It’s natural to want to help your kids even after they’ve become adults. These days it can feel like a necessity with the high cost of college, housing, and other expenses. According to a study by Savings.com, “47% of parents with grown children provide them with some form of financial support (not including adult children with disabilities).” A Pew Research Center study found that 59% of parents said they helped their children financially in the past year.
While it may be common to assist children, it’s important not to sacrifice your own financial well-being in the process. You should also keep in mind that allowing your kids to be dependent on you for too long is bad for them – psychologically and financially. Before you give money to your adult children consider these issues:
Your Finances
How much debt do you have? Can you pay off your credit cards every month so you don’t incur interest charges? Do you have an emergency fund to pay your bills in the event you suffer a crisis (job loss, disability, death in the family)? Are you putting enough money away for your retirement?
You should take a hard look at your finances before giving your child money. In the Pew study, 36% of parents said they hurt their finances to assist their children; it was 58% in the Savings.com study. The Savings.com study also found that the average amount parents gave to their kids was 2.4 times more than the average retirement contribution.
If you contribute more than you should, you don’t have as much time to fix the problem as your kids do. They have decades to earn money to pay back loans; you may not. Also, you shouldn’t count on your children to support you. They may have their own financial problems later in life.
A financial planner can help you determine how much you can afford to give to your children and invest what you have. A daily money manager can assist you in developing a budget that allows you to balance your different priorities. If you have to reduce your spending in other areas or change your retirement plans to pay your kid’s expenses, you want to make those choices with a complete picture of your finances.
Your Child’s Plan
Most children want to be independent but they may not be realistic about how to achieve that. You have an opportunity to help them learn how to take control of their finances and make informed decisions. Ask them what help they feel they need and for how long and what steps they will take to become self-supporting. They should set short-, medium-, and long-term goals so they can gauge their progress. Be honest and clear about how much you are prepared to provide and for how long so your child’s plan can take that into account.
While you don’t want to micromanage your child’s spending, you should encourage them to establish a budget and monitor where their money is going. If they don’t know how to do that and you don’t feel comfortable helping them or you think this information should come from a neutral party, consult a daily money manager who can teach your child how to manage their income and expenses and save money. A financial planner can also get them started with investing their savings.
You want them to develop their own plan to build their financial confidence. This knowledge will give them the tools they need to succeed throughout their lives.
Documenting Your Agreement
When you and your child have agreed on a plan, write it down in detail so there is no misunderstanding. How much will you provide, for how long, and for what expenses? Is the money a loan or a gift? If it’s a loan, what are the terms? What has your child agreed to do in return for the money if anything? If your child lives at home, what are the expectations for them to contribute financially or otherwise (ex. do chores)? What are the consequences if they don’t meet their end of the bargain?
Then stick to the agreement. It’s easy to start giving more to your child or for your child to do less than what was promised. If you decide to change the terms, then revise the written agreement. This forces you to treat each change as meaningful.
There is nothing wrong with helping your children financially or choosing not to assist them. The important point is to think through what it means to both of you. Make sure you can afford it and that your children have the tools they need to achieve financial independence with or without your assistance.
If you need guidance on managing your day-to-day finances or teaching your children, contact me for a free consultation.
