By Douglas Hoyes
Special to the Financial Independence Hub
We have all heard the expression “once a parent, always a parent,” so it’s not surprising that you may want to help your adult children with their financial problems.
A young adult may be burdened with student loans and other debts, and may have not yet had success in the job market. As a senior adult, perhaps having already achieved Findependence, is it wise to financially help your adult children?
The first question to consider is: will giving them money truly help them? You won’t be around forever, so at some point your offspring must learn to fend for themselves. Letting them deal with their financial problems now, on their own, while you are still around to provide moral support may be in their long-term best interests.
Such assistance could jeopardize your own financial security
Of greater concern is that financially assisting your adult children could jeopardize your own financial security.
In my firm’s recent Joe Debtor study we discovered that, of people who go bankrupt, seniors and pre-retirement debtors have the highest levels of unsecured debt of all age groups. If the only way you can help your children is by going into debt yourself, you put yourself at risk for serious financial problems.
If you have cash and can help them without going into debt, you are much less at risk. However, you don’t want to deplete your retirement funds to the point where your final years are cash strapped. Dr. Lee Anne Davies, an expert in aging and founder of Agenomics, talks about Bag Lady Fears, the fear among women of becoming poor as they age. Spending your money now on your children may exacerbate those fears, particularly if you don’t have a good pension that can assist you if your investments are depleted by paying down debt for your children.
So what’s my advice?
First, deal with your own debt issues before helping others. If you are in debt, you are in no position to help your children. You simply have to tell them that while you wish you could help, your financial situation makes it impossible.
Second, only help your children to the extent that you can afford to help without causing harm to your own financial well-being. If you have lots of cash in the bank, you can loan your children money and not suffer serious repercussions if they don’t pay you back. If you take a cash advance on your credit card to help, and they don’t pay you back, you now have a very expensive debt to service.
Third, consider strategies other than simply giving or loaning money to help your children. For example, instead of giving them money, perhaps you could offer to co-sign or guarantee a loan for them. Since the loan is in their name they will be responsible to the financial institution for making payments. Making payments successfully will build up their credit rating.
Conversely, missing payments will harm their credit rating; however, knowing this may make them more motivated to keep up with their payments. Missing a payment to the Bank of Mom and Dad has no such direct negative consequences for them, so your children are more likely to repay a loan directly to the bank. Just like with a direct loan however, you should only consider co-signing a loan if you can afford to pay back the debt yourself. As a co-signer, you are fully liable if your child doesn’t make the loan payments.
Perhaps your assistance can be non-financial. If after-school daycare is a big expense, you could offer to watch their children for an hour or two a few times a week, allowing your adult children to reduce expenses or increase their income, thus reducing the amount of financial help they are requesting from you.
Suggesting they see a financial advisor may also be wise. I have had many consultations over the years with parents and their adult children. I’ve helped the children deal with their debt, so the parents no longer feel compelled to over-extend themselves to help their children.
No matter what route you choose, have an open dialogue about what you are prepared to do. Reducing that tension makes for much more pleasant family dinners.
Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a licensed bankruptcy trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada’s largest independent personal insolvency firms.