The Bank of Mum and Dad is a well-known concept and we all hate to see our children struggle financially, which is why many parents continue to support their children well into adulthood. Instead of being ‘empty nesters’, many parents discover that their offspring return to the family home straight after university (that is if they ever left in the first place!) due to the problems of getting a foot on the property ladder.
The type of financial assistance given can take various forms, such as money towards a house deposit or a loan for a car or ongoing support towards rent or bills. While it is natural to want to help, the hard truth is that it is important not to put your child’s finances before your own retirement savings. Otherwise, in the long run, no one wins. We look at four key ways to help retain a sensible outlook.
Make sure you understand your own financial situation and your retirement goals
Before you leap in and promise to help your son or daughter, make sure you are clear about your monthly budget. What are your regular commitments and your personal retirement goals? Will you still be able to lead the lifestyle you are envisaging if you are supporting your children financially too? As a general rule, you need to be able to replace at least 70% of your pre-retirement income once you stop work. You may also have plans to travel more or have a particular home renovation project in mind. It is important that you remember to factor in any potential health costs as well.
Sit down with your child and have a frank discussion
If you are open and honest about your own commitments and the level of your support, this actually sets a good example to your children at a time when they will just be learning to manage their own finances. It also gives you an opportunity to set boundaries, clarify expectations and fix timescales. Be specific: is the money to help with a student loan, rent, a mobile phone contract or food bills? The concept of an ‘independence fund’ can sometimes work well – a one-off payment to help an adult child as they enter the ‘grown-up world’.
An external perspective
Sometimes, it helps to involve a third party, such as a professional financial adviser who can offer some valuable objectivity in what can be an emotionally-charged situation. If you all sit down and review your financial plan together, it makes it easier for everyone concerned to see the impact giving a loan to your children would have on your own finances. Bear in mind that if you did overstretch yourself, you could end up having to turn to your offspring for financial support and the last thing anyone wants is to become a burden in later life.
Put it in writing
If you do decide to give your children some money, it does no harm to make the arrangement formal. This means they will take the loan seriously and it gives both you and them something to refer back to in the future. It also sets expectations in terms of any repayments and timeframes. Make sure you review the document regularly and that it is still appropriate. For example, circumstances will change – your child may get a promotion or you may have incurred some medical expenses.
The bottom line is you need to look after your own finances now to be able to look after theirs in the long run.
18 September 2018
The views expressed in this blog do not in any way constitute advice and are specific to the date noted. As time passes the facts can change and readers should consult their adviser for up to date advice on any matters covered within the blog. Invest Southwest offers an initial review, which is free of charge, however long it takes. From this we will be able to confirm how we can help and give you an opportunity to decide if you would like us to. Thereafter, we will provide you with detailed recommendations and exact costs. Please note that we promise not to levy any kind of fee unless we can demonstrate a benefit to you.