Most parents are at least open to the idea of giving financial assistance to grown children. But there are several pertinent caveats that go along with that desire.
Published: March 23, 2023
By: Justin Weinger
It can be counterproductive to offer unlimited monetary or other kinds of support to otherwise mature adults. Even cosigning on a college loan can be fraught with potential hazards for a parent’s credit health.
While there’s a solid argument for working with youngsters who are trying to save for a first-home down payment, it’s usually never a good idea to purchase cars for older teens or children in their early twenties. Many moms and dads are happy to jumpstart a young adult’s aim of establishing an IRA or other kind of retirement account. On the other hand, it seldom does any good to provide financial support for a child’s romantic partner. Consider the following do’s and don’ts before making any money-related commitment to assist a child, no matter their age.
Don’t Offer Open-Ended Support
Open-ended financial support is almost never a wise idea for moms and dads who want the best for their children. Even if you have the resources to make generous offers to help a child, always spell out the details in a written agreement. It’s imperative for both parties to understand how much is at stake, how long the support will last, and what the mutual expectations are. Of course, there’s nothing wrong with making no-interest or low-interest loans to youngsters but put the specific terms in writing and discuss the arrangement before moving forward.
Do Consider Cosigning on a Student Loan
Many mothers and fathers cosign for college loans when their children apply for financial assistance. In such cases, a parental signature can make or break the success of the loan application. However, avoid the temptation to say yes immediately. While appending your signature to the loan document can streamline the approval process, it can also have a significant impact on your credit scores with all three major rating bureaus.
Ask yourself if you can afford to take a credit hit in terms of having a higher amount of debt. Note that the full amount of the loan balance will be listed on your credit report until it’s paid in full. If the student is late or misses payments altogether, that delinquency appears on your report too. Think long and hard about serving as a cosigner and have a lengthy discussion with children who ask request that you sign for them.
Don’t Buy No Strings Attached Cars
In general, no strings attached financial assistance is counterproductive. Unfortunately, large numbers of mothers and fathers who have the means to do so will buy cars for their children. When anyone gets a new car and has zero responsibilities to cover the down payment or regular monthly obligation, they don’t appreciate it as they otherwise might. An excellent way to streamline the car buying process for kids who have very limited financial resources is to match down payment amounts, cover insurance premiums, or agree to donate a monthly portion of the cost.
Do Give Limited Help With First-Home Down Payments
In today’s volatile real estate market, it can be nearly impossible for young adults to come up with enough cash to place a down payment on a first home. For generations, families, including grandparents, have pitched in to help young couples acquire a house and get their financial lives off the ground. If you decide to follow this route, consider either a matching arrangement with a written repayment schedule or donating a percentage of the amount to your offspring. However, avoid the urge to cover the entire obligation for them.
Don’t Support Romantic Partners
If your son or daughter is living with, but not married to, a partner, be careful with any kind of support. In essence, when adults provide money to their kids who are in romantic living situations, they donate to both their child and the child’s romantic mate. Invariably, these kinds of arrangements lead to bad blood between all parties. If you want to offer monetary assistance to a child, make it clear that you are willing to do so if they live alone but not when they are cohabiting before marriage.
Do Offer to Match Initial IRA Contributions
A great way to encourage youngsters to save for retirement is to match a percentage of their first-year contribution to an IRA (individual retirement arrangement). Avoid doing so past the first year because the aim is to get them started on a savings plan, not to support them after the account setup.
Justin is a married father of 3, with over 17 years of corporate finance experience in various industries. He is an avid personal finance enthusiast, blogger, and chaser of passive income streams.