Job scarcity, sky-high student loans and looming foreclosures. These are just some of the obstacles many young adults, 28 to 30, have to overcome in order to realize the dream of financial independence.
However, for a huge percentage of these young adults, it appears this will only remain to be a dream. For them, seeking refuge in their parent’s pockets and houses is the only bullet in the chamber. For the parents, this is a threat to their retirement and financial future not to mention the dangerous door of dependence they’re opening.
On the other hand, parents will want to be there for their children when they hit financial roadblocks. Even a kid with the best financial management skills can land on difficult times, but then these are isolated cases.
What financial advisors warn against is the constant bailout parents offer their children. Laundry? Bring them on, phone bills? Of course. Insurance? Yes, please. According to a recent study, up to two-thirds of people above 50 have in one way supported a 21-year-old or over financially in the previous 5 years.
The report released by the Pew Research Center in 2013 reveals more shocking figures. According to the report where they interviewed adults aged between 40 and 59 with one or more children, 73 percent of them admitted to having supported a child in the last year.
Even more startling is 50 percent of those parents said their children viewed them as their main source of support. The reasons, in some instances, was because the child was still schooling. However, over a third named other reasons beside education.
Up to a quarter of young adults aged 25 to 34 live with either their grandparents or parents. This is according to another study conducted by Pew, which also showed an 11 percent increase from 1980. In fact, these figures inspire reduced stigma for children who still put up with their parents.
While, as a parent, you wouldn’t want to see your children stressed out or in pain, it’s inevitable for you to leave this world. What then will happen to your children after you’re long gone? Striking a balance between over-dependence and support in order to launch your child into the world.
Here are a few ways to do it.
1. Avoiding Risking Your Financial Future
Let’s face it; no parent would want to see their children suffer and do nothing. On the other hand, you may want to think twice before sending that money may affect your lifestyle. Frequent support every time your child comes calling can jeopardize your retirement.
As you near retirement, your income buffer slims. In contrast, a child in their 20s and 30s has numerous income generation options which a retiree doesn’t. Therefore, they can take out online loans because they have enough time to pay them off.
For a retiree, you have limited time. Besides, you’ve worked hard throughout the years, so you can enjoy this money. Constant gifting will only deplete your investment account, then your savings and then what? Your children may not yet be out of the woods and so cannot come to your rescue.
It could be a medical problem and with all your assets gone, a nursing home may the only option left. Don’t let it get to this point of regret. Run the numbers with your financial planner and if they say you cannot give handouts then come clean with the children.
2. Offer the Correct Help
One of the reasons children run to their parents for help is a down payment. In fact, it falls right among the gifts financial advisors warn against. Your children may not be mature enough to understand what it means to save for a home, yet you’ll still finance a down payment.
According to financial experts, your rent should be no more than 10 percent of your total income. If you’re paying more, then you may find yourself in financial jeopardy. On the other hand, if you struggle to come up with this figure, then you’re not ready to live alone.
This goes for a down payment as well. If your kid comes to you for help when buying a house, then it means they cannot afford it. Period.
Parents of guilty of diving into their pockets to fund various activities for their children without taking the time to think about the future. Take, for example, financing a startup. It’s well known that small businesses have little odds of making it past the first year.
If they do, they’ll have massive debts. With this in mind, as a parent, you must protect yourself against such downfalls by putting everything in writing. If they approached other lenders for financing, they’ll do the same. Furthermore, if they end up defaulting, then the lenders will auction their assets.
3. Loans or Gifts?
If you hand out a substantial amount of money to your kids, then they must pay it back. In fact, to make sure they pay back, draft a contract and charge a certain interest. When they pay it back, you’ll feel proud as a parent knowing the children will achieve financial independence.
According to the Internal Revenue Service, if you’re extending the handout as a loan, then a certain minimum interest rate will apply. Going by 2015’s rates, a 3-year loan will attract a 0.40 Applicable Federal Rate, a 3 to the 9-year loan will attract a 1.47 percent interest rate while anything more than 9 years will attract a 2.19 percent interest rate. If the loan is not paid back, then it’s a gift.
Keep in mind gifts over $14,000 and $28,000 for a couple are taxable, but then only a few people know of the gift tax. If you don’t pay tax, then subsequent larger gifts must be catered for and taxed when handed out.
There are cases where some parents deduct their gifts to children from their share of the inheritance. According to them, the children who received numerous handouts during their lifetime aren’t entitled to the inheritance.
4. Make the Work for it
According to the Pew research, kids who stay longer with their parents end up developing a closer connection. What’s more, they contribute to the family both in financial and non-financial means.
The former being the highest form of contribution taking up to 75% by contributing gas, groceries, utilities and mortgage. The nonfinancial contribution took up 42%, according to the NEFE study. These contributions are advantageous to parents who provide extended support.
Make it clear to them that for the support they enjoy, they must step up and make household contributions if they haven’t started yet. It’s a give and takes the situation. Simple. You can even cell phone bills or rent even though you’ll stash it and give it to them the day they’re ready to start on their own. You can even make Roth IRA contributions in their name.
There’s also the other scenario where you provide support to your kids, yet they live away. In this case, they can still make contributions. For example, if you have a business, let them handle the books, your marketing campaign or any other task that fits their education. The point is to make them work for it.
5. Pull the Plug
When it’s time to pull the plug, it’s vital to communicate with your kids. Let them know how much the support is impacting your finances because most of don’t know because you didn’t tell them. Check out these tips before pulling the plug:
- Come clean about the impact: Since there’s no trust fund, let them know your sacrifices are what makes it possible to support them and that this dims your financial future.
- Create a solid plan to cut funding: Parents believe children should be financially independent at age 25 although according to the current situation, they believe it’ll happen at 30. On the other hand, the young adults believe it’ll happen at 27 to 32.
Don’t just sit and assume it’ll happen as you predicted. Instead, take stock of the monthly support they receive and then calculate the time it’ll take you to cut the support. The hardest part of this is sticking to your decision to pull the plug.
- To continue offering financial advice: As you offer your kids financial support, it’s inevitable to discuss money issues. For example, how to run a household, how to climb the ladder at work and keeping debt at bay. It’s important to carry on those discussions even after you close your wallet. Even better, invite your kid to a financial counseling session.
It’s a long road to financial independence. One marred with multiple obstacles which provide valuable lessons to young adults as they walk down this path. For parents, this could mean walking with them in various ways including providing financial support.
However, increasing their financial responsibility as they grow ensures they don’t remain dependent. Failing is a part of the process and resulting lessons will guide them even after you are long gone.