Closing the Bank of Mom and Dad

The phone rings and you cringe. It feels wrong, but you almost don’t want to answer. You know it’s probably not just a call to say hello... and you know the caller may not even realize how much these requests upset you, emotionally and financially.

If this sounds familiar, you may be in the same situation as over 1 in 3 American families who give financial support to adult children. This practice is not unique to Americans—a 2015 Pew Research study found that well over 40% of Americans, Italians, and Germans had provided financial help to adult children in the preceding 12 months.

These studies and the articles about them often come with a hefty helping of judgment, and few solutions—the children are described as spoiled members of the “me” generation who failed to launch. The parents, on the other hand, are portrayed as helicopter moms and dads who are letting these “boomerang kids” return home, derailing their retirement. In reality, of course, nothing is that simple. Student loans and stagnating wages may place a large burden on millennial grads, making it difficult to achieve the same milestones their parents did at the same age. Perhaps the child’s financial problems are a symptom of mental health or addiction issues. Or maybe the parents want their kids at home for cultural, financial or other reasons.

In any case, if the financial support has a negative effect on the relationship between parent and child, then it’s time to make a change. It isn’t easy, and most families simply ignore the elephant in the room, hoping it will go away, or they offer a painful ultimatum, kicking the kids out.

The good news is that there is a middle path between supporting adult children indefinitely and pushing them out of the nest, unsure if they will fly or not. We have helped clients manage this issue within their families and wanted to share how we often advise them.

Address the elephant in the room.

Simply having the initial conversation can help immensely because it breaks the cycle of guilt and resentment, opening the door for change. It’s important to get everything out there in the open.Talk about what income and expenses look like to determine the actual shortfall needed, then build a plan together for that amount.

Make a game plan for change.

The end goal is for the adult child to be financially independent. That could mean spending less (a goal that, with discipline, can be achieved in the short term) or earning more (a goal that may take some time or career training to achieve). The goal is to heal the relationship while also making a plan to resolve the financial problem.

Continuing the financial support may seem counterintuitive, but it may actually relieve stress to just agree on a monthly transfer of a set amount of financial support—for a set amount of time. If you are in the situation of many parents, you may already be giving money to the child on a random, unpredictable basis. The child may be underestimating his or her cost of living, and the parent feels blindsided by requests for cash. Changing to a more intentional plan can be beneficial, since both parties will understand what is required, and it provides small, achievable steps to end the cycle of dependence by a certain deadline.

How to implement the game plan:

Once the parent and child have determined the monthly amount needed, I recommend that the parent create a new checking account. This account will have all of the funds needed for six to 12 months of the child’s shortfall in income, plus 10% to 20% more than you think is needed. This avoids problems when things cost more than the child expects—he or she doesn’t have to ask for more, and the parent does not give any more. (Another way to achieve the same result is to have a month of the child’s expenses set aside as an “emergency fund” in a checking or savings account under the child’s name.)
Set up automatic monthly transfers from this new checking account to the child’s own account on a day that makes sense for his or her billpay.
If the parent is in the distribution phase of retirement, plan for the withdrawal as part of normal portfolio distributions for the year.
Commit to a timeframe. A year or two may be a good timeframe so the child can make major changes to increase income or decrease spending. The child’s priorities should be to better manage cash flow by sticking to a budget and start to save for emergencies so there is not a need for help from Mom and Dad in the future.

Keep in mind, that I can only offer advice as a wealth advisor, not a financial therapist. In many cases families in these scenarios would benefit from family therapy, but unfortunately, few pursue it. What I can do as an advisor is provide some solutions to alter financial behavior.

When addiction or mental illness are part of the picture, these issues need to be treated by a mental health professional before addressing financial problems. Otherwise the cycle will simply continue. However, if that is not the case, I hope that this framework can be a helpful tool to break the cycle and improve the relationships between parents and children.

This article originally appeared on Nerdwallet.com. This article also appears on Nasdaq.

Photos used under public domain. (photo 1, photo 2)

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