December 14, 2015
We often hear so much about millennials’ finances that it’s easy to forget older Americans have money woes, too. The Great Recession pushed back retirement for many middle-aged boomers and decimated a lot of their life savings. So it should come as no surprise when young adults are faced with the conundrum of whether to loan money to Mom and Dad.
If you have a parent who’s behind on his auto loan, crippled by credit card debt or even facing bankruptcy, how do you know when to step in?
When to Bail Out Mom and Dad
Offering assistance should hinge on how stable your finances are. Just as a parent wouldn’t want to jeopardize his or her own security for the sake of helping the kids, you shouldn’t risk your retirement or miss monthly payments to bail out your parents. “You have to assess whether or not your are sacrificing your own goals in order to help your parents,” said Jorie Johnson, a certified financial planner based in Brielle, N.J. “It depends on where you are in your life and where you’re at in your career.”
It also depends on what type of assistance your parent is seeking. “If it’s a one-time event, it’s less concerning than if it’s ongoing,” Johnson added. Helping a parent cover emergency car repairs, for instance, is different than covering mortgage payments each month.
In situations where long-term aid is necessary, you can offer to help but “need to sit down with your parents and come up with a budget or plan,” Johnson said. That way your relationship, bank accounts and credit scores won’t incur too much damage. A person-to-person loan won’t impact your credit, but co-signing for them on a loan or making your parents authorized users on your credit cards can. (You can view your credit report summary for free on Credit.com to see where you stand.)
Here are some other things to consider when your parents ask for help with their finances.
1. Make It a Gift
Loaning money to friends and family often backfires, said Sophia Bera, a certified financial planner and founder of GenYPlanning.com, so she suggests not doing it at all. “If they are going to help their parents out, it should be a gift that they don’t expect anything for in return,” she wrote in an email. “I think it works well when it’s a monthly amount that they can work into their budget as opposed to gifting away a large chunk of their savings.”
2. Plan Ahead
You may not need to help your parents right now but know you will down the line. Bera sees this a lot among first-generation American and immigrant families: “Oftentimes it was their parents’ dream for their kids to go to college in the U.S. and get a good job upon graduation,” she wrote. “Their parents sacrificed a ton to make that happen, and now the adult children are expected to help their parents in retirement.” If you find yourself in a similar situation, Bera recommends “opening a savings account or brokerage account and contributing to the account monthly so that it has time to grow before [your] parents need the funds.”
3. Give the Gift of Your Time
If you can’t afford to give money, you don’t exactly have to say no. Instead, offer your time. Print your parents’ budget and “go through the line items” with them, Johnson said. You may be able to help them cut certain expenses. Older adults may also benefit from learning about new apps or other technology that can help them save here and there. These savings could add up and ease their stress.
4. Consider Alternatives
There may be other solutions out there your parents have yet to consider. Some older Americans take out reverse mortgages or consider debt consolidation loans or balance transfer credit cards to lower their debt. If a parent’s situation is particularly dire and you can’t afford to help, consider having them move in with you, Johnson said. You may want to consult a financial adviser about the best options for you and your loved ones.