It starts at the very beginning. You hold your baby in your arms and feel a deep, primal desire to give them everything they need. At some point, though, it’s time to tighten the purse strings and help them make responsible decisions.Giving your kids everything they want can cause more problems than it solves, not only during their formative years, but also when they’re well into adulthood. There can be a fine line between financially helping adult children and putting them into a situation in which they’re financially reliant upon you.The ‘too-nice neighborhood’ problemAccording to a recent survey from mortgage lender Veterans United Home Loans, more than half of parents of adult children are willing to help their kids purchase a home. Sometimes that’s helping with a down payment or closing costs. Other times, it’s cosigning a loan. About Adviser IntelThe author of this article is a participant in Kiplinger’s Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.Problems quickly arise when parents help kids buy houses they can’t afford to maintain on their own. Whether it’s a monthly payment that burdens the budget or homeowners association (HOA) fees that feel excessive, helping your kids buy a house that they can’t afford can be more of a curse than a blessing.Instead, help them buy within their means or match their down payment to ensure they have some financial skin in the game. Avoid lifestyle inflation by proxyIf you paid for a somewhat luxurious life for your kids or took extravagant vacations when they were younger (and continue to do so into their adult years), your kids might feel that a certain lifestyle is the norm and come to expect it.Trying to keep up with a lifestyle once provided by financially established parents can rapidly become problematic. Covering rent, vacations or luxury expenses tells your kids that their current lifestyle is normal even when it’s not sustainable. Once support stops, the adjustment can be brutal, and the kids might try to scramble to afford the same niceties to which they’ve become accustomed.This isn’t to say that you can’t occasionally splurge on a fun family vacation or other luxury, but rather to suggest that boundaries are clear that such a splurge isn’t to be expected.You’ve probably learned how to deal with lifestyle inflation, as many successful people have. Don’t allow it to become your kids’ problem by proxy.Gifts should build habits, not dependence You can be generous with your adult kids without risking bigger problems. Offer to pay for tools that can create momentum so they can stand on their own, such as professional certifications, seed money for a business or contributions to a retirement account.The goal is empowerment, not entitlement. If you can help set them up for success, do it with clear expectations that you thoroughly discuss. Ensure the “help” you provide is actually helpful — a certification in a career your child has no interest in will likely be a waste of money, as would seed money for a business your child wouldn’t be able to keep afloat.Talk openly about the trade-offsIf you gift something to adult kids, explain what the gift does and doesn’t cover. If you buy a home, clarify who handles taxes and maintenance. If you pay their tuition, make clear it’s a one-time payment. Clarity today prevents conflict tomorrow. Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.Examine the complications and relational strain that can come with changing your role with your child from “parent” to “lender” and decide if it’s worth it. If you expect your child to pay you back, have a clear agreement on the terms so there’s no ambiguity in the payback of the funds. Protect your own financial healthParents often dip into retirement savings to help adult children, but that kindness can jeopardize long-term stability. It can be a bad idea to earmark money to fund your adult child’s lifestyle when you might need that money for your retirement.Remember: Your kids can borrow money for a house or an education, but you can’t borrow your way through retirement. Being financially ill-prepared for retirement because you’re helping your kids can backfire on everyone involved if they have to then step in to help you survive. Helping your adult kids in a productive way can be beneficial, but putting your own finances at risk can damage your financial health. Instead, choose when you want to help, and be clear in your intentions of wanting to help your kids thrive in adulthood on their own. Related ContentHow to Decide How Much Money You Can Afford to Gift in Your LifetimeIf You’re in Your 50s or Nearing Retirement, Protecting Your Well-Being Is as Important as Protecting Your SavingsTurning Everyday Spending into Free Flights, Hotel Rooms and MoreThe Secret to Life, Liberty and the Pursuit of Happiness? It Isn’t Money. A Financial Planner’s Take on the American DreamShould You Buy a Beach House? The Truth About Vacation Homes, From a Financial PlannerThis article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
How to Give Money to Kids Without Setting Them Up to Fail
