Families have many traditions and patterns that they pass along from generation to generation. And just like parenting skills or communication skills, money management and attitudes are either directly or indirectly passed along. "In my experience, people are greatly influenced by how their parents managed finances and also by how their parents talked (or didn't talk) about finances," says Maura Van Heuit, an independent fee-only financial planner with Ashland Financial Solutions.
There are generational trends as well, says Van Heuit. For example, the generation that experienced the Great Depression tends to have more interest in financial security than in raising their standard of living. But their baby boomer children don't want their own families to experience the financial limits they grew up with. "These folks are spenders in a big way," says Van Heuit. "They want comfort and a high standard of living"¦[and] it is the first generation to be offered almost unlimited personal unsecured credit, allowing spending beyond their means."
Nancy Sash of KDCO Financial Services, LLC compares a financial plan to a map. "If you were going to head across the United States to go to Florida without a map," compares Sash, "I am sure you would get there — but it may take you a lot longer and may cost you much more than if you had properly planned your trip." A comprehensive financial plan will cover a variety of issues including tax planning, insurance, savings, debt management, estate planning and investment planning. If your own plan is in order, it will be much simpler to advise your adult children correctly.
"Talk to your children about your situation and estate plans," encourages Sash. "It will start additional conversations about money and how to manage it. If your children are set to inherit large sums should anything happen to you, you will want them to know your wishes, and what your hopes are for how they manage that money. If you feel they are not capable of properly handling that amount of money, you can put constraints on how and when they receive portions of an inheritance. You may, however, be surprised at how much your children have matured after having these types of discussions."
What does all this mean? "All of this means [is] that they haven't managed their money very well, they haven't had the skills to pass on to their children, and they've shielded their children from having to develop good financial habits," sums up Van Heuit. "Baby boomer parents tend to help their children way too much... I've seen parents continue to pay adult children's cell phone bills, car insurance, medical insurance, rent, and in almost all cases, the parents are way behind in saving for retirement and yet can't seem to bear cutting them off."
So what can be done to encourage adult children who lack the skills (or sometimes the initiative) to become financially independent?
"Giving adult children money is not the answer," says Nancy Sash, certified financial planner and director of financial services for KDCO Financial Services in Medford. "The old adage that instead of giving a person a fish, you teach him how to fish applies here." Consider these options:
Give them the tools for the job. Both Sash and Van Heuit recommend books, classes or seminars as great places to find solid basic information on personal finances, and the sooner the better. "Kids need an education in basic financial management (savings, cash flow/budgeting and insurance) as well as in the basics of investing," says Van Heuit. Sash suggests buying a budgeting software program for them to track spending. "Each month they can print a budget sheet and see where their money is going — this can be an amazing eye opening experience." Many financial advisors offer a complimentary first visit or one-time hourly rate that can help them know where and how to start. Also, consider giving your adult children gift certificates to financial consultants for birthday and holiday gifts. They may thank you forever for it.
2. Pay for a night class or offer to watch the grandchildren while they attend. "Helping them to make more money by increasing their marketability in the job market and encouraging them to budget and take control of the spending creates a more responsible and self-confident person," says Sash.
3. Know your children. "Responsible children who have a history of repaying parents are certainly good credit risks and sometimes a parent carrying an adult child's mortgage, for instance, works very well for both parent and child," says Van Heuit. But she also cautions, "Parents should only loan money to their children if they can afford to lose it." The same is true of co-signing loans or securing their bank accounts with your credit card.
4. Know your own limits. "Time [and] value of money is on the children's side. The parent's time and ability to rebuild valuable retirement assets in many cases are limited"¦," says Sash. "I don't recommend placing your own finances at risk to bail out children." Be sure you are adequately prepared for your own future care costs and living expenses.
5. Know when to draw the line. "I would recommend the parents give warning ahead of time. They need to tell kids NOW, not next time they ask for a loan or bail-out," says Van Heuit. "Parents will have to let their kids go through the consequences, because that is one way we learn how to manage our finances. Parents need to let their adult children make mistakes."
It may sound like "tough love," but helping your adult children learn to build a financially secure future could turn out to be the greatest legacy you leave them.