By Bryan Lee, CFP®, MBA
If you’re significantly financially supporting your adult children (not just slipping them $20 every now and then or covering the bill when you’re all out to dinner), you’re in the majority. A Merrill Lynch Age Wave survey of more than 2,500 parents shows that 79% reported helping their adult children financially—to the tune of $7,000 per year on average. (1)
Of course, it’s natural to want to help your children, especially now more than ever. The younger generations are facing some significant financial challenges in the form of heavy student loan debt, high housing costs, and slow wage growth, not to mention the havoc the COVID-19 pandemic has wreaked on certain sectors of the economy. Though your desire to help your kids is understandable, putting their needs ahead of your own could be dangerous to your financial future . Furthermore, the wrong kind of financial support could also be holding them back from reaching their potential, as financial independence from parents is a necessary trait for attaining adult status.
Three types of financial support of adult children have been identified:
- Financial scaffolding contributes to the child’s human capital and socioeconomic potential. This type of support can include helping them pay for grad school or temporary support so that they can take an entry-level job. This support is generally helpful to the child in the long-term, as long as its parameters are clearly defined – that is, defining the specifics of what will be paid, the amount, for how long, and whether any circumstances could result in the support being terminated.
- Financial safety nets can provide emergency help on an occasional and temporary basis, for example, if the child loses their job. While not necessarily contributing to the child’s long-term growth, providing short-term safety net support can help them avoid high-interest debt or other detrimental outcomes. However, if this type of support is repeated over time it can become more of an enabling behavior.
- Financial enabling includes repeated and/or ongoing financial support with no clearly defined parameters or termination date. Enabling behaviors can undermine the adult child’s perception of their ability to “do it on their own,” as well as negatively impacting your relationship with them, since financial dependence can delay their attainment of peer status with parents.
Only by taking an honest look at the circumstances of the support being offered can a parent decide whether they are helping their adult child or putting them at a long-term disadvantage – not to mention potentially risking their own financial independence.
If supporting your adult children financially is disrupting your retirement plans or potentially impacting your child’s long-term self-sufficiency, here are some ways to equip your children to succeed financially.
1. Have a Heart-to-Heart
Kids of all ages are used to their parents taking care of their needs, so they may not realize their reliance on you is setting you back. Make sure you and your adult child are on the same page so that there aren’t unrealistic expectations. It might help your child if you are honest about your financial situation. Let them see the big picture so they understand the financial implications of their choices.
This will likely be a difficult conversation, but they’re adults; use your judgement to determine the timing for the conversation, and how specific to be. You might consider explaining how your financial support has postponed your retirement date or forced you to dip into your investments earmarked for retirement. If your children are upset, remind them that by pursuing your own financial security, they won’t have the financial burden of supporting you later in life. If you’re unsure how to approach this conversation, discussing it first with a trusted friend or family member, a pastor or other spiritual leader, or a professional counselor or financial planner might be helpful to help formulate your thoughts.
But don’t just tell them you’re cutting off financial support, as such a sudden change could lead to resentment and damage to the relationship, resulting in refusal of other types of support. Instead, give them the tools they need to succeed on their own and consider helping them build their plans around gradually diminishing support, if appropriate. It is also beneficial to mention that you are doing this because you love them and want them to build the necessary skills so that they don’t have to rely on you when you are no longer around.
2. Offer Non-Financial Support
Just because you’re halting or diminishing the flow of money over time doesn’t mean you are cutting off all forms of support. You have decades of wisdom and experience that you can pour into them that will help them as they gain independence. Ask how you can be there for them moving forward. Could you help them look for a job? Offer to search for housing within their new budget? Maybe walk them through how to negotiate a raise at their current job? There are many ways to help your child build their human capital without handing over the checkbook. Make sure they know you’re still there for them.
3. Equip Them With Practical Skills
Living within your means is easier said than done, but by teaching your kids how to create a spending plan (sometimes called a budget), you give them a framework to make financial decisions and take ownership of their future. As young adults start their first full-time jobs and adjust to possibly living on their own or taking on more expenses, they need to learn how to look at the numbers and align their lifestyle with their income. This means ignoring society’s incessant messages that they need what everyone else has.
Setting a spending plan will help them stay on top of their debt, know where their money is going each month, and see how much they are saving. The first rule of financial security is spending less than you earn and investing the difference. If your adult child can master this, they’ll soon be on their way toward financial independence. While the parameters of a spending plan depend on an individual’s specific situation and goals, you can get your child started by giving them tangible examples of what it costs to manage a household and help them map out how they will divide their money among essential expenses, savings, debt payments, and non-essentials.
And since your adult children likely rely on technology for just about everything, encourage them to use a budgeting app to track their money and stay on top of their accounts.
4. Help Them Build a Financial Plan
Budgeting is essential, but a solid financial plan will take your kids even further. By helping them set goals, reviewing different financial scenarios, and showing them the big picture, you’ll be giving them the tools they need to take ownership of their financial life and start working toward their dreams. And make sure they actually get things down on paper; studies show that if your kids put their financial goals in writing, they’ll be 42% more likely to achieve them. (2)
Helping your adult children create a financial plan is also the first step in legacy planning. If you have a financial plan, there’s a good chance legacy planning is a part of it. If you want your children to inherit your wealth when you’re gone, you don’t want them to squander it. This is another area where having their own financial plan can help.
When a financial advisor works with the next generation of a high-net-worth family, it helps ensure the parent’s legacy seamlessly transitions to the children when they pass away. It also establishes an ongoing relationship between the advisors and your children, which opens the door for clearer communication and transparency down the road.
Creating multi-generational wealth isn’t easy. It involves more than just minimizing taxes and maximizing investments in the here and now. It’s about instilling the values and habits in your children that ensure they’re good stewards of wealth after you’re gone. That starts with a financial plan.
Get Started Today
There’s never been a better time to get your kids involved with financial planning. At Strategic Financial Planning, Inc., we’re here to help you and your children on your financial and life journeys.
If you think your children could benefit from a financial plan, have them schedule a call with us. We’d be happy to do a review of their finances in which we:
- Analyze their current financial situation and help them establish goals.
- Create an investment plan that aligns with their risk tolerance, goals, and time horizon.
- Help them track and manage their wealth through eMoney, our client wealth management system.
If you’re interested in learning more, call us at (972) 403-1234 or contact us online to set up a complimentary introductory meeting so we can see if we are a good fit!
Bryan Lee is the founder and President of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With over 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and MBA in international finance from the University of North Texas and is a Certified Financial Planner (CFP®) practitioner. Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including serving as President and Chairman of the Dallas/Fort Worth Chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, the CITY House Board of Directors President and Chairman, Editorial Review Board of the Journal of Financial Planning, Family Services of Plano, as well as a Junior Achievement Volunteer Teacher. Bryan has been featured in local and national magazines, newspapers, and journals, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, Dow Jones Newswires, and has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception. To learn more about Bryan, connect with him on LinkedIn.