By FPA Members Elaine King, CFP®, CDFATM and Philip Herzberg, CFP®, AEP®, MSF
Last Updated: May 7, 2012
Dr. Lee Hausner, clinical psychologist and family wealth specialist, underscores the sentiment that the motivation for young adults to stay focused and disciplined in handling the tasks and challenges of building a career is the actual need to support themselves.1 As parents with adult children needing monetary help, you should first have an open and focused conversation with your children about their expectations so that everyone involved protects their financial futures.
While you may be willing to financially assist your adult children amid evolving economic conditions, be wary that this predicament can potentially have implications on your established financial plan and well-being. Recognize the possible ramifications on your own financial situation when money saved for your retirement will now help defray your adult kids’ credit card debt, student loans, and variable expenses.
Apply the following insights and principles to encourage financial security and independence in your adult children:
Be transparent about setting guidelines for parental financial support.
- To determine whether you can capably help with their money matters, talk to your adult children about what financial burdens they are encountering and why. Attend to their requests and evaluate your own financial health prior to offering support. Once you can verify that you have sufficient resources to last a lifetime, you can figure out how much you can afford to spend on your adult children.
- With the collaborative guidance of a CERTIFIED FINANCIAL PLANNERTM professional, you can formulate a written contract outlining ground rules and arrangements for monetary support. Create a realistic budget with documentation that covers accountability, as well as any other stipulations, such as seeking full-time employment or repaying a gift. Incorporate important provisions in your documentation, including loan terms and required behaviors, such as weekly tasks to land a job2. Find a qualified financial planner from the Financial Planning Association.
- Keeping in perspective that 75% of adult children currently living at home with their parents are financially contributing to the household3, you can draw up a written agreement requiring your kids to help defray an amount of rent and household expenses, such as groceries and utility bills. Monitor payments and spending to ascertain that financial commitments are being kept.
- When you co-sign a car loan, credit card account, or mortgage with your adult kids, be cognizant of the possible risks to your credit rating and keep in mind that whatever they do with the account becomes part of your credit record. Also, review your loan structure and assess gift tax consequences of your family aid (i.e. handing over a house or car for some nominal amount) in consultation with qualified legal and tax professionals.
- Make direct tuition payments to colleges or creditors on behalf of your kids, rather than making outright gifts, should you desire to assist your children but have qualms about renouncing control. If giving a large gift or loan to one adult child and not to others, minimize any further misunderstandings and conflicts among children by articulating the situation and rationale behind this support to all family members.
Cultivate sound life skills and provide ongoing financial education to your adult children.
- When does the obligation to your adult children end and how do you wean them off financial support before it presents more risks than benefits? If you are loaning money to your adult kids over an extended period of time, think about charging a small interest rate to encourage timely reimbursement and to deter future borrowing.
- Start the education process by giving a modest amount of money for your young adults to manage. Prepare your adult children to be financially-savvy by letting them learn how to deal with both the financial and interpersonal ramifications of making mistakes with money. Utilize mentors (i.e. family members and trusted outsiders), credentialed advisors, and structured online resources to educate your young adults on financial matters.
- Instill a sense of financial responsibility in your adult children by modeling pivotal life skills around saving, spending and personal budgeting. Lead by example and demonstrate the financial behavior you would like your kids to emulate. Once your adult kids attain financial goals and save enough to become self-sufficient, do not forget to celebrate their accomplishments.
FPA member Elaine King, CFP®, CDFATM, is Chairman of FPA of Miami-Dade and Author of Family & Money Matters, La Familia y El Dinero Hecho Facil. FPA member Philip Herzberg, CFP®, AEP®, MSF, is President-Elect of FPA of Miami-Dade and Director of Media Relations & Public Awareness for FPA of Florida/Miami-Dade.
1Collier, Charles W., Wealth in Families, 2006.
2Mantell, Ruth, The Wall Street Journal, “Parents to the Rescue. Or Maybe Not,” March 12, 2012.
3National Endowment for Financial Education (NEFE) Survey, May 2011.