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I come from a very giving family, as is the case for most recent immigrants. My mother and father, while lower middle class, have always provided their children with whatever was in their means. As a small child, my parents purchased hi-quality clothes and shoes for us, paid for braces, prepared wonderful meals, purchased our first used car, and paid for about 2/3rds of our college educations (including our books). My parents continue to be very giving (even as we’ve purchased our own homes and established our families); my mother will often pick up a few items at the grocery store if she sees a good deal and my father, as I’ve posted in the past, has acted as our general contractor on numerous occasions (painting, re-wiring, running copper water lines, installing windows, etc.).
Given the above I’m wondering if it’s generally a good thing for parents to help their adult children? I know, for example, that if I had to pay contractors to do work on our home our personal savings rate would be much lower than it is today. I also believe that if I had to foot a larger portion of my undergraduate tuition, and purchase my first used vehicle, I would not have been in a position to buy my first home in my mid twenties with a 20 percent down payment (as well as buy my first new vehicle in cash). Some critics would argue that parents should let their adult children fend for themselves and that as soon as the child leaves the home at 18 to attend college they should provide for themselves. Well, I think the aforementioned notion is silly and that getting ahead financially can’t be done without a strong family network.
Given my experience, I think it’s critical for parents to provide a stable financial foundation for their children; in fact, I think parents who force their kids to fend for themselves once they turn 18 is akin to financial child abuse! Here are five tips on how parents can help their children/young adults get off on the right financial foot:
1. Pay for your child’s college education. With tuition rising at 4 year colleges and universities at an astronomical rate, it’s not uncommon for students to graduate with $20,000 – $30,000 in debt, not including credit card debt (see an older article from USA Today entitled, “Students Suffocate Under Tens of Thousands in Loans”). Now imagine starting your adult life (at the age of 22) in debt and with no promise of a job to pay off loans! Don’t get me wrong, I think students should hold a part time job during their undergraduate years (especially if it’s related to what the student is studying) and apply for a few low interest loans, but the more a parent contributes towards tuition and living expenses, the better off the new grad will be come graduation.
2. Help your young adult child purchase his/her first used car. One of the best things my parents did for me was purchase a 1991 Honda Civic with about 75,000 miles on it (for about $3000). I used the car to get to my first job after graduating from college and it was a huge relief to not have to make car payments so that I could focus on paying off my college loans. The vehicle was reliable and bare bones and it got me where I needed to go. I paid my parents for insurance and bought gas, but my parents did not require that I contribute towards the purchase of the vehicle. The same vehicle was later used by my younger sister for the same purposes.
3. Offer to house your children once they graduate from college. Paying rent and utilities can be a huge expensive, especially if you live in or around a large city, so if you have the means to continue to allow your recent grad to live in the house it can be a huge money saver. Some parents charge rent or even have their recent grad take care of a few of the utility bills, but if he or she is well intentioned and independent they will probably move out within a year or so (so asking him or her to contribute financially kind of defeats the purpose of living at home and saving).
4. DO NOT offer to help pay for the young adult’s first home. Preparing to buy a home requires a great deal of discipline and sacrifice; more specifically buying a home requires, at a minimum, a 20 percent down payment and saving for a down payment is a great lesson in living below your means. In turn, I think every parent (or close relative) should resist the urge to turn over a large sum of cash for a home purchase. Moreover, saving for a down payment on a home is only the first step in the home ownership lifecycle, the home owner will need to save for costly repairs and maintenance, inevitable renovations, etc., so letting the young adult come up with his or her own down payment builds the necessary “saving” mentality needed for home ownership (a good general rule is that if you can’t come up with the down payment then you shouldn’t be a homeowner). Plus, if you’ve helped by way of the three tips above your child should be in a good position to save for a decent down payment.
5. If you have more than one child, provide the same financial help with each child regardless of financial situation. One of the worst things any parent can do is play favorites, especially in a family with multiple siblings. My view on parents helping their children is simple: give the same to each child regardless of need (this will keep things fair and prevent unwanted resentment).
I want to reiterate that I’m not advocating parents support their kids outright through early adulthood, but rather strategically help with life steps that can make or break a young adult’s financial foundation. After all, once a young person accumulates debt it’s very hard to get back on track. Parents should also be very aware of the type of young adult they are dealing with; obviously, you do not want to buy an irresponsible child his or her first used car (use common sense and know your children).