Dear Mom and Dad: You Are Not Your Child's Bank

5 Tips for Yanking the Financial Chord with your Kid(s)

Does the silver spoon look like it's losing its polish? It's because it frequently carries money from your pocket to your child's pocket.

You spend your whole life loaning money to your children hoping they become self-sufficient. You finance them by lending your time, your love, and your money to set them up for success. So, how do you handle when your child appreciates you but not your lending services?

Parents always want the best for their children. It's common to see parents using emotion to justify their reason for giving an excessive amount of money to their children. This is because they want their child to be more affluent than they were growing up. However, they complain when their child doesn't value money the same way they did. Why is it this way?  

We all get sick of hearing the ole saying, "If you truly want to appreciate the value of something then get skin in the game." In other words, put your money on the table. The quote is repeated so often that we usually just ignore it. However, it's time to quit before you get stuck financing your child financially well into their adult life.

5 tips for everyone to use while trying to pull the money chord from their child:

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Are you Loaning or Gifting? 

Parents often have the intention to make their child repay the money but fail to follow through. It will take time to figure out how to remove financial support from your child so it's best to make sure you are taking advantage of the benefits available to you while supporting them. Under current IRS guidelines, you can gift up to $16,000 a year (for 2022) without filing a gift-tax return. Work with your child to identify what budgeting or behavioral gap your gift is helping with. That way, they don’t look to you each time they get overwhelmed with expenses or debt. Be sure to clearly state whether it is a loan or a gift at the time it’s given so everyone has a clear understanding. There are certain tax advantages available for people currently gifting their child money. It's always best to consult with a CPA while exploring your options.

Focus on Essential Liabilities. 

You can't really let your child miss their light bill because they will just move in with you once the lights get cut off. Offer to help with only critical bills, such as health insurance or car insurance, so coverage is never lost. If you decide to help your children only in an emergency, make sure you stick by this. Explain to them in detail what you consider an emergency and avoid granting any assistance unless it constitutes what you both agreed upon originally. It is important that you put a strategy in place and stick with it because the hand that feeds will continue to be bitten forever. 

Formalize Loan Financing. 

It’s in everyone’s interest to formalize the specifics of a loan, particularly for a large dollar amount. It may be awkward the first time. Your child or your spouse may wave away a formal process as unnecessary. But leaving a loan open-ended reduces the likelihood you’ll be repaid, and that can create challenges down the road. Write all the details of the loan down, including the purpose, amount, and repayment schedule. You both should sign the loan paperwork once the lending agreement is processed. Lastly, be sure to charge interest for the loan to make your time worthwhile, it will help to reinforce the cost of needing financial assistance. You are trying to accomplish three separate things:

• Responsibility
• Support
• Skin in the game

Responsibility

You are teaching your children responsibility by making them repay the loan. There will be a time when you will not be around to provide the support they need. It will be extremely important that they understand the importance of repaying borrowed money.

Support

Why else would you help your child? You love them. You can support your child and teach them responsibility all at the same time. It's a win-win situation for most family households. People will feel like criminals for pulling support from their children but in reality, you are doing them a massive favor.

Skin in the game

This one is my favorite. Have you ever felt like you appreciate something more when you have to pay for it? It's because you had skin in the game. This concept can be duplicated across many different areas in life. Investing, relationships, and even commitments because nothing feels worse than losing something that you were tied to financially or emotionally. The most successful companies in the stock market were founder-led and had actual skin in the game. 

Control your home now. 

If you allow your children to move back in, make sure they know what you both expect before moving in. Consider a written agreement that outlines rent or expectations for help with household upkeep. One idea is for parents to let their kids stay at home for a given number of months, then begin to charge rent after that. Set a target end date or a set of conditions that would necessitate the child to move back out – such as finding a job at a specific income level. You have to keep in mind that the goal is to remove the financial burden from yourself and teach your child a lesson. It will be easier for you to sleep at night and they will learn a valuable lesson. 

Weigh Financial Alternatives. 

If you are considering tapping into your retirement savings to help your child financially, look at every other available option first. While you may feel it necessary to pay for a child’s college education, pulling from retirement funds should be a last resort. Students have access to grants, scholarships, low-interest deferred loans, and student employment. They also have a longer time horizon to pay off student loans. The opposite is true when it comes to your retirement savings. It’s natural to want to help your child or grandchild during times of financial hardship. With planning and guidance, loaning or giving your child money can also be well executed without burdening your finances and escalating familial stress. 

Bottom Line

Life is perspective and you've got to find some. Is your glass half-full or half-empty? Do you want to jeopardize your financial future or help them learn responsibility by teaching them to take financial initiative? You can make a massive impact on your children's financial lives by simply turning gifts into loans, formalizing the loan, assisting only with important liabilities, setting boundaries inside of your home, and weighing all of your alternatives. This is a difficult topic to handle emotionally. I hope that you take initiative on some of the points listed above and know that I am here to help you get through them if needed. My job is to coach people into being their best selves financially. If you are ready to sell the Bank of Mom and Dad or need financial advice on any of the Tips mentioned above, let's talk. My calendar can be accessed here.

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