An estimated two-thirds to three-quarters of all parents provide financial help in some form or another to their adult children. Some parents allow their children to live at home rent-free or help pay bills or tuition. Others contribute to student loan debt repayments or contribute to the down payment on a first home.
The increasing percentage of parents offering support to adult children is a relatively new phenomenon and is, in part, driven by two major economic trends. First, following the rising cost of a college education, student loan balances have been growing at almost 9% per year* in recent years, much more rapidly than other forms of debt. Student debt totaled $1.59 trillion in 2022 up from just $370 billion in 2005*. Second, skyrocketing home prices in many areas of the country, including the San Francisco Bay Area, have made homes unaffordable for many young people. Economic burdens for young adults have increased significantly in recent years as a result of these two trends. Maybe it is no surprise therefore that anxious parents are increasingly trying to provide some relief.
But is it a good idea to help your adult children financially? How will helping your children impact your own financial and retirement plans? There are no blanket yes or no answers but here are a few things to consider as you go about determining what is the right amount of support, if any, you should give to your offspring.
1. Know your own financial situation
The first thing parents need to consider before giving aid to an adult child is their own financial situation. You are entitled to put your own financial needs first. Do you have enough saved to enjoy a comfortable retirement? Do you have enough saved for unexpected events, such as illness? Have you already achieved your financial goals or are they still in front of you? It is worth remembering that putting yourself in financial jeopardy is unlikely to help your children in the long run.
So, before offering support to your children, stress test your own financial situation under a few “what if” scenarios to see if you could help your children financially without compromising your own wellbeing.
2. Why does your child need support?
Most parents want their children to achieve adult self-sufficiency, which is usually defined as being able to support themselves economically and manage their own financial affairs. Some forms of parental financial support work in harmony with this self-sufficiency standard while some work against it.
Helping children with the cost of their education or subsidizing them while they take a temporary, low-paying internship is generally seen as scaffolding for a young adult clearly on the road to self-sufficiency. As soon as the student loan is paid off or the internship parlays into a permanent position, the child is off and running and parental support usually ceases. Similarly, providing a portion of the down payment on a first home is seen as a great, one-time investment in your child’s future, setting them on the path to wealth creation through home-ownership.
On the other hand, if your adult child seems to just be counting on you for steady money infusions and not establishing a career or good financial habits, it may be time for an honest conversation about whether your support should continue.
3. Your relationship
There is no standard template for relationships between adult children and their parents. But be sure to consider the relationship between you and your children when making a decision about financial support.
Are you happy to provide the help they need, or do you feel resentful about being asked? Are you in sync with the goals they’re trying to accomplish or do you not agree with their choices? If you help one child, will the others demand equal treatment?
Consider the interplay between their emotions and yours as well. Is either one of you likely to feel resentful or take each other for granted? You want to avoid potential future negative effects and foster positive outcomes.
4. Determining the amount of support
If, after careful consideration of your own financial position and the reasons your child needs help, you feel that you can and want to offer financial support, the next step is to determine the amount of support. At this point it can be helpful to talk to a financial advisor to help you decide how much you can give while maintaining your own lifestyle and financial goals.
Regardless of whether or not you consult a professional, make the parameters clear to your adult child. For example, if you are giving a certain amount toward student loan repayment or a home down payment but do not intend to give more, make that clear. A contract or document specifying the parameters may be advisable.
At times, the best solution may be a loan. If that’s the case, be sure to draw up loan terms and sign a contract, just as you would do for any loan. Having an agreement in writing clarifies matters and can avoid confusion later on.
Parents instinctively want the best for their children. But when it comes to financial support for adult children, careful consideration of where the money is going, why your child needs it, and your own financial circumstances is highly recommended. An open and honest discussion about how you can partner with your child to help them make better financial decisions can start them on the road to financial independence.
At Fairview Capital, we believe that comprehensive wealth management is about our clients and their loved ones. It’s about serving their needs for today as well as tomorrow. And it’s about planning for future generations and philanthropic aspirations. Contact us today for more information.
* JP Morgan Asset Management “College Planning Essentials” 2023 Edition
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