Should You Provide Financial Assistance to Your Adult Children?

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Stock Market ExcitementA survey conducted by the National Endowment for Financial Education (NEFE) found that nearly 60% of parents are providing or have provided financial support to their adult children after they have finished school. It can be difficult to refuse a child’s request for financial support, especially when it is within your means. However, careful thought should be given to the request. Sometimes saying no is the best way to help in the long run.

First, assess the reason for the request:

  • Is the financial request due to a job loss?
  • Is this an unexpected short-term crisis or is it a chronic issue?
  • What sacrifices (if any) is your child making to improve his or her financial situation?
  • Is your child taking any steps to avoid a future crisis?

The NEFE survey found the main reasons for giving support were:

  • 43% – Because they are legitimately concerned with their child’s financial well-being.
  • 37% – They struggled in the past and do not want to see their children struggle the same way.
  • 32% – Their children are worse off than they were when they left home.

Are these good reasons for assistance? If you have decided you are going to help, be very clear about two things: 1) the kind of assistance you are providing and 2) the terms of that assistance. Will this be a gift or a loan? If it is a loan, be clear that you expect the loan to be repaid and within what period. Make sure you discuss the loan terms prior to giving any money.

The NEFE survey revealed some of the ways parents are providing support:

  • 50% – Providing housing
  • 48% – Help with living expenses
  • 41% – Transportation costs
  • 35% – Providing insurance coverage
  • 29% – Spending money
  • 28% – Help with medical bills

An adult child who repeatedly needs help because he or she isn’t financially responsible may be better off referred to a financial counselor. Many areas have non-profits that provide financial counseling at no cost. These counseling services usually run financial education classes teaching budgeting and long-term financial planning. You may want to insist that your child work with a counselor as a condition of receiving any further financial help.

Before you pull out your checkbook, you should consider whether you can really afford to help. Will helping now compromise your financial future? If so, look for other ways to provide assistance. For instance:

  • Housing – Could your child move in with you on a temporary basis? Set expectations before they move back in – how long will they stay? What is expected of them while they are living with you?
  • Transportation – Do you have an extra car they can borrow temporarily? What will the car be used for? Commuting to work only? Can you provide a ride until their transportation problem is resolved?
  • Cosigning a Loan – Cosigning a loan carries many risks and very little reward. Many financial experts believe that you should never put your name on someone else’s loan. Usually a consolidation loan or another type of borrowing isn’t going to solve their problem anyway. Don’t cosign the loan unless you’re willing and able to pay for the entire item or loan yourself. There is a chance you will be paying it.

The decision to help or not is emotionally charged and a difficult one on which to offer advice. My final word on the topic is when in doubt, don’t. There is much to be learned by suffering the consequences of your decisions. Failing to set aside money for an emergency fund will cause suffering when the “unexpected” expense arises. Being able to run to Mom and Dad makes them the emergency fund. Helping in this situation only enables bad financial behavior. There is also value in learning to think through your problems and work out solutions. Bailing out our children robs them of the lesson they would learn by solving their problem and discovering what caused it in the first place.

Parenting is something you do for your entire life and it’s a natural instinct to want to help your child no matter what age. Resist the temptation to open your checkbook when they ask for help. It’s time to start treating the child like an adult.

Rick’s Tips:

  • 37% of adults in the NEFE survey have struggled financially and do not want to see their children struggle the same way.
  • Insist on having your child meet with a financial counselor as a condition of getting financial help from you.
  • Don’t cosign a loan for your child unless you’re willing and able to pay for the entire item or loan yourself.

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