
Young adults may find that moving on to the next chapters of their lives – higher education, marriages, first homes – requires hefty sums of money. In these times, the “Bank of Mom and Dad” may be where they turn first.
But how should parents help their adult children without giving out handouts and free passes?
“There are a lot of young adults struggling to cover the basics, like rent and groceries, despite working full-time,” says Ann Douglas, a parenting expert and author of Parenting Through the Storm. “It only makes sense that they would turn to their parents for assistance.”
Giving your children a financial boost is common, according to a recent CIBC poll. Seventy-six per cent of Canadian parents with kids 18 or older said they helped their children when they were moving out or getting married. Nearly half said they gave an average of $24,000. As many as 25 per cent gave over $50,000.
“There comes a point in time when [our adult kids] need to be independent and living on their own,” says Scott Hannah, president of the national Credit Counselling Society. “It’s more challenging today, so there is a time and place where parents come in to help if they can.”
Here’s how to give your kids financial assistance without straining relationships or draining your bank accounts.
Establish the ground rules
Parents and their kids should have a frank conversation about the child’s finances and what he or she needs help with.
Parents need to decide:
- How much can I provide in financial assistance?
- Is this a one-time favour or will I be here to help again?
- Is this a gift or a loan?
- If the expectation is that the child will pay the money back, when will those payments begin?
“A common pitfall is to not be sufficiently clear about expectations surrounding the gift,” Douglas says. “Hard feelings can arise if a parent thinks they’re lending the money for an emergency home or car repair, only to find out after the fact that the child used the money to fund a vacation.”
Hannah cautions against loaning your kids money for any reason. Your parent-child relationship is sacred and you don’t want your kids skipping Sunday dinners or holidays because they don’t want to face you if they don’t have money to pay you back.
“What if they can’t pay you back and you’ve put a big wedge in the relationship?” Hannah says. “That loan is going to be at every conversation you have with your kids, and it can get tense.”
You kids should have skin in the game
Hannah doesn’t think parents should just hand over money. He says kids should either match contributions or meet some criteria, such as getting good grades or getting a part-time job.
“Whenever you just give something over, your kids don’t appreciate it as much if they didn’t have to apply some work into it, too,” he says.
For example, instead of gifting $20,000 for a home down payment, have your kids save up a certain amount before they see your share of the help.
This move will help your kids learn some financial lessons along the way, such as budgeting, setting funds aside and saving for a goal. Otherwise, your kids may return to you for help again.
Make sure you help yourself first
Before writing a cheque to your kids, crunch the numbers for your own financial situation, says Pat White, executive director of Credit Counselling Canada.
“The right way to do this starts with not getting yourself in debt,” she says. “You cannot help your kids if it means jeopardizing your pension or your mortgage and other debts. It’s really looking inward at your own personal situation so you don’t willy-nilly hand over money.”
If it isn’t feasible, or you can only help so much, be upfront with your kids and let them know so they aren’t waiting for a Bank of Mom and Dad bailout.
“It’s not saying no to the relationship, just to the ability to financially help out,” White says.
If you help your children before you help yourself, you may be hurting their future finances if they need to cover your home care or other debts after you retire.
Don’t be their credit crutch
While you may be tempted to co-sign or be a guarantor on a loan, make sure your kids are building their own credit history. This way, they can qualify for loans and credit on their own.
“If they don’t have their own credit history and credit rating established, they won’t be stable enough and will keep turning to you,” Hannah says.
Talk to your financial advisor to find strategies to make sure your kids won’t face setbacks on building their own credit with your help.
Offer help in other ways
While some parents want to help their kids, they may not have the financial capacity to do so. There are other ways you can assist them, though, Hannah says.
If one of your kids is saving up for a down payment, let your child move home to help them build their savings. Or if your child started a new job across town, sell your second car to your son or daughter.
“Offer room and board for six months to one-and-a-half years, but tell them they need to set aside what they would have been paying in rent and groceries for their down payment,” Hannah says.
If they don’t provide proof that they’re keeping their end of the bargain, tell them they need to move out, he says.
“You‘re now dealing with adults, and it’s different,” Hannah says. “They have a clear understanding of expectations and they aren’t kids anymore, so they know there will be ramifications.”
“You don’t want to be opening your wallet for them forever,” White says.