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By Thomas Muellner
It’s almost a rite of passage. Your son or daughter goes off on their own for college, takes an extended trip abroad with friends or moves into an apartment for the first time, only to realize that independence comes with a hefty price tag.
Sooner or later, the phone rings.
“So, I was wondering if you might be able to help me out. I got into a little jam money-wise, and I need a favor.”
While it’s natural to want to provide for loved ones, it’s often difficult to know where to draw the line when it comes to rescuing teens, college students and adult children from their financial blunders. Because whether your son or daughter is faced with a dwindling bank account, a stack of past-due bills or crippling credit card debt, no two situations are the same.
If your child is putting their financial future in jeopardy as a result of money mismanagement, consider these points before jumping in to save the day.
The only thing worse than having a child in debt or struggling with a financial hardship is for you as a parent to put yourself in the same boat with them. Sometimes being a good parent requires tough love.
If you’ve done the hard work of saving for retirement, the last thing you should do is use the limited funds you’ve set aside for your golden years to bail out a dependent child. It will be much harder for you to rebuild those funds over the remainder of your professional career. And withdrawing assets early from 401(k) and other retirement accounts comes with steep penalties. In some cases, you may be forfeiting as much as 10 percent of your retirement savings by withdrawing prematurely.
Any major money moves that will significantly impact your net worth, such as taking out a second mortgage or selling off capital assets (e.g., cars, jewelry), should be done with caution. Though the quick cash may seem like an obvious fix, there’s no turning back once assets have been liquidated.
Likewise, if your son or daughter asks you to co-sign a loan -- say, to purchase a vehicle or consolidate debt -- understand that you’re financially liable if the loan defaults. Even a missed payment will result in a ding on your credit.
If you have the discretionary means to lend a hand, it’s still smart to weigh a variety of factors when deciding whether to play the role of financial superhero.
What’s the crisis? How old is the child? Are they capable of resolving the situation on their own with a bit of guidance?
As a first step, be candid with your child and assess the situation. Rather than simply asking, “How much do you need?” try to fully understand the issue (or issues) your child is dealing with. It may be uncomfortable, but it will lay an honest foundation for resolution and give you the information you need to offer advice and support.
Small mistakes can be learning experiences; big mistakes can be life-altering. If your son or daughter needs help making rent because they’re still getting their footing after graduation, you may be inclined to write a check and then guide them through setting up an emergency savings fund. If they’ve been out of school for several years and are $20,000 in the hole with credit card debt, writing a check probably isn’t an option, nor is it likely to solve the root problem. But each case is unique.
Keep in mind that some financial mistakes, though seemingly small, can linger over time. For example, a single collections notice can take up to seven years to fall off of your child’s credit report. When they go to apply for a car loan or mortgage in their late 20s or early 30s, they still may be dealing with the financial blunders of their youth.
While financial mistakes are inevitable for some, the best way to help your kids avoid serious financial struggles throughout their life is to teach them the basics of money management and budgeting at an early age. From chores and allowance to part-time jobs and savings accounts, take every opportunity to highlight the consequences of overspending and the benefits of financial stability.
Once your child has proven that they can be trusted to manage their own money, help them start building credit with yours by adding them as an authorized user on your credit card. By setting a low limit of a couple hundred dollars or less, you can let them experience what it feels like to use credit responsibly before getting an account of their own. Plus, establishing a strong credit history can help offset the damage caused by a minor blemish on their credit report down the road.
If you’ve weighed your options and decided to use your own money to help rescue a teen or struggling young adult from their financial woes, set clear guidelines before the funds change hands.
If the money offered is intended to be a loan, put it in writing and make your child sign a basic promissory note. Similarly, if there are expectations such as attending school or actively pursuing a new job attached to a gift, be explicit about them and outline consequences if expectations are not met. Unfortunately, writing a check without guidelines and a strong plan for rebuilding your child’s financial standing often leads to a repeat of the same situation.
Moreover, if the situation is particularly dire and you’re concerned that the funds you’re willing to share will not be spent as intended, know that it’s OK to make payment directly to an organization or institution (i.e., utility, college, property manager) on your child’s behalf.
Though dealing with a financial crisis in the family can be draining for everyone involved, there’s usually a solution if all parties are open and honest about how to move forward. By focusing on tangible goals and personal finance best practices, you can rest easy knowing that you’re being a good parent while helping your child find their way back to financial stability.