Being a grown-up is hard. Being a financially independent grown-up is harder. Our children must take on a lot when they reach adulthood: rent, food, transportation, insurance, not to mention staying connected (cellphone, cable and/or WiFi) and perhaps student loans. It’s a challenge for most of them: In a 2014 poll conducted by the Pew Research Center, 65 percent of U.S. adults between the ages of 18 and 29 said they had received financial help from a parent in the preceding 12 months.
You want to help, but you also want them to stand on their own. The trick: weaning. Instead of pivoting from paying for everything to paying for nothing, you should methodically transition your child to financial independence.
“When I stepped out at 18, I didn’t have a clue about managing money. I ended up in debt with a bad credit score and had to take out payday loans,” recalls Latisa Be, an IT manager in Houston. The single mom not only turned her financial life around, but she decided, “I didn’t want my daughter to have that same journey.”
She didn’t. With Be’s advice and guidance, daughter Jasmin, 22, not only pays her own way, but maintains a monthly budget and has two savings accounts (emergency and travel) and multiple income streams. It didn’t happen overnight. Mother and daughter have routinely held financial conversations since Jasmin received her first paycheck as a high school senior.
“If you have the means, there’s a lot of benefit to helping your child achieve financial independence, but you have to be strategic,” says Bobbi Rebell, a certified financial planner and author of “How to Be a Financial Grownup.” A University of Arizona study found that higher parental expectations and a well-grounded financial education promote a more successful shift to young adulthood.
If you want to raise financially independent adults, here are some tips for getting started.
Start early. Children can grasp basic money skills as early as middle school. Leslie H. Tayne, a lawyer concentrating in consumer debt, says to tell the kiddos that if they want a video game or to go to concert with friends, they need to save their money and pay for it themselves. This helps instill a level of independence early on. When Tayne’s twins reached driving age, she provided the car and paid the insurance but told them they’d have to pay for the gas. “They quickly realized that it was going to cost them to take joyrides with their friends or drive across town,” she says.
Seize the moments. Use any question about money — first paycheck, first car, first chunk of cash as a gift — to jump-start a conversation. Rebell recalls using her then-17-year-old stepson’s questions about the stock market as the impetus for a chat. When Jasmin received her first paycheck, Be reviewed it with her line by line, so the high school senior would understand withholding, taxes and the like.
Have them teach you. It’s important kids understand how finances work, and what they hear from friends may be just plain wrong. Ask them to explain the difference between a credit card and a debit card, or collision vs. comprehensive car insurance. If they don’t understand or are way off the mark, give them the facts or send them links to articles or websites with accurate information.
Help with the right expenses. Tayne believes young adults should pay bills that fluctuate and require them to think about prices, such as a credit card, gas, WiFi or cellphone bills. Parents should focus on fixed expenses such as rent and insurance. “When Jasmin moved into an apartment before her sophomore year of college, I gave her a lump sum for rent, utilities and groceries equivalent to what the dorm and a meal plan would have cost,” Be says. “She had to pay the bills herself, and if she wanted extra spending money, she worked odd jobs.”
Create an exit strategy. If you subsidize your child’s rent, consider paying 50 percent the first year, 25 percent the second year and zero in year three. At that point, they may need to get a roommate or downsize, but ultimately the onus will be on your child to find the solution. Sometimes, an end point is self-evident, as in the case of health insurance: Under current law in most states, you can keep a child on your policy until they turn 26.
Give them choices. Empowerment is key to financial independence. Cede some control over decisions and finances. Say, “I can help you with this or that. Which would you like me to cover?”
Consider an adult allowance. It may make more sense for some parents to provide a monthly lump sum rather than contributing to specific expenses. “A fixed amount invites positive behaviors and encourages your child to budget,” says Kelley Long, a Chicago-based certified public accountant and financial wellness coach. If, for example, you are giving $1,000 monthly toward rent and your child finds an apartment for $900 a month, then they will have extra cash. If the apartment they love costs $2,000, they will have to find more money elsewhere.
Celebrate the positive. If your child receives a raise, offer hearty congratulations. Don’t penalize them for success by immediately demanding they pony up more bucks. Instead try, “I’m so proud of you. Have you given any thought as to how to transition to some additional expenses you’d like to take on?”
Share your mistakes. We’ve all experienced some financial mishap — bouncing a check, underestimating the monthly electric bill, buying that non-returnable lamp we loved until we got it home. Sit down with your kids and explain how you goofed. Ask what they would have done differently.
Consider family an ecosystem. It’s not unreasonable to have your child on the family cellphone plan, but have them chip in proportionally. The same holds true for auto insurance. If you can get a better deal on your plan (multiple vehicles usually garner a discount), have them pay their share. Health insurance is another expense where it can be cheaper for them to be part of a group rather than setting out alone. But don’t just pick up the bills. Have your child cover their co-pays and file the paperwork.
Stash the cash. Even if you have the means to subsidize every bill, have your child contribute their share, Long says. If that makes you uncomfortable, consider depositing their payments into a special account they can tap into at a future date, such as an emergency fund, for a down payment for a home or even a Roth IRA. “This is less about money and more about happiness and success as an adult,” she says.
Keep the door ajar. Experts agree that even when young adults achieve financial independence, it’s important to reassure them that they can always call you for advice or help. “I’m so proud that Jasmin is on her own, but she knows I’m her backup — a payday loan without interest,” Be says. “It’s hard being a grown-up, but if you have the financial knowledge its easier. She’s not going to mess it up.”