Providing Financial Help to Your Independent Child
Your child is your child for the rest of his (and your) life. Just because he's on his own doesn't mean that you need to stop providing help and guidance. True, your abilities in this regard become limited in some cases by distance and your desire to encourage independence. But there are still ways that a parent can provide helpful and needed assistance.
A guarantor is a person who agrees to make payments if the person obligated to so do fails. In effect, you're assuring the landlord or lender that he'll get his money no matter what. A guarantor must be a financially responsible person with a good credit history who's willing to take on this job.
Being a Guarantor
Your child may want to get an apartment, take out a car loan, or apply for a loan to start a business. Unless she's independently wealthy, the landlord in the case of an apartment, or the lender in the case of a loan, your child may find people who are reluctant to deal with a young person with limited or no credit history. This is so even if your child truly believes she'll be able to pay the rent or repay the loan. Here's where you come in.
You can act as a guarantor for your child. The landlord or lender will do business with a child if there's a responsible adult backing her up.
Lending a Hand
Even if your child has a good job and knows how to handle money well, there may be times that he can use a little extra financial help. For example, even though he's got a paycheck coming in regularly, he may need cash in certain situations:
- To get an apartment. He knows he can pay the rent each month, but he doesn't have the funds for the two-month security deposit or the 15 percent fee to an apartment broker to find an apartment. He could save up for these expenses, or he could take some cash out of his credit card (if he has one), although he'll probably be repaying that kind of loan at exorbitant rates. As another alternative, you could lend him the money with the understanding that you'll be repaid (with or without some reasonable rate of interest).
- To cover expenses temporarily. Maybe he's laid off and his unemployment insurance isn't enough to cover both his rent and his car payments. Here you may want to step in to provide temporary assistance until he's back on his feet.
- To buy a house. Maybe he's able to pay the mortgage but is a little short on the down payment needed to close the deal. A bank loan for the down payment may not be possible, but a loan from you might clinch it.
- To go back to school. Your child may be able to handle some of the cost by taking out student loans or getting a scholarship. But you may be able to help with any shortfall.
Watch Your Step
Helping your child by lending her money once or twice or in very special circumstances won't undermine her financial independence. But don't always come to the rescue. Let her try to solve her financial difficulties on her own before turning to you for help.
In deciding whether to lend money to your child, review Loaning Money to Your Child. The same principles apply to lending money to your emancipated child as to one still living under your roof. You probably want to help in these cases:
- The money is needed for a good reason. If the need is temporary (only while he's between jobs), or the situation giving rise to the need was beyond his control (he got ill and couldn't work), you may be more sympathetic than if he was just a poor money manager who got into a financial fix by overusing his credit cards. You may also want to help out if your child decides to return to school, for example, to pursue a graduate degree.
- You believe your child is responsible and able enough to repay the loan. If he's working and his budget has room for debt repayment, then you can be reasonably assured that he'll make good on the loan.
- You can afford to make the loan. There's no point in creating financial problems of your own just to appear to be the good guy to your child. If you don't have the resources to make the loan, don't do it.
Lending an Ear
No matter how old your child gets or how far away she's living, she's still your child and you're still her parent. You can continue to provide help as she faces new financial questions.
She may need advice about having a roommate. Obviously, having a roommate is a great way to share expenses, but it's up to you to point out some of the financial questions your child should address.
- Whose name is on the lease? This is the person who's responsible for paying the rent. If your child is on the lease and her roommate doesn't ante up or is late, this doesn't relieve her of this responsibility. She'll have to either pay her roommate's amount or face eviction on account of her deadbeat roommate.
- Whose name is on the electric company bill? As with the rent, the person whose name is on the utility bills is responsible for the entire amount. The failure to pay the bill in full can hurt that person's credit history even though he's paying his fair share.
- Will there be one phone line or two? Having one phone line is less costly overall but can cause problems when roommates use the phone unequally (especially when long-distance calls are involved).
- What happens when one person wants out? Decide in advance who must move if the living arrangement doesn't work out. Also work out details about what happens when one person wants or needs to move (because of a job relocation, marriage, or otherwise).
Your child may want your help in deciding whether and how much to contribute to her company's 401(k) plan. You may have already explained about making IRA contributions, but company retirement plans are another thing.
Your child also may need your advice when trying to decide between a job with a small company that's offering a larger salary and no benefits, and a large company with less salary but medical insurance and other benefits. She'll know which company she'd rather work with according to the work she'd be doing, but your guidance on which may be the better financial deal can be very helpful.
It's probably best to offer advice only when asked or when you see a situation ripe with impending financial doom. Otherwise, let your child make her own decisions—and her own mistakes. These mistakes are part of a lifelong learning process.