If you have a child about to graduate from college or have one who did The Walk within the past five years, there’s probably a question on your mind: How can I help my kid financially without going broke myself?
There’s no easy answer, but after talking with some experts, I do have a few suggestions.
The need for boomer parents to assist their twentysomething kids may be greater than ever.
Many young entrants to the working world are finding it extremely tough to pay their rent and utility bills, afford groceries and make their car payments.
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Challenging Times for Recent Grads
“It’s very challenging for graduates to find decent jobs and begin their financial lives these days,” says Barb Miller, a certified financial counselor and bankruptcy specialist with the nonprofit LSS Financial Counseling agency in Duluth, Minn.
But “there’s a fine line between helping children out because they need it and helping too much, which hurts the children in the long run,” notes Derek Gabrielsen, a chartered retirement planning counselor and wealth advisor with Strategic Wealth Partners in Independence, Ohio.
Still, it’s awfully hard to say no.
While the job market for recent grads has improved a bit lately, it’s still pretty crummy. And starting pay, other than for professionals, is often lousy. The Georgetown University Center on Education and the Workforce estimates that the average Millennial won’t earn $42,000 (the U.S. median wage) until he or she is 30.
Debt Can Be Disastrous
Then there’s the debt albatross. The median total indebtedness of college grads under 40 with student loans is $137,010, according to a new Pew Research Center study. Mark Kantrowitz, senior vice president and publisher of Edvisors.com, recently told Vanguard.com that today’s grads with bachelor’s degrees have student loan debt averaging $29,400; the figure is $41,400 for master’s degree graduates. And nearly one in ten student loan borrowers under 30 is behind in payments by 90 days or more, according to the Federal Reserve Bank of New York.
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As the recent report by the Corporate Insight financial services consulting firm — The Millennial Shift: Financial Services and the Digital Generation — put it: “With a high debt burden and low income stream, Millennials need help balancing their budgets, managing their credit card and education debt, and planning for retirement and other goals.”
I can relate. My two sons in their 20s are trying their best to make it on their own, and it hasn’t been easy for them. My wife and I are no longer covering their rent or their daily living expenses, with one exception: their cell phone bills. (As a friend of mine who also has two twentysomething sons just told me, somewhat hyperbolically: "Everyone pays their kids’ cell phone bills.")
Don't Forget About Your Finances
You won’t be doing your kids any good, though, if you give them so much financial assistance that doing so depletes your savings. That could lead to your going to them with an outstretched hand sometime in the future, which could be painful for all concerned.
“One of the best gifts a parent can give their children is the freedom from having any financial responsibility to support their parents in older age,” says Blake Bostwick, COO, Transamerica Individual Savings & Retirement. “In order to adequately accomplish this, parents generally need to make saving for retirement a priority above most, if not all, other financial needs their children may have.”
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Adds Gabrielsen: “One big mistake I see is parents in their 50s or 60s supporting their children rather than saving for their own retirement. They’re in their prime time years for saving and this is when they should be maxing out the money they put into retirement plans.”
So here are six expert tips from Gabrielsen, Miller and Bostwick:
1. Make sure your child is really doing all he can do to make a living. “You can’t let him live at home and play video games, while he’s half-heartedly looking for a job,” says Gabrielsen. “You want to be sure he’s moving in the right direction."
2. Determine what your child’s financial problem really is and work together on a solution. Maybe there truly is a mismatch between his income and expenses. In that case, have a candid conversation about spending priorities.
But it could be something bigger, such as difficulties managing debt — whether that’s a credit card, repaying student loans or making car or mortgage payments on time.
If debt is the issue, you may want to take your child to a nonprofit credit counselor for advice and payment strategies. “Having too much credit card debt is not a good way to start off life,” says Gabrielsen. “It can ruin your credit and force you to pay higher interest rates on new debt, which can cripple you financially.”
3. Figure out how much help you can realistically afford to offer. “Parents need to think about their own finances first,” says Miller.
You may be able to provide useful assistance in a way that isn’t financial. “There are many ways to help without opening your checkbook,” says Miller. For example, she notes, you could offer to watch your child’s kids to reduce her daycare costs. This type of an “in-kind” gift is truly kind.
If you’re not in a position to help your adult child right now, have an open talk with her about it, says Bostwick. This way, you won’t come off as being heartless.
“Be honest and explain that there are certain things you as a parent are willing to do for your kids and certain things you won’t,” Bostwick says. “This seems obvious, but these honest conversations don’t happen often enough.”
4. If your child has a chronic problem managing bills or debt, work together to address it. The actual problem could be a lack of knowledge about handling money. In a recent survey testing the financial knowledge of first-year college students, Money Matters on Campus, the students answered only two questions correctly out of every six they were asked.
“Perhaps your child hasn’t learned how to make good financial decisions,” says Miller. “If that’s the case, parents can’t change that by handing over cash.”
You want to see what caused the money troubles to happen and, more importantly, whether there’s reason to believe they’re bound to happen again.
5. Consider giving your child a loan that must be repaid, rather than an outright gift. Gabrielsen suggests charging roughly 2 percent in interest and requiring that payments begin three months or so after his first paycheck.
6. Finally, don’t sweat paying your kid’s cell phone bills. “The way phone companies structure their deals, you might lose some discounts and shared minutes if you break up your family plan,” says Gabrielsen.