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Having children has always been a financial responsibility, but in the age of student debts, tough housing markets and low entry-level wages, this responsibility can sometimes start extending well into adulthood. For many parents who themselves are in a secure financial position, lending a hand to help kids get on their feet either after university, or maybe when hardship strikes, later on, can be a great way to work together to get ahead.
However, finding the right balance between supporting your adult offspring and creating a relationship of over-dependence is tricky. As parents, it’s natural to want to help out as much as possible, but it is imperative that you consider your own financial position and any ramifications of lending.
We will explore what you need to be aware of before offering financial aid and have a look at some of the best ways to help in some common situations.
Always check your own financial position
If you are seriously considering financially aiding an adult child, your first consideration should be how it will impact your own financial stability and any investment plans. While this may sound a little selfish, it really does no one any good for you to ensure the financial security of your children, only to require a bailout yourself when it comes to retirement planning or health costs.
One of the best ways to make sure that your support will not jeopardise your own financial future is to discuss your intentions with a financial adviser. They can help you to determine whether, and how much, you are in a position to gift or lend. Creating a firm budget strategy for how you will help out your children can also help to give everyone a firm understanding of your limits and the plan in place.
Remember that even if you are unable to gift money, there are many non-financial ways that you can still be of assistance. For example:
Educating and helping children to budget appropriately
Provide low cost (or even free) accommodation in your house to allow for higher savings
Help out with child care to reduce these costs.
Two areas where financial aid is often needed
There are two main areas where adult children often need a helping hand financially:
Paying off debt
Getting onto the property ladder.
Let’s have a look at what you should consider and some of the best ways to help out in these situations.
Helping out with debt
Debt is often a very sensitive issue and one that can cause a range of emotional responses from those affected. It can of course be a great thing, for example getting a mortgage or any sort of investment that will generate long term wealth. However unfortunately through either poor planning or unforeseeable circumstance, many young Australians can find themselves owing money urgently.
If your offspring approaches you about help paying off debt there are a few things that you need to know first.
Why did this happen? It can feel like an insensitive question but it is critical for your own financial planning. Is this a one-off situation caused by unforeseeable circumstances like redundancy or eviction? Or is it the result of chronic money mismanagement and something that you will likely have to deal with again?
Can you afford to help? Another big consideration here is whether it’s in your power to pay off the debt. Always consider the possibility that you may not be paid back.
Can they afford to pay you back? Plan with them how they will pay you back and realistically at what point in the future this will be. It can often be good to get this agreement in writing to refer back to.
Are there any non-financial ways you can help? It can be very hard to say no to helping a child out in urgent need, but there may be other ways you can help.
With the Australian housing market exploding in price, it can be very challenging for young people to buy a place of their own. This can often be very frustrating and forces young families to continue renting.
As a parent, you could be in a position to offer assistance in a number of ways that will help your children to achieve their dream of owning a home.
Signing as a guarantor: Lenders are increasingly allowing people to use the equity on their own home as security for a loan taken out by your child. This can help children to access mortgages that would otherwise be out of their reach. However, you should always discuss this move carefully with a financial adviser. Remember that this is essentially you taking responsibility for the loan and promising to pay it if your child is unable to.
Gifting the deposit: If you can afford it, gifting all or some of the deposit can be a great help to prospective buyers. This will reduce the amount they need to borrow and also the interest. However, remember that a gift of this size can sometimes have tax ramifications. Always get advice to find the best way to do this.
Consider co-ownership: This is a big commitment but can work for some families, especially those who are considering a multi-generational household. Remember that this gives you equal responsibilities for loans but you also own effectively half of the property.
Our dedicated lending team can help you find the right loan and lender to complement your individual circumstances.
4 easy mistakes to make
Getting into a cycle of financial rescue: This cycle is detrimental to both your financial well-being and also the autonomy of your children. If debt or financial insecurity is a reoccurring event for your children, try to get to the root of the problem rather than handing out money.
Withdrawing all support too soon: It is a hard world out there and sometimes children just need a bit of support when times are rough. This is particularly the case after university where the gap to find a job can sometimes be stressful and expensive. Setting conditions for help can sometimes be a good way of controlling the support, for example time limits for free accommodation.
Lending money you can’t afford: Never put yourself into financial strife, it just isn’t helpful for anyone,
Lending with an agenda: If you do decide to lend or gift money it has to be without strings attached. Having expectations about unwritten payback gestures will only cause tensions.
Making the best decisions for both you and your adult children can be tough and requires a lot of planning. Here at Invest Blue, we are passionate about helping people to plan for their future in a way that works for them and the people they love. Get in touch with our team of experts today to get the best advice for you.
What you need to know: This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
