Thinking about helping out your adult children financially? You’re not the only one - this is becoming more and more common - especially when it comes to home-buying and paying down debt.
Buying a first home is one of the biggest financial pressures for anyone. Banks have become more stringent on the stress test, so it’s harder to qualify. Previously, Millennials and Gen Xers could go in with 5% down, but it’s not as easy anymore. The price of housing has eclipsed most young people’s incomes, especially compared to 10 or 15 years ago. And it’s not just the $50,000 down payment, either. Many adult children are looking to their parents to co-sign the mortgage.
Similarly, credit card debt is getting out of control. When incomes don’t support the cost of living, many people turn to credit cards as an emergency source of funds. This quickly leads to unmanageable debt because credit cards rates are very high.
It’s a tricky situation for parents who want to help their adult children during difficult times. Here is Paul Shelestowsky, Meridian Senior Wealth Advisor, answering some of the most common questions he gets about helping adult children financially.
Is it a good idea to help my children financially?
I get this question a lot, but I never give a yes or no answer. I try to relate to what someone is going through and advise from the perspective of what I would do if it were my money. Clarifying the pros and cons really helps because it shows Members the real financial burden of helping. Numbers only tell a part of the story, though. Helping children is also an emotional decision. So while I can help provide some clarity within the overall plan, I also advise people to dig deep and listen to their gut.
Would I be OK financially if I helped my kids out?
When I make a list of pros and cons with Members they can really see the financial impact of giving money to their children. Often, going through this exercise gives them permission to say no, or gives them the peace of mind to say yes.
We can also generate other options. For example, I talked to a married couple recently who wanted to give $50,000 to each of their two children. They are in their 70s, and their kids range in age between 35 and 45. Before we did anything else, we went back to their financial plan and made sure it was up-to-date so they could get a sense of where they are right now. Currently, their estate is worth $1.5 million. If they were to take $100,000 out of non-registered investments, they would end up with an estate of $1.4 million. Seeing those numbers gave them peace of mind. They live below their means, so they realized that if their spending habits remain the same they could still leave an inheritance and cover any medical expenses that may arise. In this case, these Members felt pretty secure giving money to their children, they just wanted proof that they would be OK.
I've also worked with Members at the other end of spectrum. They have children who want help, but giving it would have a negative impact on their own financial well-being. It’s my job to show them the numbers so that they really understand the long-term impact. In either scenario, providing concrete proof is critical. Otherwise, I'm doing Members a disservice. Also, I think it’s important to note that when we have a financial plan to reference it makes it much easier to me to advise on this decision with both context and proof.
I’m going to help my kids financially - what should I do first?
If you do decide to help your kids financially, it is vital to talk to your advisor about it and make sure that your financial plan takes this into account. For example, if you are going to give your child $1,000 a month for the next year, that expense should be included in your overall plan. Be frank with your advisor. Share how much you plan to give each month and how long you anticipate you’ll be helping. Those two pieces of information go a long way in determining the long-term impact of your decision.
For many people, helping kids financially is an emotional decision, and it often becomes a private family matter. I definitely understand that, but I also want to emphasize that it’s important to share information with your advisor because it has a big impact on your long-term plans and ultimately, your peace of mind.
How can I be smart about helping my kids financially?
You can give your adult children money and still be smart about your finances. I always recommend keeping the whole picture in mind. As we come through the pandemic, financial pressures are only increasing. There’s a growing trend of underemployment, yet spending is anticipated to rise dramatically as people gain their freedom. The housing market and prices continue to surge, and interest rates are sure to follow. While there's a lot of optimism, there is a still a lot of financial uncertainty as well.
At the same time, more and more Members are coming to me to discuss how they can help their children financially. The first thing I say is always: let’s be smart about this. Look at your overall financial situation and take a few key things into consideration. First, it’s likely that your child will have a longer time horizon to rebuild financially. The same may not be true for you - if you overextend yourself at 75, how will you earn that money back? First and foremost, it’s important to protect your own financial well-being and then help where you can and where it makes sense.
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