Many parents would spend any amount of money to help their children get out of debt or get ahead. But loaning or giving money to your adult children could do serious damage to your ability to retire comfortably. Making sure your children are financially independent is one of the best things you can do to protect your retirement savings. Here’s how to safeguard your nest egg from your children.
Teach good money habits. Educate your kids about savings, investments, and debt, and emphasize how difficult it can be to get out of credit card debt. Talk about your own financial experiences as a young person. Share some of your money successes, failures, and the financial challenges you currently face. If your children aren’t learning about money from you, they may not be learning how to save and invest from anyone. Make sure your children know how to make sound financial decisions going forward.
Don’t fund business ventures. Your kids may have great small business ideas, but that doesn’t mean you are their investment banker. People loan their children money all the time to fund a business or a home purchase. This is not a problem if you can afford it. But don’t make the mistake of making a loan to your children and banking on getting it back. The odds are highly against you. In my 26 years of experience working with retired people who have done this, they almost never get the money back. Don’t loan or give money to your children that you can’t afford to lose.
Encourage independence. When your child losses his or her job, you’re going to help if you can. But make sure you really help. Provide enough support, but not too much. You want your child to be motivated to get out there and look for opportunities. It’s fine if you want to provide a home for them and some financial support. But don’t forget to provide some ideas on how to find a job and get back on their own.
Take preventative measures. Ask your children if they have created a financial plan and set aside emergency money. Tell them about your emergency fund and the times when you have used it. Your stories and guidance may help avert a financial meltdown for your children and yourself.
Set a good example. Explain to your children why you track your spending and how you do it. Show them the software you use or the spreadsheets you’ve created. This preventative step can pay huge dividends down the road for your entire family. The best way your child can stay out of financial trouble is to stay out of debt. Tracking their spending and making a budget can help them to do this.
Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.