Mitt Romney Says to College Students: "Just Borrow Money from your Parents"

[Beet]

Thomas Stanley and William Danko, in their bestselling 1995 study of the wealthy, The Millionaire Next Door, concluded that "the more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more. This is a statistically proven relationship. Yet many parents still think that their wealth can automatically transform their children into economically productive adults. They are wrong. Discipline and initiative can't be purchased like automobiles or clothing off a rack." They go on to give the example of some parents who subsidized her daughter's fashion business, extending her a loan in lieu of a commercial loan. By the time the daughter was in her late thirties, she still lived at home and despite her business earning $50,000 in revenue, was still being subsidized at a tune of $60,000 per year by the parents. The daughter never developed independence. In general, the two Ph.D's found that "giving precipitates more consumption than saving and investing," "gift receivers in general never fully distinguish between their wealth and the wealth of their parents," gift receivers are significantly more dependent on credit than nonreceivers," and so on.

In general, I doubt that borrowing money from parents is a good plan. The advantage of going to a bank first is that the bank forces you develop a clear and believable business plan. If the bank won't believe the plan, then chances are it has some problem with it. Further, you're likely to work harder if you realize that defaulting to a bank is what is on the cards. Parents are too likely to throw money at something out of love and support, not necessarily because the business idea is truly viable. Even if you have to borrow from parents, it's probably a good idea to try and borrow from commercial sources, or even online now (there are sites where people can fund your ideas) and use the parents only as supplemental funding.