It's a personal decision to help adult kids with money. But it doesn't mean handing over a blank check. And it doesn't require blowing up your budget and putting your own financial plan in peril.
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If you're helping your adult children on their path to financial independence, you're not alone.
Nearly six of 10 parents (59%) with offspring age 18 to 34 said they gave financial help to an adult child in the past year, according to a new survey from Pew Research Center. And while nearly two-thirds said offering money-related assistance to their adult kids didn't have a negative impact on their own finances, 36% said it "has hurt their personal situation."
If you have the capacity to help your adult children, it's not necessarily a bad idea to offer financial assistance. Just as long as you're not "creating some sort of negative incentive for your child," said David Kressner, managing advisor at Altfest Personal Wealth Management. There might even be a tax benefit to passing on some of your wealth while you're still alive.
However, if your finances are tight, subsidizing your adult child may not be an easy decision. In that case, "you really want to look at it as an expense like any other expense you have," said Kressner. In short, it's all about affordability and where you might be able to make cuts in your budget to make it happen.
So, how do you throw your adult children a financial lifeline without sinking your own financial ship?
Make Sure You Can Afford To Help
First off, run the numbers. A rule of thumb when it comes to lending a hand to adult children is to make sure the added expense doesn't impede your ability to meet your own financial goals. Of course, every situation is different. But it really comes down to whether you have the resources available to support your kids' goals as well as your own.
"I say to parents all the time, 'You need to take care of yourself financially, first,' " said Jamie Cox, managing partner for Harris Financial Group. "You have to make sure (helping adult kids financially) doesn't torpedo your own finances or impede your ability to save."
Red flags that suggest you can't afford the extra expense of helping adult children include not being able to fund your own retirement account, not being able to make ends meet each month, and running up debt rather than being able to save, financial pros say.
"If you're raiding your 401(k), you're making a big mistake," said Cox.
To help determine if helping your adult children is feasible, have your financial advisor run an analysis to see if your probability of success in meeting your retirement goals is still extremely high.
For example, if your current financial plan calls for total spending of, say, $90,000 per year, see if you're able to fit the added expenses into that total budget. If the answer is yes, it's your call if you want to allocate part of your budget to your adult kid. If not, you'll have to figure out a way to fit it into your budget with cuts elsewhere or be honest with your adult children and tell them you can't afford to help them.
Set Expectations Before You Lend Assistance
It's important to make clear to your adult kids that it's their responsibility and in their best long-term interests to earn their own way. Stress that any financial assistance you provide to them should be viewed as a bridge to their eventual financial independence — and not a handout.
If you decide to help your adult kids pay for things like cellphone bills, streaming subscriptions or rent, it's critical to have a conversation upfront to set expectations and ground rules.
"Create a plan that has both periodic reviews and an end in sight," said Justin Flach, managing director of wealth strategy at Ascent Private Capital Management at U.S. Bank. "I hesitate to suggest to clients to start off by saying, 'Hey, we're just going to offer you help for as long as you need.' Start with metrics that can be measured and milestones that can be achieved."
Put Guardrails In Place To Avoid Bad Outcomes
Buying your adult kid groceries, keeping them on your family cellphone plan or paying for their Netflix streaming service likely isn't going to break the bank or force you to postpone your retirement. But paying an adult child's rent year after year or writing a big check to buy them a car or pay for their graduate degree could be detrimental to your own finances.
"Magnitude matters," said Kressner. So does duration, or the length of time you're footing a particular bill or bills for your adult children.
Paying recurring bills that aren't your own is quite different from helping on one-time events. Similarly, temporary situations such as letting an adult child move back home after a job loss or to save up money for a down payment of his own, are less of a financial drain than a never-ending expense.
"If you're giving them sizable amounts of money that makes you feel like, 'Oh, that's a lot of money,' I don't see any harm in bringing that up to your financial advisor to see if it's relevant (or truly material to your bottom line)," said Kressner.
Recurring expenses have a much greater impact on the probability of success or failure of your own financial plan.
Kressner added: "Are we introducing a new expense? If so, the next question to ask yourself: Is this an expense that you anticipate to kind of like go on forever at this level, or is it something that you'd expect to change over time?"
All you can do is plug in the new expenses into your longer-term financial plan projections and make the best assessment that you can as to whether you can afford to provide money-related assistance to an adult child or not.
Tips To Make Helping Your Adult Kids Out Financially Is A Win-Win
To drive home the point to your adult kid that getting them on the road to financial independence is critical to lifelong success, make sure the money you give them has strings attached.
"There has to be skin in the game for the kid," said Cox. "You have to provide them with positive incentives to succeed financially."
That means, for example, if you decide to chip in money for a graduate degree, that the purse strings only remain open if your adult child earns all A's in the classroom. If you let them move back home they can only shack up in their childhood bedroom if they chip in for rent and groceries. Additionally, you might also frame a big money transfer for a car or a house as a loan, rather than a gift.
"You don't want to create dependency," said Cox.
You want them to eventually be able to go out on their own for good and not look back. "If you want to have successful kids, teach them good money habits," he said.
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