When getting ready for retirement, most people plan for costs like basic living expenses, housing, health care, transportation and recreation. One thing you may not be planning for is the cost of assisting your adult child financially. According to a 2015 Pew Research Center poll, this situation affects 61% of parents in the U.S.
With the cost of college education continuing to rise, student loans, and difficulty finding a good paying job, it can be very difficult for millennials to reach financial independence. If you are still supporting your adult child or he or she has a setback and comes to you asking for money, consider all aspects of the situation, both financial and emotional.
Consider Your Own Financial Situation First!
The stresses involved for the parent can wreak havoc on your pocketbook as well as your mental and physical health. Even though a parent’s instinct is to help a child who is in distress, you need to determine if you are able to help without causing yourself financial problems and derailing your retirement. Communicate to your child that you have your own financial responsibilities that come first. You will have a shorter time span to make up for the financial costs than your child will. If you determine that continuing to give them money will cause too much financial strain to you, then you should just say “no”.
Start the conversation.
The hardest part can be to start the conversation, but it can help greatly to open the door to change. There may be feelings of guilt, resentment and fear that by just getting it out in the open can start the healing process for all parties involved.
Most likely, your child would like to be financially independent just as much as you want them to be!
Get the Facts.
It is extremely important to know exactly what the financial situation is. Your child should produce specific information that includes any documentation of their income, bills, debt and savings. This is no time for being vague. Ask your child how they have tried to resolve their money problems before they came to you. Have they looked for other options or opportunities to increase their income? Can they cut back on expenses? Get a second job? Sell their car for a cheaper one, or sell it all together and take public transportation? You may want to consider other ways of helping instead of giving them money, such as providing child care or assisting them in networking for better job opportunities.
If you do decide to offer financial assistance, make a plan that is clear and specific.
Establish whether you are providing a gift or a loan.
If your help will be a gift, then be clear to your child if you are giving this gift as a one-time offer only, and to use the funds wisely.
If your help will be a loan, set the terms before you give any money. The guidelines need to be clear and realistic so both sides know what to expect.
- Put it in writing! This contract should be signed and dated by all parties involved. Include the amount of the loan, installment schedule and repayment schedule, and any consequences for late or missed payments. Also, establish if the loan will include any payments made by the parent that may be sent directly to whomever the child owes. For example, a direct payment could be for a car a loan or utility bill.
- Depending on how large the financial downfall is, set a realistic time frame for repayment to help your child manage their budget and create an “emergency fund” to have a cushion for life’s unexpected expenses. It is better to make small, realistic steps to achieve this goal, rather than a rushed and unfeasible plan that can cause more stress and discouragement to all parties.
- Keep detailed records of any money transfers or payments made to companies directly.
Make a plan for change.
The goal is to heal the relationship while assisting the child to become financially independent. Once all is agreed upon, discuss the changes the child will be making in his or her life to live up to their end of the contract. How specifically is the child going to accomplish this goal? Create a budget together so he or she has a plan that will help in learning how to live responsibly and the value of making good choices. This can help create a sense of confidence when they budget successfully. Let them know that you are making sacrifices to support them which might affect any inheritance you were hoping to leave, since that money will not be invested for your retirement and estate as planned. Your child being aware of this can provide additional motivation to becoming financially independent.
If part of the agreement is that your child lives with you, establish a time frame that they will be permitted to live with you and how they will need to contribute to the household. This does not necessarily need to be in the form of rent, but could come from home maintenance, cooking, cleaning and errands.
Throughout the set time frame, schedule periodic meetings to discuss if they are on track and make adjustments if agreed upon. Helping your child learn to become financially independent can be a fulfilling achievement for parents. Children who find themselves in this situation can learn valuable lessons with your guidance that will be crucial in their lives and improve strained relationships in the family that will benefit all involved.
Carol Chaudet
(Last updated 10/03/2016)