Helping adult children become financially independent is harder than you think

How to begin setting limits on The Bank of Mum & Dad

Annual research indicates an average of 6 out of 10 parents report supporting their adult children financially to the detriment of their own financial stability - and it's getting worse.

In 2021, almost half, or 45% of parents with adult children have given their children money during the COVID-19 pandemic, and of those, 79% said the funds would have otherwise gone towards their own personal finances.

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Helping our kids learn the skills they need to successfully navigate modern financial life, is the job of all good parents. But this can become harder with adult children and finding the right balance between supporting your adult child and creating a relationship of over-dependence is tricky.

Being a grown up is hard; being a financially independent one is even harder.

The truth about financial independence

Financial independence is a broad and often abstract concept that's difficult to strive for unless you’re told what the key numbers and behaviours are to get there.

This is because financial independence is not just a financial journey, it also involves the emotional and maturity behaviours to support your financial health.

How to begin setting limits on The Bank of Mum & Dad

Annual research indicates an average of 6 out of 10 parents report supporting their adult children financially to the detriment of their own financial stability - and it's getting worse.

In 2021, almost half, or 45%, of parents with adult children have given their children money during the COVID-19 pandemic, and of those, 79% said the funds would have otherwise gone towards their own personal finances.

Helping our kids learn the skills they need to successfully navigate modern financial life, is the job of all good parents. But this can become harder with adult children and finding the right balance between supporting your adult child and creating a relationship of over-dependence is tricky.

Being a grown up is hard; being a financially independent one is even harder.

Talking money with Older Teens and Adult Children

Talking about money with our older teens can feel like a minefield because we all want our kids to have what we never had.

• At the same time, we also can appreciate today's financial pressures and expectations are often very different to those of our own parents.
• Many young adults today seem to have the idea that mom and dad are made of money, so they can spend carelessly because the folks can always bail them out, right?

Setting limits on the Bank of Mum & Dad can be an emotionally charged situation that raises the bar in parenting to Boss Level.

We all need to talk about money more

If talking about money was not a positive and normal part of your family history growing up, the good news is you now get to decide if it's going to become a healthy part of your own family’s future.

You may even choose to make that part of the conversation you’ll share with your close circle of friends too.

• Ever wondered what it costs an average person to retire in Australia?
• Ever wondered what the assumptions are when they talk about retirement planning?

When the Bank of Mum & Dad is open at all hours, and why you cannot pour from an empty cup

Many parents enjoy helping out their adult kids with financial gifts and occasional short-term loans.

But over the longer term, constant financial support without structure can hurt both sides of the equation.

• Many Australian parents report putting their own financial futures at risk financially helping their adult children, at the expense of their own retirement needs.
• Ultimately this action can lead to parents running out of retirement savings early and their adult children suddenly finding themselves part of the new sandwich generation - feeling sandwiched between looking after their ageing parents and their own younger family - with little money and time left for them. And so the cycle continues.

Everyone will be forced to retire someday

Retirement is part of everyone's future and if you want the best chance of successfully navigating that increasingly lengthening part of life, you at least need to know the financial behaviours and tools needed to be successful - whether you feel they’re currently relevant to you or not.

The best time to learn a new skill is well before you actually need it.

No two families are the same

Ensuring the future looks bright for everyone in your family means helping your adult children realise financial independence is possible, desirable and for the majority of us, a basic necessity of modern life.

Regardless of whether you're part of a multi-generational family with adults from different generations all living under one roof or whether you’re partnered, parenting solo (or if you find yourself somewhere in between) the financial reality is there are basic financial skills we all need to learn to successfully navigate the financial world around us.

The curse of short-term thinking: if not today, when?

So how can you get your adult children on the road to financial self-sufficiency and if you're an adult child, how can you make sure you're learning the financial skills needed to pass into your own family (and preparing yourself for when your parents are no longer around?)

The hardest questions are those that have both financial and emotional answers.

Core financial behaviours you need to understand - even if you think you won't use them now

However you do family, here are some core financial behaviours to understand;'

1. Set limits and document the bigger ones

An open-wallet-open-purse policy provides no incentive for an adult child to curtail or even stop and consider their own spending behaviour.

Setting a limit on how much financial assistance you're prepared to give, (each month, each project, each child etc.) for what and for how long, is helpful behaviour.

• If you're making large-scale gifts to a child, consider using a Family Loan Agreement where a written agreement and a signature acknowledge it's a real commitment.
• Using a Family Loan Agreement document not only helps draw attention to the cost someone has to bear to provide the loan, it also provides basic protection to the recipient in case of a future relationship breakdown where the Family Law Court can seize all gifts and assets of an individual (but not their loans), as part of the proceeds of a forced financial settlement.

We can help you with this legal document.

2. Know your own monthly cost of living numbers and expect them to know theirs too

‘Know your numbers’ is a phrase we often use with our small business clients when talking about the importance of understanding how much it actually costs to stay open for business each month.

• In the same way, a family needs to know its cost of living each month so they can control their own expenditure and not spend more than they comfortably earn.
• An easy way to do this is to create a bill list showing the frequency and amount due of recurring bills, broken down into monthly amounts.

Knowing your own numbers is also a natural conversation response for every money conversation that begins with the words, “Mum and Dad, can I borrow some money please?”

3. Working towards a shared goal

With shortening attention spans (fuelled by mobile phone addictions I'm sure), working towards a set of shared short-term goals can be a helpful way to model behaviours and model future expectations in your adult children.

• When your child wants to move out of home, writing down what the anticipated costs will be for setting up utilities, Wi-Fi and rental bonds, help break a bigger process down into bite-sized bills that can be saved for and worked towards.

Pro Tip: Some parents use a dollar matching option, where for every dollar saved by a child (regardless of age) the equivalent amount is met by the adult, up to a set limit over a set period of time.

• The dollar matching method seeks to reinforce the awareness of mutual sacrifice, the existence of a mutual cost burden and respect towards the shared goal among equals.
• The dollar matching method can increase a person's motivation to save and participate in their future and help them reach a savings goal faster. This shared action also creates a reason for a regular conversation update about the simple financial realities of life we all face.

4. Begin teaching good habits early in life

Talking about the money matters sooner rather than later is just another way many engaged parents help prepare their children to be able to stand on their own two feet.

• While this should never be a tedious conversation about compound interest, the importance of superannuation and saving for retirement, simply adopting a family strategy of ‘deliberately talking about money matters more in our family’ helps normalise the very behaviours needed by your children to navigate through life financially on their own two feet - regardless of their ages.

It also serves to help them become more aware of the ever-present risks of money scams and the importance of their being able to plan ahead and rely upon themselves, rather than perpetually dependent upon another.

Pro Tip: We regularly have clients who will bring their older children into the key parts of a conversation with us when they are refinancing debts, setting up Life Insurances and signing estate planning documents. This simple process triggers conversations about managing financial matters and normalises the expectation of regularly using financial tools and professionals to help you get ahead in life.

5. Continuing to teach good habits later in life

Life happens to us all and often financially it never works out exactly the way we plan.

• If you find yourself in a situation where you need to financially start again - whether that's after a relationship separation, a business bust or just an expensive lesson life learnt - if you need to recover from significant financial trauma, aim to use your own recovery behaviours as a helpful shareable life lesson your adult children could learn from later too.

Whether you need to scale back your lifestyle because you're paying debts, saving for a goal or you just need to create an emergency savings buffer in your offset account, sharing the reason for your new behaviours can help your kids see they can financially recover too.

6. Decide to become better at communication

Be upfront and honest about your expectations with your adult children.

• Whether that be cultural, practical, or aspirational, teaching kids (and reminding ourselves) that most financial goals require a plan, effort and the exercise of delayed gratification is a good behaviour to work towards.

Helping your adult children become financially stable, and ultimately independent, is a major milestone and there are no set rules for when this stage is reached. For most of us, it's a gradual process (with the occasional hiccup or three in the middle) and a time of immense pride for a parent or significant friend or mentor.

Here is a list of some of the money concepts families need to become more comfortable talking about with their teen and adult children

1. How to set a goal and find fun ways of saving for it - try our child's play resource here
2. Know your numbers - what are the regular costs of living each month
3. Know how to save money and how compounding interest works for you
4. Know how to spend money and how compounding debt interest works against you
5. Know how to save money with a term deposit or an investment bond.
6. Know the importance of building an emergency savings fund
7. Know what a mortgage is and how to use an offset account
8. Know how credit card debt works and how minimum repayments work against you
9. Known about the importance of having a Back-up Plan for your family and friends
10. Know how and when to use a Power of Attorney or Power of Enduring Guardianship
11. Know about the importance of having a Will in place and Guardian recommendations
12. Know why to nominate a beneficiary in your superannuation fund
13. Know how to how to nominate a beneficiary in your life insurance policy
14. Know how to insure your own income and your health
15. Know how to get more money into your superannuation fund
16. And know what you can do when your financial wheels fall off and how to start again
17. Know what a Power of Attorney does, and why everyone needs a Will, and sometimes a Protective Will

Every family has their own journey toward money maturity

To help make better financial decisions we need to normalise the conversations about money and the importance of learning basic financial concepts (and seeing them in practice).

If your adult child has relied upon you up until now to handle all their bills, rents, major purchases and financial obligations, the risk is they may have taken this ongoing lifestyle for granted and the switch to money maturity and financial independence can be traumatic, damaging and often unsuccessful.

Helping your adult child become a fully self-reliant responsible adult is something they'll probably complain about today but thank you for tomorrow.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.