If your parents occasionally gift you money, you may consider yourself fortunate. But for parents whose savings likely took a hit during the Great Recession, even a couple thousand dollars a year could contribute substantially to their retirement.
In fact, 70 percent of aging parents say they need to cut back on giving money to post-college children in order to get their own retirement in order, according to a survey from Merrill Lynch and Age Wave. The survey, which studied 50,000 respondents over four years, found that those who gave their adult children financial support doled out an average of $6,800 per year.
Anybody who has lived through the past decade or so can see why adult children can use the support — but that doesn’t mean it’s a wise practice to continue.
“Post-college adults relying on their parents for support are facing record-high student debt and stagnant wages,” says David Lynch, the former managing director and head of branches for TD Ameritrade. “For those millennials who have started families, they also face rising childcare and healthcare costs. Our research shows that half of grandparents today consider their adult child not completely financially independent.”
Why Cut the Purse Strings?
By continuing to rely on your parents’ money, you could be putting their own finances at risk — and setting them up to rely on you financially later on. In addition, by keeping your parents on the line as your financial safety net, you may be avoiding developing important habits of financial responsibility.
“Parents may feel inclined to take care of their children financially, even as they enter adulthood,” says David Geibel, managing director, senior vice president at Univest Wealth Management in King of Prussia, Pennsylvania. “However, by doing so they may be putting their kids at risk who will otherwise not learn personal finance basics. This isn’t just Mom and Dad’s job; millennials need to start taking ownership of their financial freedom and move away from relying on parents.”
How to Make the Break
If you’re ready to develop financial independence, follow these five steps to get started.
Set a date, then cut the cord.
While many recent college grads and millennials move back home for the short term to save money, it does not foster financial independence, Geibel notes. So be sure to make it a temporary fix.
Once you start getting back on your feet financially, set a goal to move out on your own by putting a date on the calendar. Then set a savings goal so you start out on good financial footing. Once you do move out, take all your bills with you: cell phone, car insurance, and anything else which tethers you financially to your parents. This will not only help foster independence, it will also build your credit.
Educate yourself based on life events.
Our K-12 educational system teaches us very little about personal financial management, and colleges and universities are not much better, Geibel explains. So start simple.
If you are enrolling in your first retirement plan, begin researching that topic to ensure you pick the most advantageous plan. Or say you have decided to buy your first home: Educate yourself on the different mortgage options and affordability indexes for homes. Enhancing your financial education as life events dictate is a great way to educate yourself and avoid bad decisions.
Create a backup plan.
Rather than relying on your parents as your safety net, put back a set amount of money each month to establish an emergency fund. Lynch recommends saving up enough to cover your living expenses for as long as it may take to find another job: three to six months is a good rule of thumb.
Create a budget.
Develop a monthly budget so you know where your money goes. Be sure track your savings each month, Lynch says. Base your budget on your own income, not including any expected windfalls from your parents. Include paying off student loans or other debt into your budget and pay off high-interest credit card debt as soon as possible.
If your parents still insist on giving you cash gifts at Christmas or your birthday, accept the gifts graciously — but don’t rely on them to balance your budget. Instead, consider depositing the cash into your child’s college fund or your emergency savings account.
Keep in mind that in some circumstances, accepting help is certainly OK. If your parents want to help you start a business or help fund your child’s college account, that’s perfectly acceptable. Also, “emergencies happen, and it is normal and appropriate for parents to assist if they are able,” says Kimberly Foss, CFP, founder and president of Empyrion Wealth Management.
“If a child has an illness that isn’t covered by insurance, parents might legitimately help out until things get back to normal. If a child is laid off or going through a difficult divorce, parents might wish to provide some temporary support. But none of these events should become a pattern,” she continues.
If you’re accustomed to relying on your parents for regular or occasional funds, and you gradually wean yourself off of those old habits, you may just develop a newfound sense of confidence and personal value.