One of the things that I notice that seems to be a common theme among my students is that much of their financial struggle has been a result of indiscriminate giving to children.
The story is much the same. Little Johnny and Susie want something that their friends have. Life cannot possibly go on with out it. All their friends have one, and they do not want to look square or not be hip. So, inevitably, mom and dad capitulate and give into their children’s demands. What this behavior does is solidify in children’s minds is that if they beg long enough and diligently enough, they can get mom and dad to pay for anything. This is a dangerous precedent, and will jeopardize parents’ financial security in the long run. They key to eliminating this threat to financial security, is to set boundaries early. It is a good idea to reward children who are frugal and learn to do things on their own. It would seem that a general disdain for work has evolved within the past three decades. Children during this time have grown up in a general period of prosperity and thus they seem to believe that they are entitled to things without putting in any effort. It is not uncommon for children to never�grow-up� when it comes to money. I have seen parents with the best intentions put down a major down payment on homes that even the parents could not afford. In other words, adult children tend to want what mom and dad have right now. They fail to realize that this type of living costs enormous sums of money over time and robs individuals of financial security.
Parents must sever the economic umbilical cord at a young age. One good idea would be to reward children for saving their money. For example, a parent could pay one dollar for every five dollar a child earns and saves. It would be a good idea to teach children the value of work. Pay them for adequate chores to be completed around the home. This needs to done within reason. It would not be a good idea to ask a child to complete a task which would be best suited for an adult.
When it comes to home buying, try to temper your children’s enthusiasm of purchasing that $400k starter home. Children need to understand that parents are not a bank or that they have access to an unlimited supply of funds. If you as a parent are going to lend money to your children, make sure you do it in the right way.
Consult a financial advisor to ensure the promissory note is written properly. For example, with a mortgage loan, the Internal Revenue Service may require that the interest rate be tied to a specific benchmark. There may be gift tax consequences if the parent forgives a large obligation. Talk about parents’ expectations upfront, outlining the worst-case scenarios: What happens if you default on the loan? Clarify that the money toward a home doesn’t give parents a vote in your design or other decisions. Put everything in writing. Meanwhile, realize that borrowing can quickly become an ugly family affair. Children who hit up parents for money should be prepared for the resentment of siblings who don’t — and potential squabbles over the parents’ estate.
Beyond home buying, many parents subsidize adult children in other ways. Some 45 percent of middle-aged workers with grown children provide financial support of about $2,500 a year on average. Many times parents are paying for one adult child or more. Before they give, parents should consider whether the money is to enhance a child’s future or subsidize his lifestyle, and make a distinction between a one-time event and a chronic condition. That’s very different from children who continually seek loans to pay off credit cards.
Remember that teaching your children good financial habits now, can save you thousands of dollars and heartache down the road.
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