“The question is, what’s the purpose of the ongoing payment?” said Barry Glassman of Cassaday & Co. Inc., an independent financial planning firm in McLean, Va. For example, temporarily helping a new college graduate with living expenses so he or she can take a job in an expensive city might be an investment that allows the former student to achieve financial independence.
Using that kind of guidance, my sister’s investment in her son is probably a good one, since Russell will repay her in kind someday when she needs help.
One way of avoiding having to shell out to an adult child is to introduce your children early on to the idea of financial stewardship, Glassman says. “Having to earn even a small portion of your college fund money can build skill sets that can help in adulthood.”
Many of today’s retirees learned to be careful with money either from parents who were scarred by the Great Depression or through direct experience of their own in tough times. Many of their children “do spend beyond their means,” Cabaniss said. “They’ve never been turned down for a credit card. They buy things first, and then they pay for them.” In this new economic era, we may be relearning some of the lessons the Depression taught, she says.
So it’s hard to resist helping your kids, but at least take a step back and consider a few questions:
• Can you afford to? And, if so, what time or dollar limits should you set? If you can withdraw enough from your retirement savings to safely cover your living expenses for many years, you can probably afford to help out, Cabaniss says.
• If you can’t afford to contribute financially, what else can you do? Help your adult child think of other ways to come up with the money, Cabaniss suggests, such as taking out a home equity line of credit or selling some furniture or a car. Or consider a loan, but make sure it’s in writing, with interest rates and repayment schedules agreed to by both parties. “And stick to it. If you don’t, what you have given is one more bad lesson to your adult child,” Cabaniss said. You might consider making the loan through a bank or through one of the relatively new social lending sites that facilitate such agreements between family members or friends.
• Assuming you’ve set a limit on your financial assistance, what can you do to prepare a child for when it stops? Cabaniss suggests that you help your child develop a budget and make sure there’s an understanding that a $4,000 monthly paycheck doesn’t mean you have $4,000 to spend, especially if your child is new to work. Also, encourage savings in an emergency fund for the future, so your child doesn’t end up in the same fix again.
• Was it a situation that your child couldn’t control? Or are you paying to help him recover faster from financial carelessness? The most valuable help you could give toward becoming financially responsible may be not to help.
• Is it an investment that will pay off eventually in financial independence for your child? As they say: That’s priceless.
Martha M. Hamilton, formerly with the Washington Post, writes the "Your Financial Future" column for AARP Bulletin Today.
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