so you know if you're trying to plan this out early 60s is really the sweet spot now obviously I'm joking but that same survey

9:23 also found that 70% of people would rather receive an inheritance of $250,000 at age 30 rather than $1 million at age 50 a cash injection earlier in life can help you get set up when you most need it to buy your first home pay off student loans and stretch out the budget for potentially raising a family a windfall later in life should just make a comfortable situation even more comfortable if you manage to save and invest diligently now that's a big if because obviously a lot of people don't know how to handle a big injection of cash internal data from a major financial advisory firm found that on average recipients of a major inheritance took 19 days before they purchased a new car and that's the third and most commonly overlooked service from the Bank of Mom and Dad they offer in-house financial advice whether it's wanted or not early inheritances can be more

10:09 carefully administered with terms and conditions to make sure that recipients don't squander the money but also as a way to keep children dependent for longer than they really should be now the trope of the trust fund baby exists for a reason but reverse mortgages have let even middle-class families do the same thing to help their children out the savings.com survey found that 77% of parents that gave money to their children did so with conditions attached now some of those conditions were simple pragmatic financial advice but more often than not it was personal rules related to their relationships career and family planning now it may be hard to feel sorry for people getting major financial assistance but this is a genuine burden that's increasingly hard to say no to because these financial advantages are just so hard to compete with even with an extremely high income saving a significant amount of money is challenging when realistic assumptions

10:56 are made about rent student loans and the cost of living where most high-income jobs actually exist similarly even a modest salary paired with a big cash injection can put someone decades ahead of a more highly compensated peer starting from nothing if the price of this head start is playing by mommy and daddy's rules for life then it's pretty hard to say no to it's also a self-perpetuating problem things can only get so expensive if nobody can afford them the reason that college tuition has outpaced inflation is because student debt has become really easy to access and really safe for institutions to offer similarly home lending has become easier and cheaper thanks to things like national credit reporting agencies low deposit mortgages and tax advantages for homeowners and that's all just made entry-level homes more expensive if getting an advance of the Bank of Mama and Dad becomes the norm it will again just make big life milestones more expensive for

11:45 everybody including those that unfortunately don't have open accounts there and this is why more and more parents are feeling obligated to help their children even if they can't really afford to starting out in life has become extremely expensive but so has the stuff at the end of it age care has become a huge and oftent times predatory industry where comfort really does depend on how much people can afford almost half of the surveyed parents reported making sacrifices to their own financial security to support their adult children with the most popular source of funding simply being retirement accounts so the Bank of Dad isn't good for mom and dad it isn't good for the children who give up their independence to get a head start and it certainly isn't good for the children from families who can't support them or worse still who they have to support but the world's biggest financial institution also isn't good for a generation

12:31 of people who don't even exist yet it's no secret that one of the main reasons why people choose not to have children is because they simply can't afford to even amongst high-income earners the financial burden of children is making a lot of people reconsider starting a family with most reporting to Pew Research that they have other financial goals that need to be met first if people assume that they will need to be the bank of mom and dad they are naturally going to want even more financial security before starting a family because not only do they need to get themselves set up they also need to be comfortable enough to support their children so they aren't left behind starting a family is financially scary enough when it's an 18-year commitment but if allowances to 30-year-olds become an expectation it's going to preclude the vast majority of people now the obvious solution to scaling back the bank of mom and dad would be to make it easier for young people to support themselves but to do that you really need to understand why it's become so

13:19 hard to get ahead go and watch this video next to find out what has changed that left young people so far behind and don't forget to like and subscribe to keep on learning how money works