Amounts Parents Spend on Their Adult Kids Continues to Rise
Parents are spending more than ever on their adult kids, with the total now at $500 billion a year. It’s nice to be able to do this, but we need to consider ourselves too.
One of the trends that is emerging over the last few years is the amount of money that American parents spend on their adult kids, aged 18-34. The 2018 figures are just in, and the sum total has now risen to $500 billion a year.
That’s about twice as much as people are spending on their retirement every year through saving. Given that so many people struggle to save enough for retirement, and end up regretting their decisions later as they approach it or are in it, the goal here needs to be to figure out how we can allocate more to this, and not spend even less on it.
When we simply don’t make enough, that’s one thing, but this often comes down to spending too much of our money that we could have set aside. There are a lot of competing objectives out there for this money, with saving for retirement only one of them. We need to look at the overall value we get from spending it now and compare it to the benefits of saving it, and ensure that we’re shooting for keeping our heads above water both now and later, and avoid the live for today because tomorrow you will die attitude.
We usually don’t die though, and these days we are living longer and longer, and we really do need to avoid setting ourselves up for a life of discomfort in our golden years. That might happen anyway in spite of our best intentions, but we at least need to be as sensible as possible about this and account properly for the importance of saving up enough for this.
There are usually quite a few things that we can look at when we’re projecting a significant shortfall in retirement, and all involve spending less now. It can be even harder to do this when it means deflecting money away from our children, who we usually want to have a better life than ours and are willing to sacrifice to help provide this.
We usually think of this sacrifice as what we give up now, but we particularly want to be aware of the future sacrifices that we may be burdening ourselves with if we are too generous with our kids. We therefore need to seek out the right balance here, and this applies not just to the formative years of our children, but with all this spending on adult kids, in the period where they are able to contribute to their own finances.
Seeking the Right Balance with Helping Our Children Financially
Financial advisors tend to preach a minimalist approach to helping our adult kids, wanting for them to fend for themselves at this point, and although they may have a vested interest in this, wanting us to add more funds to their book, we indeed may want to look at this situation more closely and seek out a more balanced approach to it.
The best foundation for this is to both practice financial prudence ourselves and teach our kids to do the same thing. Our serving as a role model here is very important, and if we and our kids are both imprudent and we continue to stroke theirs by financing it, this will not produce the outcome we want.
Where kids tend to struggle with this is not being subject enough to the consequences of spending too much. Whenever we have money and we spend too much of it, there is always some effect, even if this is only not having the chance to blow all of our money the next day, but if we don’t bear enough of the burden that we cause ourselves, this can create some bad habits.
As much as we may care about their welfare, we can set a safety net for them, but we should let them walk the bridge toward financial independence themselves as much as possible. If we don’t, we’ll just end up delaying their progression.
Living within your means is the most important lesson to be learned here, and if they truly lack the means to support themselves at a minimally acceptable level, we will want to step in there if we can, but letting them manage things as much as possible without crossing what line we’ve set as the floor here should be the goal.
The More Responsibility We Give Them, the Better
When we do give them money, ideally it should be by way of a loan, even if the child cannot afford to make payments on it right now. We can and should defer payments here like student loans do rather than just gifting the money.
We may also want to charge interest on these loans, and doing so will more closely approximate what it’s like to borrow money outside of the Bank of Mom and Dad. There are also times where there are tax advantages to charging this interest, as long as it is at or above the minimal level that the IRS sets for interest, which is now a little under 3%.
Americans can provide their children and spouse $15,000 a year as a tax-free gift, but if you want to give a child more than this, to help with a down payment on their first home for instance, you shouldn’t want them to pay tax on this if they don’t have to. Lending them the money has the benefit of avoiding this. The loan can even be forgiven at some point in the future if desired.
When you do need to bail them out, it’s best to attach conditions to it, especially ones that promote more acceptable behavior. A parent for instance may require their child to close a credit card account as a condition of paying it off for them, but this doesn’t condition behavior all that well and may cause the child to lose their credit history. A better approach would be to have them agree to let you act as a trustee over their finances, and this also allows us to teach them more.
Our children also can benefit from our experience in financial matters, although this does require that we conduct ourselves in a manner that we would want to serve as an example. A lot of these parents need financial education just as badly as their kids do, and with some cases, even more.
While it’s also important to teach our kids about the importance of saving, the first step needs to be to teach them how to be more self-sufficient, and it is only when they can manage this that we can move on to lesson two, how to balance spending now with saving for the future.
More and more children are living at home longer, and some see this as a bad thing, but if we can comfortably manage it, this can benefit both us and our kids. We should be charging them some amount of rent, enough that they are paying for themselves, and perhaps set aside any excess into a savings account which we can use to help them financially later if needed. It is important for them to realize that this isn’t money they are giving us to save for them though, but an actual cost, just like paying rent to someone else will involve when the time comes.
It costs a lot of money to raise a child, and it costs even more after they finally reach adulthood. It’s important to reasonably manage these costs at every step along the way, but once they get into a position to take charge themselves, we need to do our best to make sure that things actually do get managed well.
This not only sets them up for success better, it also looks to minimize the sacrifices that we need to make as we wait for them to learn to fly.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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