Closing the Bank of Mom and Dad
By Ted Halpern | July 18, 2016
The phone rings and you cringe. You feel guilty, but you almost don’t want to answer the call from your own kid. He or she probably isn’t calling just to say hello. Your adult child needs money again. Does your child even realize how much these constant requests upset you emotionally and financially?
If this sounds familiar, you may be in the same situation as more than one in three American families who give financial support to adult children, according to the nonprofit group American Consumer Credit Counseling. But a typical report on this issue deals more in judgment than solutions. Children are described as spoiled members of the “me” generation who failed to launch, while parents are portrayed as helicopter moms and dads who are letting these “boomerang kids” return home, derailing their retirement.
In reality, of course, nothing is that simple. Student loans and stagnating wages may place a large burden on millennial grads, making it difficult to achieve the same milestones their parents did at that point in their lives. Perhaps the parents want their kids at home for cultural, financial or other reasons. In some cases, the child’s financial problems may even be a symptom of mental health or addiction issues.
Whatever the case, if the financial support has a negative effect on the relationship between parent and child, it’s time to make a change. It isn’t easy, and most parents simply ignore the issue, hoping it will go away, or they may offer a painful ultimatum, kicking their kids out or cutting them off.
What to do
The good news is that there is a middle path between supporting adult children indefinitely and pushing them out of the nest, unsure whether they will fly. Here’s some of the advice our firm gives to the many families we’ve helped manage this issue.
1. ADDRESS THE ELEPHANT IN THE ROOM
Simply having the initial conversation can help immensely because it breaks the cycle of guilt and resentment, opening the door for change. It’s important to get everything out in the open. Talk about what your adult child’s income and expenses look like to determine the actual shortfall, then build a plan together for that amount.
2. MAKE A GAME PLAN FOR CHANGE
The ultimate goal is for the adult child to be financially independent. That could mean spending less (which, with discipline, can be achieved in the short term) or earning more (which may take some time or career training to achieve). For now, the aim is to heal the relationship while also making a plan to resolve the financial problem.
Continuing the financial support may seem counterintuitive, but it may actually relieve stress to agree on a monthly transfer of a set amount of money — for a specific amount of time. If you are in the situation of many parents, you may be giving money to your child on a random, unpredictable basis. Your child may be underestimating his or her cost of living, and as a parent you may feel blindsided by requests for cash. Changing to a prearranged plan can be beneficial, since both parties will understand the parameters, and it provides small, achievable steps to end the cycle of dependence by a certain deadline.
3. IMPLEMENT THE GAME PLAN
- Once you and your child have determined the monthly amount needed, I recommend that you create a new checking account. This account will have all of the funds needed to cover six to 12 months of the child’s shortfall in income, plus 10% to 20% more than you think is needed. This avoids problems when things cost more than the child expects — he or she doesn’t have to ask for more, and the parent does not give any more. (Another way to achieve the same result is to have a month of the child’s expenses set aside as an “emergency fund” in a checking or savings account under the child’s name.)
- Set up automatic monthly transfers from this new checking account to your child’s own account on a day that makes sense for his or her bill paying.
- If you as the parent are in the distribution phase of retirement, plan for the withdrawal as part of your normal portfolio distributions for the year.
- Commit to a time frame. A year or two may be a good time frame so your child can make major changes to increase income or decrease spending. Your child’s priorities should be to better manage cash flow by sticking to a budget and start to save for emergencies so there is no need for help from mom and dad in the future.
Breaking the cycle
Keep in mind that I offer this advice as a wealth advisor, not a financial therapist. In many cases, families in these scenarios would benefit from family therapy, but unfortunately, few pursue it. What I can do as an advisor is provide some solutions to alter financial behavior.
If addiction or mental illness is part of the picture, the issue needs to be treated by a mental health professional before you address the financial problems. Otherwise, the cycle will simply continue. However, if that is not the case, this framework can be a helpful tool to break the cycle of financial support and improve the relationships between parents and their children.