One of the things I have learned as a financial planner about parents and children is that the natural tendency for parents to help kids out financially may not always be the best course of action. Although the urge to help when your kids are in distress is almost irresistible, it should only be done in a way that results in stronger, smarter and more independent individuals.
Most of our clients have accumulated their wealth through hard work, smart decisions, thrift and frugality. Unfortunately this discipline sometimes does not extend to their responses to their kids’ money troubles. Most parents want to help their kids get started financially or provide assistance from time to time when things get tight, but this can have a negative impact on them if not handled properly. Being strong and diligent, even if it breaks your heart, can have a huge positive impact.
A proper financial plan includes keeping clients from squandering their retirement resources on their children. It would be irresponsible not to point out that the money they saved for retirement is theirs not their children’s and that continuing to drain their resources to help kids means that they will be working at McDonalds at age 85, or worse. If everyone is in the poor house, nobody wins. Even if clients are very wealthy the consequences of unconstrained financial help to their children can be toxic. Although wealthy parents may not go broke, giving money to their children, those gifts often destroy the kids. There is a reason that park rangers tell us not to feed the wild animals. When they are given food they forget how to hunt.
Of course our objective is not to starve children or put them on the street but rather to make parents understand the consequences of child-related money decisions. Establishing a policy and having a plan are essential to increasing the chances of a good outcome.
Here are a few pointers:
- Ask tough open ended questions. Tell me how you think this happened? What do we do if you still don’t have a job after 3 months? What is going to have to change if this is going to work? If you could go back, what would you do differently?
- Don’t give money to children directly. If they need help paying bills have them submit the bills to you and you pay them. You then can see what they are spending money on and veto unnecessary expenditures.
- Always have a contract with a due date and interest. The enforceability of the contract may be zero, but it is the symbolism and impact of the document’s presence that is important. If you will be paying bills you can attach an addendum that will tally the total amount lent
- Force them to do a monthly budget, in writing as a condition of the loan. You can hire an hourly financial planner or pay a qualified certified public accountant to review it and suggest changes. Be prepared to demand immediate lifestyle changes as a result of the budget.
- Be prepared to be hard-nosed and confrontational. If you really love your children and want the best for them, you will make the difficult choices and stand by your guns. Remember, this is not about you feeling better; this is about solving a problem that, can have very serious consequences for the entire family at a variety of levels if not dealt with in a smart fashion.
Before problems develop:
- Avoid funding for large expenditures for houses or a business for your kids. If they can’t afford a house on their own, then they can’t afford a house. If their idea for a business is so darn good, they should be prepared to go to traditional sources of funding such as banks for loans or private investors, who will validate their ideas and plans with an investment.
- When children discuss marriage, you need to have a frank discussion about how they will support themselves, their children, their children’s’ education and their retirement. Love only takes you so far, and money problems are a leading cause of divorce. Well prepared young adults who are clear headed about their responsibilities regarding finances are much less likely to end up miserable.
In closing, there are shades of gray in all of this, I am not advocating being draconian, but parents need to be smart, disciplined and most importantly resolute. Helping your adult children become money smart, autonomous and self-sufficient is the best gift you can give them.
As seen in the 4/27/2012 issue of Washington Business Journal