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Tuesday, 11 August, 2020

Build a healthy money relationship with adult children


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Read Time:5 Minute, 12 Second

Home Rules

As I mentioned earlier, if an adult child lives with you, they should contribute to household expenses. How much is up to you. I want to be clear that this is not solely about helping you financially; it is about respecting a child as the adult they are.
I want your child to set up an automated monthly direct deposit from their checking account into yours. This is not something to be left to their best intentions. Nor do I want it to be a constant point of discussion—or contention—in your home.
As you progress through this book, you may often greet advice with a shrug and the thought “I can’t afford to do that, Suze.” Please circle back to this discussion we are having right now. I think for many of you, the money your adult child contributes will allow you to tackle all sorts of financial goals. Paying down credit card debt, bulking up your emergency savings, paying down the remaining mortgage.
But if you don’t have any pressing financial needs, you might consider setting the money aside for your kid. It’s up to you when you “return” the money to them. Maybe you use it to help them fund a Roth IRA each year. As long as they have earned income of their own, you can provide the dollars to contribute to a Roth IRA. Or when they are working on moving out, you’ve just helped them cover the security deposit or jump-start their emergency savings fund.

Rent

If you have credit card debt or are still paying off a mortgage near (or in) retirement, I don’t think you have any business helping with a child’s rent. That said, if you are intent on helping, I hope you will set the lowest possible contribution level. Helping a child rent a room in a shared apartment or house is one thing; bankrolling their own place because they don’t want roommates is not your concern.

A Car

You are never to help a child buy a new car. And don’t you ever support them leasing. If a child needs a car, they should be shopping for a used car that they can pay for with the shortest-term loan possible. The average new car loan payment in 2019 was more than $500 a month for nearly 70 months. That is financially insane for anyone, let alone an adult child who should be spending the least amount possible to free up money for other goals: moving out, paying down student loan debt within 10 years, starting an emergency savings fund, contributing to a Roth IRA.

Health Insurance

Children under the age of 26 are allowed to remain on a parent’s health insurance plan. Given that employers are increasingly requiring employees to shoulder more of the monthly premium cost and cover a bigger chunk of any care, this may not be the best financial decision for you. At a minimum, if your child is working, they should cover their share of the premium.
But I encourage you to consider taking them off your plan. Even if your child doesn’t qualify for coverage at their job, they can get coverage through the Affordable Care Act’s health care exchange (www.healthcare.gov). The younger they are, the lower their premium cost and someone who is just starting out professionally may qualify for a subsidy.
This can be a big money saver for single parents, as it will enable you to switch your coverage from family to individual, which means a lower premium and a lower annual deductible.

Student Loans

If you are nearing retirement and have any outstanding debts, you have no business helping a child pay back their student debt. Getting your own finances in order takes precedence.
Moreover, I think many of your children likely have a manageable amount of debt. They may not feel like it is manageable, and that’s where you may be able to step in with some perspective. A rule of thumb is that if a new graduate’s total loan balance is less than they will earn in their first year of work, they should be able to pay off the loan in 10 years. The average student loan balance these days is less than $40,000. That suggests that plenty of graduates will have enough income to handle the monthly payments on a 10-year standard repayment plan. If your children come to you asking for help repaying their college loans, I am asking you to discuss their overall spending before you agree to step in and help. Is their problem with the student loan because their rent and car payments are so high? Before you make the tradeoff of helping them pay back student loans, I think it is reasonable to ask them to make the right trade-offs in their own spending.

Resist co-signing for loans.

Being debt-free in retirement will be a central driver of your financial and emotional security. That’s the first reason why I don’t want you to co-sign a loan for a child without serious consideration of what you are putting at stake.
You may think this is no big deal; you’re just co-signing. It’s not like you need to shell out money each month to pay back the car loan, student loan, personal loan, or mortgage. You know your kid, and you know there is no chance there will be any slipup.
Are you sure? I know your kid has every intention of staying on top of the payments. But what if he or she loses a job or becomes ill? You will be expected to step up and pay back the loan.
The other problem I have is that I think there can be a tendency for a child to borrow more—because they can—when a parent co-signs. I know that’s not your fault, nor is it your intention, but co-signing is often the gateway to kids taking on more debt than they need, at the cost of not having more dollars to put toward important financial goals.

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