Some part of the American dream used to include raising children to be independent, and once “out of the nest,” enjoying a comfortable retirement with your spouse or significant other. The reality is, raising kids to be financially independent isn’t so common any more. According to a November 2014 survey by Bank of America, more than a third of adult “millennials” (generally thought to be those individuals born in the late 70’s and 80’s who are currently in their 30’s) receive regular financial assistance from their parents. One in five still live at home without having to pay rent or expenses.
An online poll conducted by ForbesWoman and the National Endowment for Financial Education (NEFE) back in 2011 showed that half of parental support was in the form of housing, followed by help with living expenses, transportation costs, insurance coverage, medical expenses, credit card debt and emergency money. Among the parents who offered financial support to their kids, 43% said they were “legitimately concerned” for their kids’ financial well-being, and 37% didn’t want their kids to struggle the way they did. The result: more parents are providing financial assistance to their grown kids in record numbers, with support ranging from giving occasional cash to complete dependence.
So has that part of the American dream become a nightmare instead? The answer is, it depends.
The benefits of helping your adult child through a short-term financial slump are obvious. Longer-term living arrangements may actually help bring families closer together. If young adults living at home are working and contributing to the household financially, that could actually be a help to the parent. Non-financial help from the adult kids, like cooking, cleaning or childcare not only relieves stress for the parent, it could also promote a sense of fairness and shared dependence. Young adults who appreciate the financial support from their parents now are more likely to repay this “goodwill” later on, when the parents grow older and begin needing more help themselves.
On the other hand, parents providing on-going financial support to their adult children may also lead to dangerous consequences. As a financial planner, my job is to look after the financial well-being of my clients, and if providing too much support to adult children is going to impair their own financial future, we need to have that tough conversation sooner rather than later. Even for parents who can afford to provide support without hurting themselves financially may still be harming their children in the long run. If adult children never learn responsible ways to manage money and be financially independent, they may run into worse trouble down the road when the parents are no longer around. By “enabling” adult children to be financially dependent for too long, parents can actually disable them.
Here are three good signs it might be time to take steps to “cut the cord” financially with adult children:
- The adult child is not trying to get on their feet financially. Clearly, if they don’t have a job and aren’t trying to find one, that’s a big sign. But if they are getting financial help from a parent and making the same mistakes over and over requiring the parent to step in and “rescue” them financially, then they aren’t learning the appropriate financial lessons in life, and it’s likely the “rescuing” parent is not really helping their adult child in the long run.
- The adult child is irresponsible with resources. This usually manifests in the form of spending problems, or the tendency to “waste” money. This is made easier to do by the parent, when it’s not their own money the adult child is wasting!
- Supporting the adult child is putting the parent in a “financial hole.” This could be in the form of the parent having to delay a long-awaited financial goal, such as buying a 2nd home or taking a vacation, but it could also mean the parent is being forced to take on additional debt, delay retirement, or worse, erode their retirement “nest egg,” thereby jeopardizing their own financial future.
So what should a parent who is financially supporting an adult child do to break the cycle of dependence? Experts recommend that, in order the help their kids gain financial independence and protect parents from adverse financial consequences, parents should set clear expectations with their kids. They should define (in writing, if necessary) the help they are willing to give to their adult child, whether a gift or a loan, and for how long they are willing to give it. If parents decide to lend their child money, they should also set up a repayment plan and insist that the money be paid back. And if the money is not paid back, parents shouldn’t lend to them again – just like a bank wouldn’t.
Parents should also define what is expected of the adult child in order to receive their parents’ financial support, including contributing financially to the household and helping with chores – if living at home. Those expectations can also include rules about living habits at the house and overnight guests. Parents should regularly monitor with their adult child progress toward these defined goals – whether it be finding a job or saving enough money to be able to live independently. Encouraging adult children to develop good saving habits as soon as possible is always a good thing.
Tough as it may be, it’s important for parents to stop feeling needed by their adult kids psychologically. Parents need to recognize when they may be subconsciously luring their boomerang kids back home by being too financially accommodating. Instead, they should remember that it’s a great benefit to have young adults taught to be financially responsible – as opposed to having everything handed to them. They may thank you some day – when they have kids of their own!
If this situation may apply to you or someone you know, and you feel help may be needed with a plan to get adult children on the right financial track – call us. We welcome the opportunity to protect parents’ financial health – and get their children started on the right path as well.