Financial loans between family members can cause conflict, rifts, and debt…and they can also be a show of trust, encouragement, and support! Here’s what you need to know about lending money to your adult child – and how to protect yourself from a financial disaster in your family. This article was inspired by a reader who is struggling with financial constraints in her relationship.
“Thanks for your money tips,” says Connie on How to Leave Your Husband When You Have No Money. “My mom and dad are financially comfortable and have money that they would give me if I wanted to walk away from this relationship. The problem is that I am embarrassed and ashamed to ask them for money. They knew that my husband was bad for me, but I ignored all of their warnings. I just feel stupid. I really want to leave and I have no money. I know my parents would give me as much I needed to leave him but my pride is stopping me. What do you think I should do?”
If you’re thinking about lending money to your adult child, it’s important to pay close attention to his or her financial situation, money personality, habits, and lifestyle. You know your child better than most people do – if not every person – and you probably have a pretty good idea what this money is really for. You know if this loan will be spent to improve his or her life, or if the money will be wasted on activities and possessions that you know your child is better off without. Regardless of how the loan will be spent, you may decide that it’s easier to lend money to your adult child than to say no. Here’s what you need to know about protecting yourself from the problems family loans cause…
“Every parent knows that our care and concern for our children doesn’t stop when they hit adulthood,” says “The Money Couple” Scott and Bethany Palmer, authors of The 5 Money Personalities: Speaking the Same Love and Money Language.
“But most of us are a little unclear on how that care should play out financially. Trying to figure out when and how to help adult children with money problems can lead parents into all kinds of financial miscommunication and conflict.”
Loaning money to adult children isn’t necessarily a mistake – but it can be. These tips for parents will help with several decisions about financial loans to grown kids. Here, you’ll learn if and how much money to lend to an adult child, what to expect in terms of repayment, and how to avoid financial miscommunications and conflict in the family. The Money Couple offers six tips for lending money to grown children.
6 Things to Consider Before You Lend Money to Your Grown Kids
Here’s a bonus financial tip that may help you decide if lending money to a family member is a good idea: there may be tax perks or benefits.
“Consider making a loan to your spouse or an adult child for some non-income-producing purpose,” writes Tim Cestnick in 6 Tax-Wise New Year’s Resolutions for 2017. “Perhaps you can pay for something your family member would normally pay for themselves. This could free-up any income earned by those family members. Perhaps they can then use those earnings for investment purposes; they could contribute to a tax-free savings account or registered retirement savings plan, or simply invest those dollars outside a registered plan.”
Of course, this tax tip is only legal if your adult child is using the financial loan for something that doesn’t make him or her money…such as the reader in my comment above. A loan to rebuild your child’s life would not qualify as “producing income.”
While you’re thinking about the tax benefits, read through Scott and Bethany Palmer’s suggestions about lending money to adult children.
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1. Know your adult child’s money personality before you lend money
You know better than anyone that each of your children is unique. They’ll deal with money in unique ways, which means you need to base your decisions about helping your child based on her money personality and her history with money.
“We know a couple whose son has a long history of money problems,” says The Money Couple. “He’s a Flyer doesn’t think about money or worry too much about whether he has any. But when he needs to repair his car, guess who he calls? Helping him financially only perpetuates this cycle. That’s very different from a child who is handles her money well, but needs a one-time financial loan to cover an unexpected expense.”
2. Remember that it’s okay not to play fair with personal finances and adult children
We also see a lot of couples who feel like they need to give all of their children the same things – if one gets money, they all get money. But it really is okay to lend money to one adult child and not another as long as you have good reasons for doing so. Naturally, you don’t want to give or withhold money to manipulate or punish your children, but it’s perfectly fine to say no to one child and yes to another.
As parents, you can offer equal amounts of love without offering equal amounts of financial assistance. That said, however, it might be wise to keep family financial loans private. The whole kit and caboodle doesn’t have to know who is lending money to whom, why, and for what purpose.
3. Respect your partner’s wishes about lending money to grown kids
“We’re parents too,” says The Money Couple. “We know someone’s always a softy when it comes to the kids. One parent is often more apt to loan money to adult family members that the other, which can cause conflict in the marriage.”
If one of you is more inclined to help your child than they other, work to find a compromise – consider giving a smaller loan or offering other kinds of support. Find out exactly why your grown kid needs to borrow money – and recognize that you both want the best for your child and figure out how to give her just that. And if your partner says “no,” don’t slip your child $100 the next time she comes over for dinner. Don’t let this decision undermine your relationship with your partner.
4. Don’t hurt yourselves to take care of your adult children financially
We see so many parents who would rather decimate their own resources than see their kids struggle. But giving away money when you can’t afford it doesn’t help anyone in the long run. Protect yourselves — for your sake and the sake of your children.
If your adult kid can’t save money, read 5 Ways to Encourage Someone to Save Money.
5. Decide if strings are attached to the financial loan
Most financial transactions – especially those between family members – have some kind of strings attached. If you lend money to your adult children, be as clear as humanly possible about what you expect in return.
Do you want the loan to be repaid before you turn 90? Put it in writing. Don’t just talk about a repayment timeline or interest rates. Be clear, specific, and focused about how and when the money will be repaid – and don’t feel “bad” or guilty about putting the loan terms in writing. Lending adult children money is a more successful endeavor when everyone knows what the expectations are.
Include your other expectations in writing – not just the loan repayment dates and interest rates. For example, if you think helping pay for a car means you drive it occasionally, then work out an arrangement that everyone can agree to. If you hope for more visits or phone calls or meals together, say so. Laying out all the expectations at the beginning can help you avoid the strife that comes with lending adult children money.
6. Create and have all parties sign a contract or promissary note
Save everyone the drama of miscommunication and hurt feelings: write down every detail of your financial agreement. No expectation is too small. Sign it, have your child sign it, and make copies for both of you. If you are expecting the loan to be repaid, you might want to consider filling out a promissory note (you can find a template on lawdepot.com) that serves as a legally binding agreement.
With a little thought and clear communication, you can protect your family from the kind of relational damage only money can do.
Read Setting Boundaries® with Your Adult Children: Six Steps to Hope and Healing for Struggling Parents if you struggle to say no to your adult children about loaning money, lending your car, anything.
This is an important and compassionate book from the creator of the successful God Allows U-Turns series. It helps parents and grandparents set boundaries with their adult children – especially grown kids who continue to make life painful for the family. The author (Allison Bottke) shares the lies that kept her and ultimately her son in bondage, and describes how she overcame them.
Setting Boundaries® with Your Adult Children is a “tough love” book to help readers cope with dysfunctional adult children. It empowers families by offering hope and healing through S.A.N.I.T.Y.―a six–step program to help parents regain control in their homes and in their lives.
I welcome your thoughts on lending money to adult children. I can’t offer advice, but you may find that sharing your experience, concerns, and struggles can be a helpful way to figure out what you should do. If you’ve already had experience with financial loans in families, please do share what you learned! I welcome all big and little bit of wisdom.
May you find wisdom and courage, support and guidance while you decide whether a financial loan is the best way to support your adult children. May you also find ways to be objective and compassionate, rational and loving.
For more info about the Palmers, visit The Money Couple.