Manage the Bank of Mom and Dad
We all know how it’s supposed to work. We raise our children to be responsible citizens, supporting them, loving them and providing for them generously. When they become teenagers, they head to high school and then on to college, vocational school and careers. By age 21, give or take a year, they’ve grown into full-fledged adults, ready and able to live independently in the world.
The problem is it isn’t happening this way—at least for a majority of young adults. Faced with student loans and high living expenses, but lacking the salary to pay them, more college students are returning home after graduation. Given the comfortable life they find there, it’s little wonder these “kidults” are reluctant to leave. Research shows that the average age when young adults today become financially independent of their parents is, in fact, 27.
Parents, in some cases grandparents, meanwhile, find themselves financing the lifestyles that their children and grandchildren have become accustomed to—sometimes jeopardizing their own savings and retirement in the process. The Bank of Mom and Dad can find itself in trouble and in need of new fiscal policy to remain solvent.
What are parents who have twenty-somethings still clinging to the family nest to do to help their children become financially independent and to protect their own financial well being? Here are some suggestions:
Give your child a reality check. Young adults today often think they should start out with a lifestyle equal to the one their parents have worked years to achieve. They cannot imagine trying to live on an entry-level salary without “necessities” like computers, cell phones and cable television. Many need basic financial planning advice associated with making budgets and living within their means.
Be honest about your own situation. Studies show that many parents and grandparents use credit more freely when spending on lifestyle activities for their children and grandchildren than they would on themselves. You do neither yourself, nor your children any favors if you choose this approach. It’s better to be upfront with your children about how much you can afford to help them while stressing that they can’t rely on The Bank of Mom & Dad indefinitely.
Advise against accumulating excessive debt. When you were growing up, you most likely remember the social stigma that was attached to having high debt. Among young people, that stigma has largely disappeared. In fact, for many young adults, living with high debt has become an accepted—almost inevitable—part of everyday life. Encourage your children to resist the desire for immediate gratification over the more meaningful satisfaction associated with “saving for a rainy day.”
Show financial tough love. While there may be nothing wrong with providing temporary financial support when your children find themselves in transition, it shouldn’t become a habit. Eventually, you’re almost certainly going to have to cut the financial umbilical cord. If they have lived at home for years, now may be the time to begin the weaning process. You probably don’t want to do it cold turkey. It’s better to make a plan for cutting the purse strings, share that plan with your child—and, most importantly, stick to it.
Help finance their independence. High real estate prices are among the top reasons adult children give for remaining at their parents’ home. If you have the financial means, you might help entice them to leave by helping them set up their own home. This could mean making a down payment on a starter home or condo, co-signing their mortgage or even buying a property that they could purchase from you under a rent-to-own agreement. These might seem like expensive ways to help. But if you can afford it, it’s probably a better investment of your money than regular handouts.
Charge them market-rate rent. If you can’t afford that kind of financial “carrot” to entice them outside of the house, you can choose a “stick” to push them out instead. When you are generous with your children, they have no incentive to leave. But if you start charging them marketrate rent, they might begin to see the advantages of finding their own place.
Bring in professional help. Chances are your child doesn’t want to hear about how you struggled in a studio apartment without a TV in your early years. But they may be open to listening to a professional financial advisor. A financial planner may be able to help them organize and improve their financial situation, and more importantly, teach them about budgeting and investing.
Use trusts to teach. The children of wealthier families are just as vulnerable to financial troubles as other kids and sometimes even more so. To establish some financial discipline, some families establish trusts for their children. They can even attach strings to these trusts. For example, some family trusts only allow children to receive funds if they earn a certain amount of money on their own.
The key behind all these tips is to encourage your children’s financial independence. They’ll need it to be responsible adults and you need them to have it for your own peace of mind. tpw
The problem is it isn’t happening this way—at least for a majority of young adults. Faced with student loans and high living expenses, but lacking the salary to pay them, more college students are returning home after graduation. Given the comfortable life they find there, it’s little wonder these “kidults” are reluctant to leave. Research shows that the average age when young adults today become financially independent of their parents is, in fact, 27.
Parents, in some cases grandparents, meanwhile, find themselves financing the lifestyles that their children and grandchildren have become accustomed to—sometimes jeopardizing their own savings and retirement in the process. The Bank of Mom and Dad can find itself in trouble and in need of new fiscal policy to remain solvent.
What are parents who have twenty-somethings still clinging to the family nest to do to help their children become financially independent and to protect their own financial well being? Here are some suggestions:
Give your child a reality check. Young adults today often think they should start out with a lifestyle equal to the one their parents have worked years to achieve. They cannot imagine trying to live on an entry-level salary without “necessities” like computers, cell phones and cable television. Many need basic financial planning advice associated with making budgets and living within their means.
Be honest about your own situation. Studies show that many parents and grandparents use credit more freely when spending on lifestyle activities for their children and grandchildren than they would on themselves. You do neither yourself, nor your children any favors if you choose this approach. It’s better to be upfront with your children about how much you can afford to help them while stressing that they can’t rely on The Bank of Mom & Dad indefinitely.
Advise against accumulating excessive debt. When you were growing up, you most likely remember the social stigma that was attached to having high debt. Among young people, that stigma has largely disappeared. In fact, for many young adults, living with high debt has become an accepted—almost inevitable—part of everyday life. Encourage your children to resist the desire for immediate gratification over the more meaningful satisfaction associated with “saving for a rainy day.”
Show financial tough love. While there may be nothing wrong with providing temporary financial support when your children find themselves in transition, it shouldn’t become a habit. Eventually, you’re almost certainly going to have to cut the financial umbilical cord. If they have lived at home for years, now may be the time to begin the weaning process. You probably don’t want to do it cold turkey. It’s better to make a plan for cutting the purse strings, share that plan with your child—and, most importantly, stick to it.
Help finance their independence. High real estate prices are among the top reasons adult children give for remaining at their parents’ home. If you have the financial means, you might help entice them to leave by helping them set up their own home. This could mean making a down payment on a starter home or condo, co-signing their mortgage or even buying a property that they could purchase from you under a rent-to-own agreement. These might seem like expensive ways to help. But if you can afford it, it’s probably a better investment of your money than regular handouts.
Charge them market-rate rent. If you can’t afford that kind of financial “carrot” to entice them outside of the house, you can choose a “stick” to push them out instead. When you are generous with your children, they have no incentive to leave. But if you start charging them marketrate rent, they might begin to see the advantages of finding their own place.
Bring in professional help. Chances are your child doesn’t want to hear about how you struggled in a studio apartment without a TV in your early years. But they may be open to listening to a professional financial advisor. A financial planner may be able to help them organize and improve their financial situation, and more importantly, teach them about budgeting and investing.
Use trusts to teach. The children of wealthier families are just as vulnerable to financial troubles as other kids and sometimes even more so. To establish some financial discipline, some families establish trusts for their children. They can even attach strings to these trusts. For example, some family trusts only allow children to receive funds if they earn a certain amount of money on their own.
The key behind all these tips is to encourage your children’s financial independence. They’ll need it to be responsible adults and you need them to have it for your own peace of mind. tpw