One of the most significant challenges parents face is when to step in financially to help their adult children. The fundamental question is whether such help would lead to greater independence, self-sufficiency, or dependence on parents. More factors contribute to the need for financial assistance today than twenty or thirty years ago. These include the cost of post-secondary education and the burden of school loans. The average federal loan debt has more than doubled since 2007, from $18,233 in 2007 to $37,575 at the end of 2022. Beyond this, the cost of housing, whether apartment living or ownership, has become prohibitive for young adults. According to U.S. Census Bureau, Renters spent 30% of their income on housing, including 23% who spent 50% in this way. Combine these costs with the increase in inflation and the challenge for young people is daunting. Given these challenges, there is no surprise that 52% of young adults from 18-29 were living with one or both parents in 2020, according to a PEW study. Parents, ask yourselves three questions: Why, when, and how should I financially step in to help my young adult?
Why to Step In
The answer to this question relates to both the parents’ capacity to step in and the needs of the young adult. Many parents don’t have the means to step in or are entering the retirement period and don’t want to diminish their savings and put their retirement at risk. For parents who can fund young adults, doing so may not be the right choice. Does the young adult have a “need” like those listed below or a want – “a new car.” Just because you can fund doesn’t mean you should. Most parents have had to struggle at times to make ends meet, and as a result, they are stronger and more confident about their ability to face financial crises. Do we want to rob our children of this life experience? It’s okay to say “no.” At the same time, we don’t want our adult children to suffer financially or otherwise because of mistakes made or no fault of their own. Parents need to consider the impact of subsidizing the young adult on the relationship as a whole. Are they asking for help? Will they feel uncomfortable if help given? Will this lead to them becoming more financially independent and self-sufficient or greater dependency?
When to Step In
Some of the common and reasonable ways parents can financially help young adults are as follows:
- Help with wedding costs.
- Help with a down payment on a house.
- Help with the purchase of a car needed to get to work.
- Initial help to get into an apartment if that is what is needed for them to move toward independence – security deposit, several months’ rent, etc.
- Help with daycare costs or provide daycare a few days week if able.
- Help with insurance costs – medical and auto where lack thereof could lead to catastrophic outcomes.
- Contribution to a 529 plan for grandchildren.
- Help with unusual or excessive medical bills, disability costs, significant medical deductibles or surgery copays, or treatment costs for debilitating conditions or accidents. Help with in vetro fertilization expenses.
- Help with counseling – vocational, mental health, substance abuse, or vocational where insurance does not cover. Some young adults avoid these services because they say they cannot pay for them or even cover the copay and deductible. This is money well spent but understand with HIPPA requirements; you will need help to get information from the treatment facility or service provider.
How to Step In
When deciding on providing some subsidy to your young adult, consider how to do this in a way that helps them keep skin in the game but does not create greater dependence. If the young adult needs money for a down payment on a house or providing funding for a wedding, if given as a gift, you can’t judge or try to control their decisions on how to spend the money. If you want to contribute as a gift with no strings attached, it is essential to let this be known and stick to this commitment.
On the other hand, if you are funding their education, you need to know that you are getting some return on this investment. Adults in post-secondary education supported by parents must provide midterm and final grades to ensure the investment pays off. I have seen quite a few young adults go to college. The college tells the parents that they cannot provide information on the young adult’s academic performance, only to find out at the end of the semester that their child has stopped going to classes and the parent can’t get their money back. Outside of education and the need to know, parents should consider ways to cost share or match young adults’ contribution. This ensures the young adult has skin in the game. For example, help purchase a car for work but require the young adult to match your contribution. I’ve worked with parents to gradually reduce their subsidy for an apartment for their employed son, requiring the young adult to take on more responsibility.
If you consider a loan, it’s essential to spell out the terms in writing similar to what the young adult would experience in obtaining a loan from a bank or credit union – interests, payment terms, length of the loan, etc. Some young adults may find this business-like approach affirming them as adults but enabling them to get a better rate from Mon and Dad’s bank. Some parents have signed on with a bank, but the terms stipulated that the young adult was responsible for meeting the loan requirements. In all cases, as much as possible, avoid giving out money with some expectation which is essentially blackmail. If I give you this money, will you promise not to spend it on illicit drugs, new video games, gambling, etc.? Such a reward before a behavior change typically doesn’t work and will damage the goodwill between the parents and the young adult.
Money up front is another instance when a parent may need to” just say no” and stand their ground. At the end of the day, a parent needs to ask three questions regarding financial support or other decisions.
- Am I acting primarily out of love and not fear, worry, anger, anxiety, etc.?
- Am I acting aligned with my principles- honesty, responsibility, etc.?
- Will my decision increase my young adult’s independence and self-sufficiency or lead to greater dependence?
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