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Updated on Tuesday, October 21, 2014
Ah, the Bank of Mom and Dad. An institution that usually requires no formal application, charges little to no interest and doesn’t care about your credit history. Unfortunately, giving out zero percent interest loans to children leaves far too many parents in a financial bind.
During a recent financial empowerment seminar, a woman in the audience asked our team if she should borrow from her IRA to help out her adult kids.
To side step a delicate question, I asked when she planned on retiring instead of her age.
“Maybe five years,” she responded.
“Then I wouldn’t recommend stealing from your retirement fund to support your kids,” I told her. “Just remind them, if you don’t have the money to support yourself in retirement, they’ll need to be supporting you.”
It may sound controversial, because parents want to help their children through all stages of life. Unfortunately, the support needs to move from financial to emotional for many American families.
As a team, we often encounter parents asking how they can support their adult children while saving, paying down debt and prepping for retirement.
For many families, they simply can’t do it all. In fact, they need to evaluate when to cut their kids off.
A child returning home after college, or not leaving at 18, is an incredibly common phenomenon. But that doesn’t mean it should occur without a discussion. Parents allowing a child back in the home need to sit down and have a serious conversation with each other and then their offspring.
“Communication has to be clear as to what financial support will be provided and for how long,” explains Shannon Ryan, CFP, author and founder of The Heavy Purse.
“In most cases I have seen, parents have allowed the children to become dependent. When the parents become frustrated with the situation they loose site of the role they played to create this predicament. It is more painful to sit down and make a plan at this point but that is what needs to be done” says Ryan.
Charging rent not only helps parents cover the increased cost of a boomerang kid, but it teaches little Johnny or Susie how to budget. Knowing rent will be due can also motivate a kid to get a job.
If parents don’t actually need the extra cash to help the family make it through the month, then charging rent can be a parental 401(k). Once it’s time for Johnny or Susie to move out, mom and dad can hand over all the rent as a nice little nest egg to get independent life started.
Rent too harsh? Insistent on some contributions
Once children are capable of getting their own full-time jobs, it’s time for them to begin breaking away from the nest. Parents looking to provide support may offer to allow a child to live at home rent free, but ask the child to only cover the extra groceries and increase cost in utilities bills.
If a child is struggling to find employment, insist he or she help with chores around the house, cook meals and contribute to the home running smoothly.
Try to help a child understand finding a job should be his or her full-time job. Days should be spent filling out applications and going on interviews, not binge watching TV and playing video games. A bachelor’s degree doesn’t mean you’re above working at Starbucks, Target or the local bookshop.
Don’t rob your retirement fund
Men and women nearing retirement shouldn’t feel obligated to rob their savings for the future in order to help an adult child get through a rough patch today.
“Cutting your children financially off can be an incredibly tricky situation and one I believe that should be generally handled on a case by case basis. With that being said, there comes a point where parents need to make sure not to hinder their own retirement plans to help their children,” says John Schmoll Jr, founder of FrugalRules.com.
“That may seem harsh, but will only shortchange you in the end and likely not be the best long-term solution for your children. Instead, look for other ways you can help out your children that won’t require huge financial outlay on your part,” explains Schmoll.
Parents must remember children can take out student loans for college and personal loans or low APR credit cards for emergencies. They have the luxury of time to pay down debt. There are no loans for retirement.
Use their time at home as a financial bootcamp
Instead of just bailing your children out, consider their time at home an opportunity to provide teachable moments about how to handle their finances.
- Learn to save – it’s important for everyone to have an emergency fund, even for those dealing with debt.
- Set a budget
- Build (or rebuild) a healthy credit score
- Being proactive about saving for retirement early
- How to avoid debt
Take the time to assess your child’s situation
Of course there are always exceptions to the rules.
“In the rare case of disability or loss of job when the child is doing everything they can, I would support the parents stepping in if it does not cost them their retirement,” says Ryan. “If the parents are not in a financial place to help then maybe they can help their children find the resources or social programs that could.”
Sometimes, kids need a little bit longer to grow into their adult selves.
Holly Johnson, founder of Club Thrifty, reflects on her own journey to maturity.
“I actually moved out when I was 18 but moved back in from 19 to 22ish,” shares Johnson. “My parents took me in during that especially hard time in my life and I’m eternally grateful.”
Johnson recalls how she took sometime to grow into her own, but her parents provided a road map by serving as strong role models and continuing to show her love and support.
“I hope to show my kids the same kind of patience if they are slow to grow up once they reach adulthood,” says Johnson. “Because of my parent’s generosity, I am able to support them now when they need it.”
And sometimes an adult child needs to come after hitting a rough patch. Perhaps it’s job loss, divorce, or another monumental life circumstance, which forces a child in his or her 30s, 40s or 50s to return home. Just remember to have a conversation about expectations before a child of any age sets up camp at home for months or years.
There is no one size fits all advice
Each family needs to assess their own situation both financial and emotional. Parents, just try to find a way to help your child without permanently damaging your ability to retire. The solution may include going to a financial planner to help you navigate through impending financial issues.
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