Fostering Financial Independence
Parents have long supported their adult children. Traditional areas for contribution include education, weddings, and first homes. However, recent data suggests that parents are subsidizing their children’s lives more than ever before. This support often extends to areas traditionally under the child’s purview, an alarming reality for parents approaching retirement. This article explores various macro-economic and attitudinal factors contributing to the phenomenon. Following are considerations, strategies, and potential solutions for forward-looking parents.
A recent Bankrate report unsettled financial planners across the industry. The survey found that nearly 70% of parents have sacrificed their own finances to assist their adult children. Over half of these parents say they are forgoing debt payments and even tapping emergency savings. A majority also say they are delaying or abandoning important financial milestones, such as retirement. Lower income households are more likely to extend financial support, further complicating the problem.[1]
This data is undoubtedly concerning. However, the findings should not surprise anyone following the financial news. Inflation hovers near record-high levels and recession risks loom. A review of recent trends may provide context and inform potential solutions.
#Finterms: Financial Contagion
When markets are volatile there can sometimes be domino effects that lead to even more turmoil. A compounding trend if you will where fear begets more fear.
This is financial contagion, a term that has been headline fodder in relationship to the banking crisis of 2023, that so far, has seen two regional banks fail abruptly. The Asian financial crisis in 1997 is another historical example.
The definition of financial contagion is a scenario where one economic or market driven crisis subsequently impacts another market and spreads impactfully thereafter.
An illustration of financial contagion is when a few institutions, such as commercial banks, incur a shock that causes panic about the health of the broader banking industry. As the concern and panic spreads, there are ripple effects that extend into other areas of the economy/markets.
#financialcontagion #financialcrisis #banking #dominoeffect
#Finterms: Bankruptcy vs. Insolvency
As most of us have heard in the news recently, some banks have been described as “going bankrupt”.
Bankruptcies can come into play when individuals, businesses, or municipalities owe more than they own or is owed.
There are various types of bankruptcies, ranging from Chapters 7 (Liquidation) and 11 (Large Reorganization) to more nuanced or case specific settlements.
However, the term bankruptcy is not accurate when referring to troubled banks. When banks find themselves in trouble it is called “Insolvency”.
Insolvency is essentially the inability to pay one’s debts – the biggest, in a bank context, being what is owed to its depositors. In general accounting terminology, it boils down to assets being worth less than liabilities.
There is also cash flow insolvency, or “lack of liquidity,” which occurs when debts cannot be paid, even if its assets may be worth more than its liabilities.
Shareholder equity is the gap between total assets and total liabilities that are owed to non-shareholders. For example, if you sold all the assets of the bank and used the proceeds to pay off all the liabilities, what would be left over for the shareholders?
For the purposes of this post, to put it simply, a bank being insolvent means it cannot repay its depositors, because its liabilities are greater than its assets.
Assets – Liabilities = Shareholder Equity
Below is what a simplified bank balance sheet looks like:
| ASSETS | LIABILITIES |
| Cash (Liquid Asset) | Customer Deposits |
| Investment Securities, incl. bonds (Liquid Asset) | Debt |
| Loans to Customers (Illiquid Asset) | Shareholder Equity |
| Reserve for Bad Loans (Illiquid Asset) |
Customers of banks are protected to some extent by deposit insurance provided by the FDIC, currently up to $250,000.
With that in mind, a good practice is to have accounts in more than one bank as added deposit protection.
#bankruptcy #insolvency #liabilities #balancesheet
