It
is sometimes said that there are good and bad types of debt. A mortgage on your primary residence might
fit into the “good” category. The home
is a necessity, is typically too expensive for the borrower to pay for
out-of-pocket, and may grow in value over time.
A personal loan taken out to finance a big birthday bash might qualify
as a bad debt since it purchases only a short-lived experience (although I
believe some rare experiences that offer a unique opportunity for personal
happiness or fulfillment might be worth going into debt).
In
the same way, there are good and bad ways to financially assist your adult
children. Helping them fund a college
education is probably the most common form of financial aid. But more and more parents are jeopardizing
their own retirement security to help their older children in ways that might
not be all that helpful in the long run.
According to a Merrill Lynch/Age Wave study cited recently by FaithFi,
82% of parents indicate they are willing to make a “major financial sacrifice”
for their adult child.
I
get that. I’d probably fall into that
82%. But I’d like to think I’d be more
discriminating in what I chose to finance for them. A financial gift that promoted consumption
over investment—say, a vacation? I’d
probably pass on it. In fact, the
authors of the book The Millionaire Next Door said that they found a
direct negative correlation between parents providing money to their grown
children and those children’s ability to build their own wealth.
Keeping
your adult child on your health care insurance (even if it is allowed now by
law), and every month paying for their cell phone, Netflix subscription, or
even groceries neither builds their self-reliance nor even their self-esteem.
But
the consequences for the elderly or soon-to-be elderly parents can also be
dire. According to the same Merrill
Lynch study, 43% of parents are willing to live less comfortably, 26% are
willing to take on debt, 25% would take money from their retirement account, 14%
would refinance their house, and 8% would come out of retirement, in order to
financially assist their adult children.
It
can be a tough call to make if confronted with the choice of meeting a child’s
need (not “want”) versus your own retirement security. I’m not advocating a one-size-fits-all
approach to this dilemma. And perhaps
there is some middle ground; a loan, for example. But just remember, parents: No one is likely
to be around to finance your retirement, particularly your needy child. If you run out of money in your old age, a
reverse mortgage might be your last option, assuming you own the home in which
you live. And taking out that type of
loan usually guarantees none of your heirs will inherit that home. The bank will get it.
Think
before you leap into helping your adult child financially. My rule of thumb for loaning money should
apply here, too: Don’t loan [give] more
money than you can afford to live without, now or later.
Until next
time,
Roger
“Which
of you, if your son asks for bread, will give him a stone? Or if he asks for a fish, will give him a snake? If you, then, though your are evil, know how
to give good gifts to your children, how much more will your Father in heaven
give good gifts to those who ask him!” Mathew 7:9-11 NIV*
*Scripture quotations taken from the Holy Bible, New International
Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™ Used by permission. All rights reserved worldwide.
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