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You may be familiar with the saying, “the road to hell is paved with good intentions,” but as a certified financial planner for decades I can safely say that the road to financial stress is also paved with good intentions.
In the form of “helping” their adult children financially, many parents add to the young adult’s long-term financial issues and stress, as well as their own.
Not only are some parents are jeopardizing their own financial future with this support, they’re rendering their adult children inept when it comes to money.
For example, consider those parents who give a large amount for a house down payment without wondering if their adult child’s income will suffice to maintain the home. Or parents providing money so frequently that they do not learn to manage their own day-to-day income or learn from their mistakes.
If you are a parent, are you:
1. Paying for large expenses for your adult children so they won’t have loans?
2. Paying for cellphones, insurances, and other ongoing expenses?
3. Preparing their income taxes, including gathering their information for the accountant?
This is not sound financial behavior for either of you.
The main reason your child needs a loan is so they can build a credit history. Federally backed student loans in their name are one way to create history when they are still in school. Car loans — again, only in their name — are among the easiest loans to obtain because the loan is secured by the car. They may have to pay more interest than you would, but paying in a timely manner will create a good credit history. Plus, if a loan goes through a formal banking process, the purchaser will not be able to spend beyond their means.
Read: Retiring without millions in the bank? It can be done easily.
When they have a credit history, they will receive a credit score. This is how they will be able to obtain a home mortgage, qualify for their own credit card and in some cases, pass muster for a rental apartment or job.
Change is difficult but “this is how we have always done it,” is not a legitimate reason to maintain the status quo.
I hear parents say, ”But do you know how much the phone will cost them a month? I only pay an additional $20 a month for them,” or “On my car insurance, they save an extra $450 a year than if they got their own.”
Read: The best gift of all? A financial legacy for a child.
Reality check: The adult child is not saving anything since they never pay a bill; however, the parent maintains a financial link while their child holds on to money.
From my estimation, the above parents would be saving about $700 a year. They would have more for retirement, while teaching a budding adult the realities of cash flow.
As far as income taxes are concerned, if young adults have not been handling their returns or the cost to prepare them, as their financial life gets more complicated, they will be overwhelmed. Not understanding the gathering of the information for them makes them more dependent on you, which may feel good in the short-term, but is counterproductive in the long run.
Don’t make your adult child more reliant on you, instead help them in a positive way by using these approaches.
1. Create an opportunity for them to build a credit history
Let them pay down any loans over time. If they cannot get a loan from the bank, perhaps they need to build their credit history first. This will encourage good financial behavior and patience. By encouraging them to save for what they want, you are offering them the skill to plan ahead. If you have the means and desire, stick with the annual gifting amount of $17,000 — three years can add up fast to a home down payment, money to start a business or pay off a loan.
2. Prepare them for change ahead
If you are paying for their cellphone, car insurance and/or health insurance, let them know in six months they will need to start paying their own. Health insurance is clear-cut. At age 26, parents need to have them off their insurance coverage by law. Have you given your child a heads up a year before it comes? Provide insurance education on deductibles, copays and premiums by reviewing with them the coverage they have currently. They will be better prepared to know what they need.
3. Introduce them to your accountant
This introduction needs to take place not in the busy tax season of January to April but in the offseason. Sharing your financial professionals will give your children resources to turn to when you are not around to help. Also, there may be financial topics they would rather not share with you as adults. Whatever the approach, let them gather their own tax information and pay their own bills for services.
They will learn how to manage debt, expenses and bill paying. That is a lifelong skill. When you are not around to help, they will be able to handle whatever is thrown at them financially with less stress and more experience.
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