You took care of your child from infancy up through college. Did you take a picture of that last tuition check you wrote? Your little one, not so little anymore, is now off on their own in the real world. You are finally free, an empty nester, untethered from providing any more financial support.
But is that indeed the case? The answer for an overwhelming number of parents is no. In fact, almost 8 in 10 parents find they are providing some level of financial support for their adult children. Further, 3 out of 4 parents find they are placing their child’s interest ahead of their own retirement needs.
Financially supporting your children as they enter adulthood can provide you with another teachable moment to further their growth. But too much support for too long can upend your own financial goals, including retirement, and create strains on relationships.
Protect Your Finances First
Before you add your child back on the family payroll, make sure you can answer the following questions clearly and honestly.
1. How will this financial support affect your own financial health? It’s critical that you have defined and planned for your own financial needs, goals, and values before you consider adding an additional financial burden to your household. Your child can get a loan for certain assets, like a car or home, but there is no loan for retirement.
2. What impact will it have on your budget and expenses? Consider providing financial support to your child that fits within your ongoing budget or set of expenses. If you have monthly excess cash flow, you can divert that to supporting your children.
3. How will ongoing financial support change your own financial picture five, ten, or twenty years down the line? A little lending today may be OK, but does your retirement kitty allow for annual dips to support your children while also funding the decades you have in retirement? What about your own future financial shocks, like an unexpected health event or loss of income? Take a longer-term view when assessing your ability to provide financial support to your child.
4. Does providing financial support now affect your own goals? It’s in a parent’s nature to want their children to have a better life than their own. But your children assuredly don’t want you to sacrifice your retirement to fund a bigger apartment for them. In fact, Next Avenue reported that “nearly two thirds (64 percent) of the young adults surveyed said parents’ financial support to children age 25 to 34 is ‘a bad thing,’ because it makes those kids dependent.”
Be Specific and Communicate Clearly
If your child needs financial help early in their careers, make sure its crystal clear what the money is for and whether or not the gift (or loan) is a one-time event. Your child may have an unrealistic expectation that the bank of Mom and Dad is open whenever they need it. Avoid this issue by stating the parameters early and clearly. Consider writing your own family contract for this “financial transaction.”
Introducing a third-party to the relationship is a helpful way to remove the emotion from the money. A financial advisor can help with the technical considerations — what’s the best way to give or lend the money. Advisors can also direct the conversation so it’s open and productive for all parties.
Lastly, don’t use financial support as a tool to repair or change your relationship with your child or their spouse. There should be financial terms to agree and adhere to but tying support to other mental or emotional goals you have is a recipe for disaster. Money will not fix any underlying relationship problems and will likely exacerbate feelings of resentment and control.
Teach Your Children Healthy Financial Habits
The line between providing financial support and creating financial dependence is blurry and fraught with emotional landmines. A way to avoid this trap is to work collaboratively with your child on their finances. For instance, perhaps you are willing to provide support for rent while your child works at a promising career, or you are willing to match your child’s own retirement savings.
It’s important, too, that your child does understand the full financial consequences of “adulting.” A spendthrift child with their own credit card will only dig a deeper hole if you throw your money at their shopping habit. As they say, necessity is the mother of invention, and creating a frictionless world for your child can hamper their creativity, drive, and feeling of purpose in life.
Providing financial support is also a great opportunity to grow your child’s personal financial management skills. A full 72 percent of parents wish they had someone to educate their child about investing. Asking for professional help or utilizing online budgeting and investing tools is a fantastic way to instill healthy financial habits early.
Family Finances with Harbor Crest Wealth Advisors
While wanting to provide a better life for your children is an admirable goal, don’t do so at the expense of your own financial needs. We can help you find efficient ways to provide financial support to your family without upending your retirement or ruining relationships.
If you would like additional advice on how to determine the best way to provide financial support to your adult children, sign up for our newsletter.