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The Road to Financial Stress: Good Intentions Can Have Negative Consequences


You may be familiar with the saying, “the road to hell is paved with good intentions,” but as a certified financial planner for decades, I can safely say that the road to financial stress is also paved with good intentions. In the form of “helping” their adult children financially, many parents add to the young adult’s long-term financial issues and stress, as well as their own.

The Negative Consequences of Financial Assistance

Not only are some parents jeopardizing their own financial future with this support, but they’re also rendering their adult children inept when it comes to money. For example, consider parents who give a large sum for a house down payment without wondering if their adult child’s income will suffice to maintain the home. Or parents providing money so frequently that their children do not learn to manage their own day-to-day income or learn from their mistakes.

Signs You Might Be Enabling Your Adult Children Financially

As a parent, ask yourself if you are guilty of any of the following behaviors:

  1. Paying for large expenses for your adult children so they won’t have loans?
  2. Paying for cellphones, insurances, and other ongoing expenses?
  3. Preparing their income taxes, including gathering their information for the accountant?

If you’re doing any of these things, it’s important to understand that this is not sound financial behavior for either of you.

Why Loans are Important for Adult Children

The main reason your child needs a loan is so they can build a credit history. Federally backed student loans in their name are one way to create this history when they are still in school. Car loans — again, only in their name — are among the easiest loans to obtain because the loan is secured by the car. They may have to pay more interest than you would, but paying in a timely manner will create a good credit history. Plus, if a loan goes through a formal banking process, the purchaser will not be able to spend beyond their means.

Remember, good intentions can have negative consequences. Instead of assisting your adult children financially directly, work together on creating smart financial strategies to set your family up for long-term success.

How to Help Your Adult Child Build Credit

As a parent, you want to set your child up for success in all areas of their adult life. One important aspect is their credit history, which can affect their ability to secure a home mortgage, credit card, rental apartment or job.

1. Encourage Independent Bill Payment

While it may be tempting to pay for your child’s phone bill or car insurance to save them money, it’s crucial for them to learn financial responsibility. Encourage them to pay their own bills on time to build a positive credit history.

2. Co-Sign Responsibly

If your child needs a loan but doesn’t have established credit, you may need to co-sign. Be sure that they are responsible enough to make payments on time and that you are comfortable taking on potential financial responsibility.

3. Open a Starter Credit Card

Consider helping your child open a starter credit card with a low credit limit to start building credit. Encourage responsible use and timely payments.

By helping your child build their credit independently, you’re not only setting them up for success but also freeing up your own finances for retirement. Don’t let fear of change hold you back from making a positive impact on your family’s financial future.

Raising Financially Responsible Children

As a parent, your ultimate goal is to raise happy and healthy children who are financially independent. You want them to understand how money works and make wise financial decisions throughout their lives. Here are three tips to help your children become financially responsible adults:

1. Encourage Saving

Teach your children the value of saving by letting them pay down any loans over time. Even if they cannot get a loan from the bank, encourage them to build their credit history first. This will help them develop good financial behavior and patience. By promoting saving for what they want, you are offering them the skill to plan ahead. If you have the means and desire, stick with the annual gifting amount of $17,000 — three years can add up fast to a home down payment, money to start a business or pay off a loan.

2. Prepare Them for Change Ahead

If you are paying for your children’s cellphone, car insurance and/or health insurance, let them know in six months they will need to start paying their own. Health insurance is clear-cut. At age 26, parents need to have their children off their insurance coverage by law. Have you given your child a heads up a year before it comes? Provide insurance education on deductibles, copays and premiums by reviewing with them the coverage they have currently. They will be better prepared to know what they need.

3. Introduce Them to Your Financial Professionals

Introducing your children to your accountant or financial advisor needs to take place not in the busy tax season of January to April but in the offseason. Sharing your financial professionals will give your children resources to turn to when you are not around to help. There may be financial topics they would rather not share with you as adults. Whatever the approach, let them gather their own tax information and pay their own bills for services. They will learn how to manage debt, expenses and bill paying – a lifelong skill. When you are not around to help, they will be able to handle their finances with less stress and more experience.

By following these three simple tips, you can help your children become financially responsible adults and give them the tools they need to make wise financial decisions for the rest of their lives.

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