For many parents of young adults, cutting off financial support has become a process rather than an event. Instead of cutting the purse strings, many families are snipping them thread by thread.
A recent study by Pew Research Center supports what many parents already knew anecdotally: More young adults are struggling to be financially independent. In the survey, 45% of adults ages 18 to 29 said they had received a lot of or some financial help from their parents in the past 12 months.
While experts warn of the risks of being the “Bank of Mom and Dad,” there are ways for parents to offer support to their children without making it a crutch. The key is looking at what's needed, setting guidelines, communicating expectations, and offering advice (and tough love) when it’s needed.
Here are five questions parents should ask if they're thinking about offering a financial lifeline to their offspring.
Consider Why This Support is Needed
There's no perfect litmus test for knowing when it makes sense to provide a financial buffer, but a good gauge for most families is whether it serves a bigger purpose. For example, it's not uncommon for parents to help with rent if living in an expensive city is key to launching a post-college career; gift some money to help with the downpayment on a first home; or provide seed money for promising business venture.
Conversely, parents should be careful about handing out cash to enable an expensive lifestyle or perpetuate an extended and unrealistic job search.
Ask Yourself if You Can Afford This
Before parents get too far down the path of offering support, they need to take the pulse of their own finances. Young adults have time on their side when it comes to building a career and saving for their golden years. For parents in their 50s, 60s and 70s, bankrolling their adult kids could come at a high cost—jeopardizing their own financial security.
Indeed, parents should only offer help if they can easily afford to do so. That means not taking on additional debt, staying on track with retirement savings or, for those who are retired, not unraveling their nesteggs.
Is Your Child Seeing This as a Gift or Loan?
Families should address this question from the get-go, particularly if there are other kids in the picture. It’s important to get everyone on the same page, lest kids assume the support is a gift while parents consider it a loan.
If the support is a gift, parents should spell out exactly how much they plan to give and for how long. They should also consider if they’re prepared to offer the same support to other adult children and under what circumstances. Keep in mind that parents can each gift $15,000 per person, per year before they bump into the gift tax.
In the case of a loan, families should put the details in writing, including total amount, timeline, payment schedule and interest rate. Families concerned about triggering gift taxes can formalize the agreement using the Internal Revenue Service Applicable Federal Rates, which spells out the lowest rate that can be charged without being considered a gift.
What are the Conditions?
Different circumstances and family dynamics call for different degrees of control. In the case of adult children who have solid track records managing money, parents may feel comfortable writing a check and trusting their kids to use the funds as planned. For young adults who’ve struggled to stick with a budget, it might be more prudent for parents to cover specific expenses, such as insurance, car payments or mobile phone bills.
No matter what the situation, advisors caution, parental support should never be an open line of credit. Parents and their kids should outline clear parameters for when support is provided, for how long and under what circumstances they should revisit the arrangement.
Are There Any Alternatives?
Sometimes there’s no getting around writing a check or picking up the tab for a necessary expense. That said, parents and their adult kids should explore all the alternatives, including living at home for free or reduced rent; pursuing other career opportunities; or finding other ways to cut costs.
No matter what kind of arrangement parents work out with their adult kids, it’s never too late to instill the importance of budgeting, the value of saving and the satisfaction of working toward financial independence.
A Fifth Third financial advisor can work with you and your adult children to strike a balance between offering financial support and guiding them toward a secure and independent financial future.
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