There's more to it than writing a check

by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation
April 9, 2009

Dear Carrie,
Several years ago, I loaned my then twenty-four-year-old son the money to buy a car on the condition that he pay it back in monthly installments. Shortly after, he had some job problems and wasn’t able to keep up with the payments. Now he’s back on his feet and wants to start paying me again. While I’m happy he’s being responsible, I’m also a little hesitant to take his money. I’m more financially secure than he, and I know that there are lots of things he needs to save for. On the other hand I don’t want to lessen his sense of responsibility or independence. Any ideas on how to handle this?
—A Concerned Mother

Dear Concerned Mother,
This is a great question because so many parents of young adults are faced with a similar dilemma. As they watch their kids struggle financially—especially in difficult economic times like these—they want to help. After all, isn’t that what families are for? But at the same time, they don’t want their helping hand to keep their kids from helping themselves. And, too, the way money is handled in a family can sometimes create feelings of resentment, especially when there are siblings. So when helping your kids, you have to be aware of personal issues like control, independence and fairness.

Using financial help to promote growth and independence
First of all, I applaud you for offering to loan your son the money for his car, not just making it a gift. A car is a responsibility on many levels, but the responsibility of paying for it over time provides important financial lessons, involving saving, budgeting and working towards a specific goal. You didn’t say what the parameters of the loan were. Did you charge interest? Was there a set payment schedule and timetable? In general, the more you formalize a loan to a family member, the less likely it will negatively affect your relationship.

Whatever the specifics of your situation, it sounds as if you and your son were off to a good start until his employment troubles got in the way. And while I imagine you felt some concern when he couldn’t keep the payments going, it doesn’t appear to have created a problem between you. Since he’s now reaching out to pay back the money he owes you, he obviously understood the trust you placed in him—and his responsibility to live up to it. That’s great. And, as you imply, it’s important not to do anything now to weaken that sense of responsibility or undermine his resolve. On the other hand, as a mother, I completely understand your desire to continue to help him.

So first, let’s talk about different ways to handle the payments. Then we can discuss other ways to give young adults financial help that can actually foster their growth and independence.

You say you feel uncomfortable accepting the payments because your son needs the money more than you do. Here are a couple of thoughts on how to handle this that could work for both of you:

—Set a monthly payment that you know your son could easily afford now. Accept the payments, but put half of them aside to help him again when he needs it. You don’t even have to tell him you’re doing this if you don’t want to. He’ll feel the pride and confidence that comes with making good on a debt. And you’ll know that you’re actually using that money for his future benefit.

—Another possibility is to strike a deal where your son divides his payment into two parts: half to you and half into his savings account or IRA. That way, he’ll be encouraged to pay his debts as well as save for his future.

Whatever payment approach you decide on, I agree that it’s important to respect your son’s desire to be independent. By accepting some sort of payment, you’ll be acknowledging his growing financial responsibility and encouraging his good habits. Refusing to accept payment might actually undermine both.

Other ways to help without weakening motivation
Since you’re willing and able to help your son financially in the future, you might want to consider now just how you’d be most comfortable offering your aid. If you’re selective about the type of help you’re willing to give—ideally, help that reflects your own sense of values—you won’t be put in the position of just writing a blank check. That can be uncomfortable and demoralizing for both parents and kids.

Generalizing a bit beyond your situation, I’d like to posit three areas where I believe financial help can have a positive impact both today and down the road: health, education and housing. Of course this is a reflection of my own values, and you may or may not want to incorporate them into your own ideas.

Insurance and health care costs—If a young adult in your family doesn’t have health insurance, consider paying initial premiums on a high deductible policy. You’ll not only be helping with the monthly bills—you’ll be emphasizing the importance of having adequate coverage. Granted, with a high deductible policy, there still may be periodic medical expenses that need to be covered. You might also offer to pick these up for a specified period of time. It’s a very real way to help with the basics without just handing over extra money. (Another tip:  If you make a direct payment to a health care provider or hospital on behalf of another person, that payment is exempt from gift taxes.)

Education, both for kids and grandkids—As the job market shifts, many young adults need to shift gears, too, and get additional, sometimes costly, training to enhance job skills. Would you be willing to cover these costs? And what about considering paying for daycare or pre-school for the grandkids? As we all know, in many young families both parents need to work to make ends meet and the cost of childcare can be a real burden.

Keeping a roof over their heads—Ideally young adults should be able to budget for basic living costs, including rent and utilities. The struggle for many just getting started is coming up with move-in costs such as first and last month’s rent plus deposit. This can be an excellent opportunity to help get a young person off the ground and encourage smart budgeting of monthly expenses. When it comes to buying a first house, if you have the means, helping with a down payment is a positive way to offer support. Whether you make it a gift or structure it as a loan, the point is that you’re giving financial help toward a concrete goal that carries with it both rewards and responsibilities.

Making a gift
For some families, helping the next generation is part of estate planning. If you’re in a position where reducing your taxable estate during your lifetime makes sense, you can choose to gift up to $13,000 a year to an individual without incurring gift taxes ($26,000 a year if you’re a married couple splitting gifts). You might also consider gifting larger amounts to a 529 College Savings Plan—an excellent opportunity for grandparents to make a significant, targeted contribution.

As your personal experience demonstrates, there can be a variety of reasons grown kids might need financial help. Whether it’s a car purchase, career counseling, buying a professional wardrobe or a myriad other things, I believe that if you can help your kids, by all means, do so. To my mind, it’s an investment in the next generation, and a great way to create your legacy. Just make sure that you’re comfortable with what you’re giving—and that your kids know what’s expected in return. You’re lucky to have a responsible son who didn’t take your help for granted—and he’s lucky to have a thoughtful, caring mother.

Congratulations and good luck to both of you!