My adult child needs financial help. Can I afford it? Should I help?
We get questions about how to financially help adult children all the time from our clients. This is a true kitchen table conversation about real life and real decisions.
Oftentimes parents feel they do not have a choice and should help their adult child financially. But it is important to understand how that will impact your own financial stability and retirement.
Would You Do It?
David and Nick tackle some common scenarios and offer their opinions on whether they would do it or not, and why.
Helping with a down payment or co-signing on a loan.
Nick: I wouldn’t shy away from helping with a down payment. This is a stepping stone. You can end up saving a lot of money with a decent down payment with the same loan terms. I don’t think I’d co-sign. If you need a co-signer it means you don’t have enough credit or good enough credit.
David: I’m with you on that. If you find that you are trying to get around the requirements for a mortgage, it’s a sign that you maybe you shouldn’t be taking on that type of loan. You might be going a little too far. The rules are there to protect the bank and to keep you from getting in over your head.
If your young adult child is just a few years out of college and changes jobs or careers. He or she may not have a safety net or savings to cover being unemployed short-term.
Nick: I would probably help in this situation. When it comes to working you have to do something you are passionate about, and sometimes that means taking a pay cut or taking on some risks. When you do this, what often ends up happening is that you make more money, in the long run, doing something you are passionate about than stuck in a job you don’t like. So I would help in this situation since this a family value of mine, even if it doesn’t make the most financial sense.
David: I pretty much agree with that. I would want to talk about what the long-term plan is. I’d want to feel good that there was the right solution in the works and it wasn’t just part of a pattern. You have to be careful not to perpetuate behavior that a few hard knocks might straighten out.
Nick: There is a big difference between changing careers to something you are passionate about or changing careers because you don’t know what you want to do. Are you helping by helping or are you hurting by helping?
Nick: I have mixed feelings about this one. For the most part, I would be hands-off. If I were to do something it would be more along the lines of a loan. However, if I thought my child was being accused of a major crime they didn’t commit, I’d have a hard time not stepping in and helping.
David: This is a tough one. I’d probably do what I felt I had to but tread cautiously.
David: When someone is put in a tough financial situation through no fault of their own, it is pretty hard to not help. At that point, the guest room is available and we’ll do what we need to do.
Nick: This one is the toughest for me. Sacrificing my financial security to keep my kid healthy. I would do whatever I could. But the flip side of that is how much is too much? Between keeping yourself healthy, your kid, and your family. That is a really tough balance.
Moving Back Home
David: I am more inclined toward a tough-love approach when it comes to this. This feeds back into the job change idea too. I’m all for finding the career you are passionate about, but sometimes you have to wash some dishes and rake some yards to bide your time while you are figuring that out. Sometimes you have to have a job you hate for a while until you find the one you love.
Nick: I lean toward your logic in this, but I know for a fact my wife doesn’t. It’s a value of ours to have an open-door policy, but that doesn’t mean it will always help the kids.
David: Adoption has cross-generational implications. It is a deeper question when you consider helping your child start their own family. And that can be a very expensive proposition. It has a much bigger dimension to it than a financial value.
Nick: For me, this is much more selfish because I want to be a grandparent someday.
Nick: This is one that goes back to your own values. I don’t know at the moment what I’d do financially in this situation.
David: I don’t know what the financial implications would be, but I’d be there for my child.
Things to Consider when Making Difficult Financial Decisions
All of these scenarios are not cut and dry and involve a lot of emotions and values. Talking about money and family is hard and all of these scenarios get to the heart of the matter pretty quickly.
The first step is deciding if you want to financially help. The second step is determining if you can afford it. This is where your financial advisor can really help.
Long-term planning. We have the tools to visually look at the financial impact long term.
Strategy. The tactical level of what is the best way to do it. It’s not always as simple as taking money from this account and using it toward the issue. There can be tax implications. We can help you look at scenarios like retirement. for example, you are currently planning on returning at 65, but spending this money to help your child will now mean you will retire at 67. Knowing this, you can decide, is it more important for me to help my kid buy a house or to retire at 65? Then we are making our decisions on what our values are, not just what the best financial scenario is.
The financial implications of a one-time expense are not always as bad as people think. So don’t assume you can’t afford it if you are serious about doing it. Talk to us first and we will help you make that determination.
Planning is flexible. If you make a plan this year, you have to expect things will come up. We build in adaptability and flexibility. We are talking about the ability to get money back and money that doesn’t have strings attached. If things didn’t come up, you’d only need to talk to a financial advisor once in your life – and that is just not how life works.
Is it wise? Just because it is affordable, should you do it? Is it going to help your child be a better human and be in a better situation? Or will you need to continue helping them? For example, if you co-sign on a house, will you need to keep helping them with house payments? Ultimately it comes down to each person’s individual values and feelings on the matter.
In most cases, the client has already decided what they want to. We layout the options and risks financially, but it is up to them to decide on the values. They are looking to us to see if it is affordable and determine the best way to pay for it. Or, they are looking for us to validate that this is not a good idea. We are fine with our clients saying, “Our financial planner said this was not a good idea.”
Fairness. When there are other siblings involved, the idea of fairness can come up. We have built these things into estate plans where one child got part of their inheritance early for one of the scenarios outlined above.
What is most important to you? What do you need to do to live a fulfilling life? What is at your heart’s core? It really comes down to what is most important to you rather than what you ought to do. This really helps when it comes to making these types of decisions.
Lending money. Put it in writing with terms that you both sign. Otherwise, it is a gift. Think about how you want to be repaid and what that looks like. You can always forgive a loan, but if it is a true loan, put it in writing.
ProTip: If you think you might need money in the near future, your first call should be to your financial advisor.
No Judgement. Our philosophy as financial advisors is to never judge our clients’ values and what they think is important as to what to spend their money on. We don’t put our own values on your financial plan.
We all have families and each family has its own idiosyncrasies. Don’t be afraid to seek an objective outside advisor who can talk through not only the financial implications but also help you define your values and goals. You can also have your adult child meet with your financial advisor and get set up for success too.
This is one of those conversations that never really ends. Be open, have good communication, and get advice if you need it.
Contact us if you’d like to set up an appointment. Call us at 517-321-4832 for financial and retirement investing advice.
About Shotwell Rutter Baer
Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.
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Call us at 517-321-4832 for financial and retirement investing advice.