The Bank of Mom and Dad, or the Art of Giving Money to Your Adult Kids

I came across a study from the Pew Research Center the other day that found 61% of U.S. parents have helped their adult children financially over the previous 12 months. Of those who did so, 58% say the help was needed due to special circumstances. Another 15% helped with education-related expenses, and the remainder contributed money on an ongoing basis for other reasons.

That brings me to an interesting question: when is it smart to help out your kids, and when it is better to stay out of the situation and allow them to sort it out on their own? Here are my thoughts on the subject.

First, consider whether you can actually afford it.

As a parent, I understand how difficult it is to watch your child fail – especially if you have the means to make their life easier. Or perhaps you think you do? Look at your own finances carefully before you make a commitment to help your child, especially if help will be needed on an ongoing basis. Does your monthly money inflow cover your bills comfortably? Do you have an adequate emergency fund? How are you doing on retirement savings? If any of these questions have an uncomfortable answer, consider other ways you can help without compromising your own financial security. In many cases, adult kids don’t have a full understanding of their parents’ finances, and would have never asked for money if they knew their request would create a hardship for you.

Next, ask what happened.

Today’s younger generation is facing a tough job market, high student loans, and housing costs that are out of control. Those are difficult ingredients to work with, so have a conversation about what exactly is prompting the request for money. Is this a one-time financial emergency that was outside of your child’s control, or is it a reflection of a year or two of bad spending decisions? The answer will help you understand the extent of the problem, the length of time help is needed, and what your son or daughter is doing to remedy the situation.

If you agree to help, set boundaries.

If you make an informed decision to help your child financially, make sure everyone is clear on expectations and boundaries. Will your contribution be a one-time deal or an ongoing stream of support? When will it stop? Is it a gift or a loan? If it is a loan, what is the plan for repaying it – and what are the consequences for missed payments?

Finally, consider helping in other ways.

I am not suggesting that it is never OK to help your adult children financially. If personal safety or health is at stake, the decision is an easy one. The ultimate red line is highly individual and depends on your family and its financial resources. Some parents step in to cover the child’s temporary unemployment, while others see it as an opportunity to teach the importance of having an emergency savings fund and the willingness to do whatever is necessary to make ends meet.

The key is to make an informed decision that you are comfortable with. Remember that as a parent, you have less time to make up the financial losses that result from dipping into your retirement savings or skipping your IRA contribution this year to bail out your kid. Consider other ways you can help, and connect your child with resources that will give him or her the tools to dig out of the mess. In the long run, “no-strings-attached” bailouts are more likely to enable the underlying problem than to fix it.

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