7 Strategies for Helping Your Child Become Financially Independent
Life after college can be hard, especially when your child moves back home. High student loan debt and expensive rents, coupled with a low salary, can make living independently a challenge for someone just starting out. Parents can help their children get on their feet financially by teaching good money management skills.
“If someone needs to move back home and they’re not just using it as an easy way out -- because their parents will pay for everything, cook, clean and do laundry -- it’s a sign that your child is in financial trouble,” says Clare Levison, certified public accountant financial planner in Blacksburg, Virginia. “If they’re not able to live on their own, it’s an indicator that there are some financial issues.”
College grads frequently move back in with their parents, especially in metropolitan areas with a high cost of living. This living situation can help your child become independent, provided that he or she takes this time to build good money management skills. You have your own financial goals too, and supporting grown children when you can’t afford to may jeopardize your own plans, like retirement.
You may need to take a more hands-on approach with your child at first; here are steps to help do that.
1. Communicate expectations.
You have every right to get involved when your child asks for financial help. “If they’re seeking assistance from you, it’s time to sit down and have a pretty detailed discussion,” says Levison.
Help your child outline future goals and set time frames for achieving them. Be clear about the rules of this arrangement, including what the child is expected to contribute to the household, when he or she should plan on moving out, steps the child should take to become financially independent and your own expectations as the parent. Also discuss whether you’ll provide any financial support.
“There’s a fine line between giving your child a leg up and enabling them from not having financial independence, because they believe there’s always a backup plan of their parents,” says certified financial planner Chantel Bonneau, wealth management advisor with Northwestern Mutual in Los Angeles.
Sometimes, however, living at home can be part of your child’s future goals. A son or daughter may want to take time to build a career before trying to live independently. Or he or she may want to save money to buy a home or attend graduate school.
2. Set up a budget.
Creating a balanced budget means increasing income, decreasing expenses or aiming for a combination of both. Your child may not be able to do this on his or her own right away. So, as parent, know that your aim to build in your child the necessary good financial management skills may take time. And take steps, while your child is at home, to teach him or her to save money and pay off any debts.
“If your child lives at home and the point is to increase their financial position, they have to sit down and review their saving strategy, what their debt is and what they’re spending on a quarterly basis,” says Bonneau.
Get your child in the habit of reviewing his or her finances regularly, and encourage the use of online banking apps and budgeting tools to stay on track with spending.
3. Eliminate expenses.
Discuss wants versus needs and how to prioritize them. “Your child may be able to live on their own, just not in the lifestyle they’re accustomed to. Things look different when you’re starting out,” says Levison. A young person, for example, has to make sacrifices and live with roommates, use public transit instead of buying a car or pack lunch instead of eating out.
If you’re covering your child’s cell phone, insurance and gas, which is generous, he or she needs to think about these costs and possibly contribute. “Having to pay this could be a rude awakening; and when [a child] takes this on, it could lead to debt because they weren’t aware how much their parents were providing them,” says Bonneau.
4. Provide incentives.
Saving isn’t easy, but there are ways to help your children put money aside. If your child’s job doesn’t offer a 401(k), consider mimicking an employer’s retirement contribution. “Offer to match their savings dollar for dollar or 50 cents on the dollar,” says Mackey McNeill, certified public accountant financial planner and CEO of Mackey Advisors in Bellevue, Kentucky.
5. Charge rent.
Charging your child rent is a personal decision, but doing so can help your child get into the habit of making that monthly payment. This can help build your child’s savings too if you deposit these payments into an investment or savings account for your child. Rather than paying a landlord, they’re paying "themselves" instead. “That’s a good way of building that habit of paying rent or building a cushion, so they have options when they decide to move out,” says Bonneau.
6. Review debt.
It’s important that your child focus on paying down his or her student loans by reining in expenses. “In the meantime, don’t accumulate more debt so [your child] can put the bulk of what they have towards the student loans,” says Levison.
If your child has credit card debt and auto loans, help him or her develop a plan to reduce these as well. “Make sure that’s a focus and [that] they use this opportunity to pay down high interest-bearing debt, so they can free up cash flow when they move out,” says Bonneau.
7. Talk career plans.
Your child should take advantage of that hard-earned degree and education and use those assets to help start a career. Relocation to an area with better job prospects is also an option, but only if the moving expenses are worth it, long term. If your child does take a lower-paying job, discuss his or her broader career plans to advance.
If your child isn’t earning much at that chosen career while "paying dues," working on the side can help make up the difference.
“Encourage your child to moonlight,” says Bonneau. “There are all different ways to bring in extra income, like house-sitting, babysitting, dog-sitting, yard work, bartending, hostess and catering events.”
There's also the satisfaction of knowing that, finally, they can stand on their own two (financial) feet.