Older Kids and Money Problems
Sometimes, parents need a guide for when to rescue their kids from money problems – and when to hold back.
If a car were barreling down the street towards your child, would you push him or her out of the way?
The answer from any parent you ask would be an emphatic “Yes!” Our parental instincts naturally drive us to rescue our children from unsafe or unpleasant situations. The challenge is distinguishing between life-threatening and merely uncomfortable circumstances, as well as being able to tell when your child has enough strength, understanding, and creativity to solve the problem on his or her own. This applies to climbing tall trees, catching up on a forgotten school assignment, and recovering from a financial mistake.
That last point has been proving especially tough for parents to manage. According to a 2014 Pews research study, 61 percent of parents reported having helped their adult children financially in the preceding 12 months. Of those who did so, the majority (58 percent) stated that the financial help was needed due to “special circumstances”. However, the high percentages make me wonder: are those circumstances truly “special”, or is financial bailout of adult children becoming a parental habit?
As in many situations, it’s hard to have a one-size-fits-all answer. Over the years, we have seen clients that have compromised their own financial security because of repeated handouts to their adult children. At the same time, we have seen parents who navigate this terrain very effectively: giving money in a way that doesn’t sabotage their own financial plan while at the same time providing support to their children in a constructive, positive way.
If you are facing a question of whether financial help for your adult children is appropriate or constructive, here is a blueprint for thinking it through.
Understand what happened
Sure, this sounds like an uncomfortable conversation to have with an adult child. Have it anyway. If your money is to be used for something, you deserve to know how the situation came to be.
Remember that money conversations with adult children are best managed by sticking to facts. It’s easy to fall into judging their choices (luxury car, designer shoes, frequent meals at expensive restaurants, vacation in Bali, etc.) but the damage from a snarky comment will outlast whatever small pleasure you take from being right.
Your goal should be to walk away from the conversation with clarity on whether your child’s financial bind is a one-time problem or a recurring one. It’s also your opportunity to pick up on the red flags that may point to a larger issue (such as addiction, disorder-level pathology, or concerns about physical safety) as that may influence your next steps.
Know your own financial needs and limits
It’s impossible to make sound financial decisions out of context. Therefore, the process of determining whether you can give money to your adult child should begin with your own financial plan. Work with a financial planner to understand your cash flows, savings rate, desirable lifestyle in retirement, etc. Except for a handful of independently wealthy families, most clients don’t have unlimited financial resources and must therefore know how much they can afford to give.
As you think through your circumstances, it can be helpful to remember that young adults typically have more financial options than their parents, especially in the long term. Time is on their side, as they have decades before retirement. Sometimes, the right course of action is to help them think through their choices – especially if your counsel is sought out.
Help should come with clear boundaries
If you do decide to help your adult child financially, you must set clear boundaries.
First, is this money a gift or a loan? If you are giving the money as a gift, remember that any gifts over $15,000 annually are considered income to the recipient. The annual exclusion amount of $15,000 is maintained at the giver-recipient level (i.e. each spouse could give a child $15,000 in a year without triggering the need to report the transaction to the IRS).
If the money is meant to be a loan, set the terms and conditions in writing. How will it be repaid? What are the consequences for not repaying? Remember that the IRS requires all loans to have a minimum interest rate that’s driven by the length of the loan period (check the IRS website for current published rates at this link). It may seem strange to charge your children interest, but this practice will help you avoid IRS penalties. Remember that if repayments are not done timely, the money can be classified as a gift subject to annual limits.
Second, is this a one-time financial boost, or will your adult child rely on you for ongoing support? This question is particularly important because your child can normalize your financial contributions and begin to treat them as a normal part of his or her budget. That, in turn, can put their breaks on motivation to effect constructive change (such as analyzing cash inflows and outflows, implementing a budget, reaching out for a better-paying job, making financial choices that align with their means, and otherwise moving towards financial independence).
Finally, whether the money is a loan or a gift, do your own work to ensure it comes with no manipulative strings attached. Using financial support as justification to criticize your adult child, meddle in his or her life choices, etc. can do irreparable damage to your relationship.
Stick to your guns
As in many things, you may find that direct communication works best. Sit down with your child and walk them through your thought process. You may consider showing them your monthly budget and financial plan. Name the amount that you can contribute without sacrificing your own savings. Remember that your retirement and emergency savings are sacred: without them, you risk becoming a burden to the very same children you are trying to help.
Whatever your chosen boundary, communicate it clearly and be prepared to defend it. This may sound harsh, but continuous requests for money with no plan for financial independence can be damaging to your relationship.. Parents who hope that repeated handouts will improve their connection with an adult child may find themselves short on both the financial and relationship fronts.
To give or not to give?
In our experience, a black-and-white stance on financial assistance to grown kids can be overly simplistic. A no-questions-asked-blank-check family might be challenged when it discovers that a 23-year-old son suffers from a drug addiction. An unshakable insistence on complete financial self-reliance may crumble when a 35-year-old daughter needs money to get herself out of a physically abusive relationship in another state. Resolving to make each decision based on the specific facts and circumstances of the situation is likely more realistic, especially if set against pre-designed guardrails.
The key to long-term financial independence for everyone involved is to create a policy on giving money before you are ever asked. So, consider developing a set of family rules for situations where you would or would not offer financial help. For example, you might decide that helping your adult child cover unexpected medical bills up to $5,000 is within the family budget, while monthly help with credit card payments is not. You may choose to pay your child’s rent for up to 3 months following a job loss (provided that they are actively looking for a new opportunity during that time). You might decide that giving your child money to launch a business is a function better suited for an investor or a bank.
As long as you can develop an approach that’s in alignment with your resources and philosophy, having a set of consistent “decision rules” matters more than the specific rules you choose. On the other hand, outright failure to set clear guardrails is a disservice to yourself and your child. A family money policy can make it easier for you to explain and feel good about your decision, and for your children to know what to expect.