How to Close the Bank of Mom and Dad

My middle child frequently tells me and my husband that she doesn’t want to grow up and wants to live with us forever. It’s sweet that she says this now because she’s just 9 years old. But if she’s saying that when she’s 19, we have a problem.

As a parent, I provide for my children, but I don’t plan to support them forever. I expect them to be self-sufficient once they’re working adults.

Plenty of parents continue to help out their adult children financially, however. A survey by LIMRA Secure Retirement Institute found that six in 10 parents provide financial support to their adult children. They help their kids pay for rent, cell phone service, student loan debt, credit card debt and even entertainment expenses.

“It’s natural for parents to want to support their children, but you want to help your child find a solution to their financial challenges not just be the person who writes the checks,” said Andrea Johnson, vice president and head of U.S. financial education for TD Bank.

This distinction is important for parents to keep in mind if they have children who are about to graduate from high school or college. In fact, one of the best graduation gifts parents can give their children is to prepare them to be financially independent rather than to open up the Bank of Mom and Dad.

Read: Why You Should Care About Your Personal Finances

Why Parents Shouldn’t Be the Bank of Mom and Dad

Parents shouldn’t provide financial support to adult children — or set young children up to rely on handouts from Mom and Dad — because it hurts both the kids and parents financially in two ways, said Claudia Tabacinic, head of deposits and payments at online bank TIAA Direct:

  1. Kids don’t learn how to be responsible with money and live within their means if parents continue to support them.
  2. Parents can put their retirement at risk if they aren’t saving enough because they’re covering costs for kids or draining their savings to help their children.

The LIMRA survey found that 45 percent of parents said that supporting their adult children financially hurt their retirement savings. It’s not just helping children once they’ve entered the real world that’s hurting parents’ finances, though. Plenty of parents are putting their retirement at risk by taking on students loans to help put their kids through college.

Without Retirement Savings, You’ll Be Dependent on Your Kids

Adults age 55 to 74 are carrying unprecedented amounts of student loan debt that was taken on to help children pay for college, another LIMRA study found. “Parents see it as their duty to help their kids get through college,” said Mike Ericson, research analyst for LIMRA Secure Retirement Institute and author of the study. As a result, they’re saving less and are depleting their retirement savings to pay for college.

Of those surveyed, 40 percent said they would delay retirement or work in retirement to cover college costs for children. Another 30 percent said they were willing to tap their retirement savings to help kids pay for college, Ericson said.

Read: 7 Reasons You Shouldn’t Risk Your Retirement to Put Your Kids Through College

Parents need to keep in mind, though, they have a much shorter time period at their age to save for retirement than their children have to pay back student loans if they were to borrow. Even though parents might not want their kids to be saddled with student loan debt, they need to remember that they can’t take a loan out for retirement, Ericson said.

Plus, if parents support their kids to the detriment of their retirement, they’ll be dependent on their children for financial support later in life, said Shomari Hearn, a certified financial planner and vice president with Palisades Hudson Financial Group. “I’ve seen that happen,” he said.

How to Close the Bank of Mom and Dad

Ideally, parents should take steps to help their kids learn how to make smart money choices from a young age so they don’t have to rely on Mom and Dad when they get older. You don’t want to wait until your kids are starting college or entering the real world to talk with them about finances. “In order to close the Bank of Mom and Dad, we need to start educating our kids early,” Tabacinic said.

You should teach kids how to be responsible with money from the time they are young by giving them a chance to manage money on their own and make mistakes. They need those mistakes to learn financial skills before they’re in the real world.

But if your kids are already at the point of counting on you for help, it’s not too late. You can take steps to help them become financially independent.

1. Be Clear About the Support You’ll Provide

Parents need to have open conversations with their children about how much financial support they’re willing to provide them, Hearn said. When they’re in high school and college, let them know what expenses you’re willing to cover and what they’ll be expected to pay for. Then be clear about when that support will end, he said.

“Of course parents will lend a helping hand when children need it, but make sure that your kids know that you will not be a first financial resort,” said Shay Olivarria, a financial education speaker and author of “Bigger Than Your Block.”

2. Set Limits for Adult Children

More than two-thirds of millennials say their parents gave them some or a lot of financial help when they were starting out, according to a survey by Bank of America and USA Today. If your children are grown and are asking for help, let them know what the conditions are for receiving your support, said Mike Falco of Falco Wealth Management. “I recommend setting boundaries before writing a big check or letting a child move back home,” he said.

For example, let an adult child know a month or two in advance that you will no longer pay their mobile services as part of a family plan past a certain date, Johnson said. Then you can discuss how you comparison shopped to find the best deal for your needs so your child can do the same.

3. Establish Ground Rules for Boomerang Kids

More than 25 percent of adults age 18 to 34 lived with their parents in 2015, according to Pew Research Center. In fact, young adults in this age group in 2015 were less likely to be living independently than the same age group was during the Great Recession.

Hearn said it’s understandable that parents want to help children who don’t have a job or who have a salary that’s too low to cover the cost of living on their own. But they need to discuss ground rules with their kids before letting them move back home.

Your conditions for living at home might include actively seeking employment and doing household chores, Hearn said.  If your child has a job, consider charging rent. “That will help them responsibly manage their money,” Hearn said. And if you don’t need the money, you can place it in an account that can be used for your child’s future needs, such as a security deposit for an apartment.

You also should set a timetable for your child to move out said Bill Engel, a certified financial planner and senior vice president at Fort Pitt Capital Group. This provides a goal for your child to be able to find his own place and a natural point to have a discussion if it looks like the deadline will be missed, he said.

4. Offer Help, Not Handouts

Rather than perpetuate your child’s reliance on you by giving them financial support, help them become financially independent. “Instead of giving your adult children money, consider giving them financial mentoring,” Falco said.

The Bank of America/USA Today survey found that nearly two-thirds of millennials said their parents’ advice and lessons their parents taught them had the greatest impact on their handling of finances.

Related: 6 Lessons I Learned From Being Broke

Help them understand how to manage their credit cards by explaining why they should pay off their balance each month to avoid racking up interest and pay on time to avoid late fees, Tabacinic said. And explain the importance of building good credit so they can get a car loan or mortgage.

You also can help your children write resumes or prepare for interviews, Falco said. Doing this or helping them make job contacts could jump-start their career so they can become financially independent.

5. Make Sure You Are Closing the ‘Bank’ Together

Parents need to be on the same page when it comes to deciding how much support and what sort of support they’ll provide their children — and when to cut them off. If you agree to stop providing financial support, don’t sabotage your joint efforts to help your child achieve financial independence by going back on your word. Sending mixed signals won’t help your child, and going behind your spouse’s back could jeopardize your relationship.

“If one parent is slipping the children money without the other one knowing or approving, that can damage the marriage,” Falco said. “It is so important that couples do not keep financial secrets, so make sure you create a plan together with your spouse.”

Whether your kids are young or already adults, it’s important to teach them to be financially responsible and not rely on you for support. Even if you have the means to help, “stepping in to save the day can be detrimental to their motivation and your retirement savings,” Johnson said.