The in­her­i­tance you don’t want

Money habits are of­ten passed from one gen­er­a­tion to the next

Toronto Star - - SMART MONEY - SUZANNE WOOLLEY

You may have re­ceived a big in­her­i­tance you’re not aware of it: your money-han­dling skills.

Eco­nom­ics pro­fes­sors at the Univer­sity of Copen­hagen have found that if a par­ent was in de­fault on a loan at the end of the year (their study looked at data from 2004 to 2011), the chance of de­fault for their chil­dren was more than four times as high as for those whose par­ents were model fi­nan­cial cit­i­zens. And that’s across all lev­els of parental in­come, loan bal­ances and other mea­sures, in­clud­ing that of in­tel­li­gence.

The study an­a­lyzed about 30 mil­lion per­sonal loans held by some five mil­lion Danes aged18 to 45. It linked that in­for­ma­tion to gov­ern­ment data, in­clud­ing in­come level and ed­u­ca­tion for the bor­row­ers and their par­ents.

The key finding: The share of 30-year-olds in fi­nan­cial trou­ble — nar­rowly de­fined in this study as be­ing at least 60 days late on a loan at the end of the year — was 5 per cent among those whose par­ents showed no sim­i­lar sign of fi­nan­cial trou­ble.

It was 23 per cent for kids whose par­ents’ records showed fi­nan­cial trou­ble.

The study fol­lows other re­search con­clud­ing that risk at­ti­tudes seem to be handed down by gen­er­a­tion. It couldn’t rule out the chance that long-last­ing health shocks had an ef­fect on in­come that car­ried over to the next gen­er­a­tion, but it did find ev­i­dence that shared com­mon shocks tied to the busi­ness cy­cle, such as a par­ent and child un­em­ployed at the same time, weren’t likely causes for the cor­re­la­tion.

An ear­lier study that lends sup­port to the Copen­hagen work found that adoptees with par­ents who take on more in­vest­ment risk in their port­fo­lios tend to make fi­nan­cial de­ci­sions for their own port­fo­lios that re­flect sim­i­lar lev­els of risk. It con­cluded nur­ture plays a sub­stan­tially larger role than na­ture in fi­nan­cial risk­tak­ing among par­ents and chil­dren.

That’s not to say our hard wir­ing plays no role. A 2015 study of iden­ti­cal and fra­ter­nal twins in Swe­den con­cluded that “ge­netic dif­fer­ences ex­plain about 33 per cent of the vari­a­tion in sav­ings propen­si­ties across in­di­vid­u­als,” finding that par­ent­ing plays a part in the dif­fer­ences in the twins’ sav­ings be­hav­iour early on but that the ef­fect waned over time. The re­searchers used dif­fer­ent meth­ods from those of the Copen­hagen pro­fes­sors. The Copen­hagen au­thors also found that for the same in­ter­est rate, the de­fault in­ci­dence was sub­stan­tially higher for those whose par­ents were in de­fault than for those whose par­ents weren’t. Loans with an in­ter­est rate of 5 per cent had a prob­a­bil­ity of de­fault within the next seven years of 0.5 per cent if a par­ent wasn’t in de­fault in 2004, but the prob­a­bil­ity rose to 1.75 per cent if a par­ent was, the au­thors write.

That means that “in­di­vid­u­als with par­ents who are not in de­fault on av­er­age pay an in­ter­est rate penalty to cover the losses in­curred by in­di­vid­u­als who de­fault be­cause they have adopted the fi­nan­cial be­hav­iour of their par­ents,” the study found.

That’s be­cause the two types of bor­row­ers pay the same rate, all else be­ing equal.

The re­searchers note that some of their con­clu­sions may not ap­ply in coun­tries with­out Den­mark’s strong so­cial safety net. They looked to see if par­ents and kids might both de­fault on loans be­cause a par­ent had strained his or her re­sources to pro­vide fi­nan­cial help to a child, but a drop in fi­nan­cial wealth for Danes who be­came un­em­ployed wasn’t ac­com­pa­nied by a de­cline in their par­ents’ wealth.

In fact, in coun­tries with weaker so­cial sup­port sys­tems, such as the U.S., par­ents are like­lier to put their own fi­nances in peril to help out kids in trou­ble. The par­ent-child re­la­tion­ship, then, could have an even stronger cor­re­la­tion in loan de­faults, the au­thors write.

Even if some of our at­ti­tudes to­ward money are hard-wired, no one wants to pass along a legacy of fi­nan­cial in­sta­bil­ity. There are many ways to nur­ture self-con­trol and high­light the dif­fer­ence be­tween “wants” and “needs.” Be­yond prompt loan re­pay­ment, that goes for the panoply of our fi­nan­cial lives, from weekly bud­get­ing to re­tire­ment sav­ing.

DREAMSTIME

There are many ways to nur­ture self-con­trol in chil­dren and high­light the dif­fer­ence be­tween “wants” and “needs.”

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