When Adult Child Asks For Money
When you see your adult child’s name come up on caller ID are your first thoughts, “oh no, how much is it going to cost me this time?”
We want the best for our kids whether they are babies, teens, college students, or adults out on their own. If your six-year-old asks for gum at the grocery store check out, in an exhausted moment you may push better judgment aside and purchase the treat. When your twenty-six-year-old needs help to pay their rent and you catch yourself saying or thinking, “I’ve got to help, she’s my daughter" this scenario may be out of hand.
It is time to stop supporting behavior that can be financially destructive for both you and your adult child.
Financial support for an adult child can have very negative impacts on the parent's ability to retire with a sense of financial stability. The adult child may falsely learn, that mom and dad will always be there to bail them out. Parents may feel guilt and anger that their child keeps asking for money, but if they are not willing to help their child learn to make their financial way in the world, most likely the pattern will continue.
Helping today does NOT help your adult child down the road
Statistics indicate most children will outlive their parents. If your adult child keeps asking you for a handout today, it is important to think ahead. Will they be able to get along without your financial support after you're gone?
After you pass away, will they know how to make ends meet?
Maybe your savings are ample enough that your child will eventually inherit a large lump sum of money. However, do they have the financial life skills to know how to manage an inheritance?
If they don’t know how to take charge of their finances today, most likely they will blow through their inheritance quickly. Then what? Who will be there to catch them?
Learn and teach positive financial behaviors
Both you and your adult child will need to adopt new behaviors. It’s not too late to learn and you can do this together.
Parents set your budget first.
Next, teach your adult child how to create a budget.
When you fly on a commercial airline, an essential part of the safety instruction is to help yourself first and then assist minors. This is an applicable safety behavior to your finances too!
Teach your adult child to keep track of their income and expenses and try to forecast unusual or large expenses like new tires for their car.
Have them write down their income then deduct all of their fixed or required expenses (rent/mortgage, utilities, food, insurance, gas). If there is money left over, this can be used for savings and to pay for discretionary expenses like dining out at a restaurant, hair, nails, clothes, and entertainment.
If you still anticipate your adult child will require your financial assistance, having first carved out your budget, allows you to know how much you can afford to give away.
When your child is careful with their money, but still comes up short each month, at least you will know how much you can or are willing to provide without causing financial distress of your own.
Your finances should be under your control… not your kids' control
If your adult child makes a purchase that is outside of the scope of their budget, consider doling out tough love instead of cash.
They may need to make adjustments to their lifestyle. "The biggest challenge is providing enough money to help a child through a challenge, but not giving to the point where it kills the person’s motivation to work and succeed" (Morrissey, 2019).
While working with them to create and follow a budget you will be able to quickly see the financial gaps and have talking points about why you will no longer fund their lifestyle.
Loaning money to your adult child
Maybe your adult child is ready to make a big ticket purchase like their first home. If they are a good steward of their finances and you are in a position to help, you may want to provide them with a loan.
Even though this scenario sounds good, consider jotting down the terms of the loan and keep a running total as they pay you back over time. Even better, have a legal document drawn up that you both sign. This will mitigate any misunderstandings or miscalculations.
Does the IRS care if you lend money to your kids?
Occasionally slipping petty cash to your kids may happen. However, if you gift or lend big money; do so with the understanding of how this can impact your taxes. Consult your tax professional for guidance.
Consider this example, your son or daughter asks you for a large lump sum so they can use it as a down payment on a home purchase. When you receive repayments including interest charged, you will need to declare this to the IRS. If you don’t charge interest on a big loan, the IRS will consider this to be a gift. Guess what? If the sum exceeds the annual gift tax exclusion ($17,000 in 2023), you as the donor are subject to paying gift tax (2020 IRS.gov).
Conclusion
Both good and bad money habits are learned behavior.
If you feel obligated to help, begin by creating your budget then teach your adult child how to create theirs.
Dolling money out to your kids regularly can harm your financial well-being in retirement.
If you provide large sums of money to your child, consult your tax professional so you are aware of how this will impact you at tax time.
For additional information about parent-child money decisions, check out some interesting reads:
New Your Times: Thinking About Giving Money to Adult Children? Think Again.
MarketWatch: Opinion: When your adult children keep asking for money, here’s what to do.
Finally, if you recognize yourself being an enabling parent, learn it’s okay to just say NO.
About the Author
Marianne Martini Nolte, CFP® provides women and young professionals with fee-only, fiduciary, independent financial services. IMAGINE FINANCIAL SERVICES (IFS) is a registered investment advisor offering advisory services in the State of California and in other jurisdictions where exempted.
This article provides a high-level view. All written content is for information purposes only. Opinions expressed herein are solely those of IFS, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to the other party's informational accuracy or completeness.
For more in-depth information, please reach out:
Marianne Martini Nolte, CFP®
Imagine Financial Services
Website, www.imaginefinancialservices.com
Email, mnolte@imaginefinancialservices.com
Phone, (760) 472-5155
References
Frequently Asked Questions on Gift Taxes. (n.d.). Retrieved August 28, 2020, from https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
Morrissey, J. (2019, November 6). Thinking About Giving Money to Adult Children? Think Again. The New York Times. https://www.nytimes.com/2019/11/06/your-money/parents-children-money-advice.html.
Stettner, M. (2019, March 16). Opinion: When your adult children keep asking for money, here's what to do. MarketWatch. https://www.marketwatch.com/story/when-your-adult-children-keep-asking-for-money-heres-what-to-do-2019-03-14.
