Should you be bailing out your adult children?
More and more young people are relying on the bank of mum and dad. Between expensive education and skyrocketing house prices in global hotspots, many young adults don’t have a hope of clambering onto the property ladder without assistance.
But let’s turn that question around. Should you be bailing out your adult children? And what are the repercussions for your finances? These decisions are as personal as they are financial, but here are a few questions to help you think about these the right way.
Where’s the money going?
Before anything else, this is the elephant in the room that needs addressing. Yes, your children are now adults. Yes, this might be a difficult awkward conversation to have. And you’re concerned that if you press too much, your child might withdraw and hide serious problems from you.
However, this is a conversation that must happen. If your child went to a bank, they’d be asked these questions. They’d also be asked for proof of ability to repay, and a host of other intrusive questions.
So treat this as if your child IS going to the bank – except that the bank of mum and dad is interest-free and offers easier terms. So ask the difficult questions, starting with why the money is needed. After all, money to support a lifestyle is a very different proposition from one-off assistance to solve a problem.
Setting clear terms
If the first conversation was awkward, this one is going to be no better. It’s something most of us would rather tiptoe around, leaving things hanging in the air. That’s not a good idea – because mismatched expectations combined with financial matters can breed explosive resentment.
A good starting point would be to explain that you’re going to be operating like a bank – but a far friendlier bank. This will help cordon the financial conversation off from the rest of your relationship. Then set terms – and talk about thorny issues such as repayment and timelines. If needed, you can even formalise these terms and include them in your inheritance and estate planning.
Can your finances handle it?
There’s no such thing as free money. It always has an opportunity cost. Yes, you might have some funds in your savings account, but these have a purpose – to support you during retirement, help you start a new business after you’ve finished with the nine to five, or maybe even plan a vacation.
Remember, there’s a very good chance you’ll have many productive years ahead of you after retirement, and will need the money that you have carefully saved and invested.
The bottom-line question is: did you include support for your adult children within your retirement plan? If you haven’t, any money you divert to your children will have an opportunity cost for you.
Can you help in other ways?
You might decide that you can’t support your children financially as adults. That is absolutely fine, and your call. It’s far better to be upfront about your financial constraints than give handouts you can ill-afford.
But it’s worth asking whether you can help in other ways. Does your child need help with budgeting and financial planning? Your experience will be invaluable. Is it education loans they’re concerned about? Perhaps you can help them negotiate favourable terms.
Sadly, financial literacy is still not a priority at school or university. As a young adult, your child might have spent sixteen to eighteen years in the education system without practically understanding how to manage money. Perhaps the best gift you can give them is to start them on their own financial plan for security down the line.