It’s the ultimate parent trap.
You love your children and want to shield them from tough financial situations. How can anyone blame you for wanting to help? Contributing to the cost of a wedding or down payment for a home is one thing, but if you’re dishing out cash for your child’s daily living expenses, entertainment, holidays etc., know this – you may be putting your own retirement at risk and depriving your child of ultimately reaching financial success.
I recently read a report out of the U.S that says 75% of parents with children over the age of 18 are covering or have covered at least a portion of their child’s expenses (84% have helped with living expenses, and 70% have helped pay down debt).
If you think this is an “American” or “Western” problem think again. An HSBC survey recently revealed that 79% of parents in the Middle East, and 56% of parents in Asia are financially supporting their adult children. In fact, more than 50% of parents in Asia are supporting children over the age of 30! While the cost of education is a key area where they provide help, some 40% of mom and dads are aiding their grown-up children with everyday living costs.
To help or not to help – or rather when to help and on what to help with – that is the question. And it’s often a contentious issue.
In Asia, where the familial ties are strong and pursuing a higher-education is expected, it’s not surprising to hear that most parents will prioritise paying for their children’s education over their retirement. I can attest to this being of Asian heritage. My parents believed it was their obligation to pay for my education. They saw that as an investment in me, my future and my financial security. However, they had boundaries and ensured they prioritised their financial security, all the while teaching me money lessons so I could stand on my own two feet. I believe that’s the key – balancing financial support with non-financial support.
The Financial Consequence for Your Retirement
So what’s the cost to you? Well perhaps not surprisingly, most parents don’t account for these expenses in their retirement plan – so they have no idea what the real impact is.
Let me give you an idea with an example:
Suppose you gave your child/children $5000 a year for 10 years ($50,000 in total) rather than investing it. Assuming you could have earned a modest 6% on the amount, it would be worth approximately $75,000 after those 10 years (so you forego $25,000 in investment income).
If you were to leave that $75,000 invested for another 10 years and not contribute a single cent more, it would be worth $134,000. That’s a sizeable sum in your retirement years.
The Financial Consequence for Your Adult Child
It’s reasonable that in an economic downturn when your child is facing a tough time landing a job, or they’re dealing with a pile of school debt, you want to support them and give them a head start. Nevertheless, they will ultimately have to learn to be independent. The sooner they do, they greater chance they have in being financially healthy.
Sometimes, the guilt gets the best of parents to the point where they can’t draw the line of when to stop giving. And some kids (adult or not) are great at making their parents feel bad for their own situation.
So when you are thinking of giving your child money, ask yourself this: Are you empowering them towards financial success or are you inhibiting them from it?
The best gift a parent can give their child is educating them on how to master financial responsibility.
The best gift a parent can give their child is educating them on how to master financial responsibility – without you – because you won’t always be there to bail them out. Sometimes it requires tough love, but more often than not, an honest and open conversation will do the trick.
- Have the “talk”. Agree on the approach you’ll take with your child as a couple and schedule a conversation with them. Start by telling them you love them and you support their well-being. Then explain your concerns for their future security, as well as your own because of the support you’re providing. Give them an opportunity to express their view. They may be assuming you’re swimming in money if you’ve never been transparent with your own situation. It’s also very likely they feel a loss of control and need guidance.
- Agree on a few ways you can provide non-financial support with your child. For example, help them create and implement a budget; help them with their resume; connect them to potential job contacts; or help them negotiate a lower credit card interest rate.
- Set dates and targets for weaning them off the “ bank of mom and dad”. Rather than ripping the cord underneath them, lay out a plan for when the financial support will stop. Establishing some terms will protect you and let them know what the boundaries are.
There’s no clear-cut answer to what kind of support you should provide your children. Someone wise once said “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” I believe remembering this will serve you well in making the right decision.