As usual, when I have this conversation with someone, it makes a great idea for my blog!
So here are some things to think about when junior has his hand out.
Think About Your Financial Goals
I’m a parent too. I’m not going to say that I won’t give my kids money in their adult lives at some point. What I will tell you is that you need to examine your financial capacity to do so.
How is giving this money going to affect your own financial situation?
If it is a large enough sum it could affect your finances so much that you never recover. A good rule of thumb may be to keep it under 5% of your net worth.
You may want to do some work with your advisor and develop a plan. Assess the gift during the planning so that you can have good information before you fork over to your adult child.
Gift or Loan?
Now that leads me to discuss whether you will expect to be repaid. To avoid a lot of family conflicts, I highly suggest that you decide right up front whether this will be a gift or a loan. I also suggest that if it is a loan, then establish a repayment schedule and its terms. Oh, and put it in writing. Now you may be thinking, “How cold, he wouldn’t treat his kids that way!” Believe me, I see it all the time. At least with it in writing maybe little Susie will take the repayment seriously.
I’ll also make a few more points about the terms of a loan. Maybe little Susie would like to have it as a loan to maintain her independence? You may also want to set a reasonable repayment schedule. For example if an adult child just opened a new business, then payment may be tougher at the start of the business.
Additionally, have some rules about whether the adult child bails out on the reason for the loan. For instance, if the money is for graduate school and then the adult child drops out or uses the money improperly, you want to have the right to recall the loan.
Finally, let the adult child have some skin in the game. Don’t put up 100% of the funds. Even banks require some sort of down payment. It helps the adult child to stay hungry and work to repay the loan.
This is a tough economy. There are a lot of people out of work. Loaning money for going back to school, or getting additional training are all admirable things to do. We all have a soft spot for our kids and want to see them succeed in every way.
All I’m saying is don’t make it super easy to get money from you because they could start to take it for granted and abuse it. Plus, you want to make sure that it doesn’t screw up your finances either. On another note, paying off junior’s credit cards is really a no-no to me. You haven’t done anything but finance their irresponsibility.
If you would like some help with your finances, write to me at firstname.lastname@example.org, or call me at (859) 225-2596.