How to Break Up with Your Kids Financially
There comes a time when parents need to take a good look at how much money they’re spending on their kids.
Not the ones under 18 — the adult kids.
There are many reasons why you would want to offer financial help to your grown children. Maybe they’re pursuing an education. Or perhaps they’re moving to a location with better opportunities. These are great reasons. But, continued long-term financial support can hold you back from reaching your own financial wellness. It can also do more harm than good to your child in the long run.
"Parents think that they are doing their kids a favor by continuing to support them financially as adults, but the biggest gift you can give your kids is a great foundation of personal responsibility…let them find their own way."
- Laura Davis, Cuthbert Financial Guidance
When done properly at the right time, cutting financial ties is beneficial not just for parents, but also for the child. Parents must evaluate a myriad of factors to determine when financial separation is in order. In this article, we’ll look at why cutting the financial cord is important, when to do it, and how to go about the breakup.
Why You Should Cut the Financial Tether
Merrill Lynch and Age Wave recently reported that almost 80% of parents with adult children provide some type of financial support for their kids’ living expenses. On top of this, 75% of parents prioritize their children’s interests above their own retirement needs. In fact, they are spending an average of $500 billion on children ages 18-35 – twice the amount they’re putting toward their retirement.
When parents prioritize their adult children over themselves, this can become a problem – particularly if they do not have enough money saved to finance a comfortable retirement. Your retirement must be your priority. Unless you’re prepared to finance your adult child’s lifestyle throughout retirement, you must teach them to be independent. Your failure to do so could cause your retirement to be delayed for many years.
At worst, it may even force you to never retire.
Your Own Future Well-Being
Continuing this support to your own financial detriment will negatively impact what you’ll be able to afford during your golden years. As people age, we tend to develop more medical issues, some of which may require long-term medical care. Consistent gifts to grown children can deplete a parent’s investment account, emergency savings, and other retirement funds.
For example, with future assets gone, you may be forced to accept medical care at a group facility later in life. Had you not given continuous handouts to your child over the years, you could have been able to afford private care in the comfort of your home instead. Furthermore, many retirees are forced to sell their homes to afford the cost of long-term care. Cutting the financial strings with your grown child will lessen the chances of you having to do so.
Teaching Bad Habits
An open wallet policy does more damage to children than many parents realize. Kids won’t learn financial responsibility with mom and dad always being their backstop. Parents have the responsibility to raise children to become independent adults – financially and otherwise. This cannot be done when they serve as enablers of poor financial behaviors.
"If you throw money at them, they learn nothing. If you make them sign a contract for the money, they learn how leases, mortgages, and loan agreements work. Don’t stop being a parent just because your child graduated. Whatever amount of money you give them, make them earn it."
- Howard Dvorkin, Debt.com
The time will come when parents will no longer be around to financially support their children. Letting children fail when they are young will teach lessons about saving and wise spending that will stay with them long after parents aren’t there to bail them out.
A False Sense of Security
Many advisors caution against helping adult children with down payments for cars or homes. Those who do could be inadvertently encouraging home ownership before their children develop the maturity to save up for a down payment. If a grown child wants to purchase a home or car – and is counting on help from parents – this may be a purchase that the child simply cannot afford. By helping with the down payment, you may facilitate potential financial hardship later on.
When to Cut the Purse Strings
Prepare Your Child in Advance
When cutting financial ties with your adult child, it’s important not to pull the rug out from under their feet. Instead, gradually inch it out. The amount of money that you’re supplying will influence your timeline, but you need to give them lead time to prepare for the change.
Create a Timeline:
- If you’re giving them $100 or $200 per month, one to three months is fine.
- If you’re financing 100% of their lifestyle, you’ll need to give them six months to a year.
- If you’re helping to support them through school, set a cut-off date in the future after graduation. You may want to include a stipulation regarding a sooner cut-off time should the child quit school before graduating.
Regardless of your timeline, be sure to give your child a few days to process the news. Be prepared for both positive and negative feedback about the new plan.
Make it clear to your child that this is not a punishment. Instead, it is a way of helping them achieve financial independence. Clearly communicate to them that the choice to do this also does not mean you are disappointed in them. Let them know how proud you are of their accomplishments and that you wouldn’t do this if you believed them incapable of succeeding.
How to Make the Break
First, Explain Why
Be honest with your child – they deserve your transparency. If you lost your job or have been laid off, explain that. If you’re worried about your own retirement, let your child know.
Even if these circumstances don’t apply to your situation, explain to your child that you are concerned about their ability to support themselves and at some point, you will no longer be around to help. Emphasize that you want to help your child learn to financially succeed while you are around to ease them into it, as opposed to them having to learn quickly on their own once you are no longer there.
Offer Non-Financial Support
Be supportive in other ways. Cutting the financial cord does not mean severing your bond as parent and child. Let your child know that you will still be there for emotional, physical, and personal support. Your child may refuse the help and tell you they can do it on their own, and that’s okay.
Here are some ideas for non-financial support:
- Offer to help your child look for a job or a higher-paying job.
- Ask if they would like you to talk to any of your friends about networking opportunities.
- If they have a vehicle that needs repairs, offer to assist with dropping the car off at a shop and providing a ride back afterwards. If possible, offer a vehicle of yours they can borrow instead of giving them money for those repairs.
- If they currently live in your home and will be moving out, offer to help in the search for an apartment.
- If your adult child is already out on their own and falls upon hard times, consider having the child move in with you to save money instead of giving them funds for rent. They’ll want to be independent faster and move out as they regain their footing in life.
It’s Okay to Help Occasionally
Closing the financial funnel doesn’t mean that you can never help financially.
It can be difficult to cut the purse strings, especially if a parent is watching a child struggle with debt. CFP Founder Joe Franklin explains that if children are financially responsible but hit a rough patch, it’s fine for parents to help them – it’s the general “open wallet policy” that is dangerous. Inevitably, future financial milestones and hardships may require circumstantial financial assistance.
Examples of financial hardships include:
- Enrolling in college
- Moving expenses
- Baby showers
- Medical emergency
If your child is experiencing any of these – or similar circumstances – providing financial assistance is fine.
You Must Set Boundaries
If you do elect to help your child, keep some things in mind:
- This should be temporary, not long-term. Make sure your child understands that just as the circumstances are rare, so too is your financial support.
- Make it clear that your financial help is not an invitation to request more money for other reasons.
- Consider drawing up a contract for you and your child to sign. Include how much was given, when it was given, and (if applicable) the terms regarding repayment. This not only provides tangible evidence of your assistance, but also reinforces your expectations of your child.
Be a Helper, not an Enabler of Poor Behavior
There is a fine line between assisting and enabling. For example, if a parent can cover tuition and living expenses for their college student, helping them to focus on their studies, it can be considered as an investment in the child. However, if that adult child is not applying effort to their studies and squanders the opportunity, parents would be well-advised to pull the financial plug.
If your child is working hard to make a life of their own and they hit a bump in the road every once in a great while, it makes sense to continue to help out from time to time.
Remember: when your child uses your money as a crutch, you do them no favors. In the end, what really matters is that you treat your child like an adult.
How to Break Up with Your Kids Financially
This blog post was published by Axos Bank on April 22, 2020 and last updated on April 24, 2020.