Helping your adult kids to be financially savvy

It is human nature for parents to want to provide for their children but at some point, the “help” you may be giving them could actually be more of a hindrance to them gaining their own financial independence. Cash handouts to pay for mobile phone costs, car servicing, and health insurance may be insulating your adult children from the realities of financial life — stunting their financial literacy and growth.

Your financial future is at stake
The flip side of the nest not being empty is that your retirement lifestyle could be at risk. If you are 50 or older, now is the time to be setting yourself up for the future and making the most of every discretionary dollar for the development of your nest egg. If you are operating the “bank of mum and dad” for your kids instead of building your retirement, it could mean you need to work longer or compromise your retired lifestyle.

Helping them become financially savvy
So, what can you do to help your kids get a grip on their situation and gain financial responsibility? The short answer to this question is “plenty”!

You can give your children the financial wherewithal to build their financial maturity and growth, through positive encouragement and tangible education on the financial life skills they will need. This doesn’t mean you should suddenly “cut them off”, but it does mean you need to begin a serious discussion with them about the costs of maintaining their lifestyle and determine a timeline for passing over responsibility to them.

Budgeting is the foundation
The harsh realities of needing to budget income and spend judiciously cannot be avoided if your children are to stand on their own two feet. If you have been putting food on the table and a roof over their head, chances are their income has been directed toward spending on their own entertainment and enjoyment. Giving them an understanding of budgeting is critical for them to gain a broader view of what it takes to survive and prosper financially.

Fortunately, there are plenty of budgeting tools available online or through banks, which you can encourage them to use and help them to complete. This will give them an understanding of the scope and scale of spending required to live independently, as well as an appreciation of the differences between essential living expenses (such as food, utilities, communication, transport, and rent) and discretionary spending (such as eating out, entertainment, gaming, and hobbies).

Developing responsible habits
An extension of the budgeting process is to educate them on the vital importance of saving regularly from their income. Start with a simple rule of saving a set percentage of everything they earn. This can then be developed into goal-oriented saving for various objectives they consider important and worth sacrificing for.

If you do want to provide some form of financial support, rather than giving random handouts toward immediate needs, perhaps you can offer to match their savings dollar for dollar in support of something worthwhile, such as a home deposit, rental bond, or a business venture. This gives real incentive to form solid saving habits that will benefit them throughout their life.

Educating on credit is also essential. With the accessibility of credit cards and financing offers on major purchases, it is easy for them to quickly rack up personal debts that can demoralise them and distort their financial priorities. Analysing a month’s spending may point out where their income is being squandered or wasted, and will help you identify how they can save and achieve major purchases through their own income, rather than by resorting to credit.

Creating wealth slowly
In a society that is focused on instant gratification, easy credit, and an expectation of getting what you want right away, your children may view the concept of creating financial independence as something that can only happen through outrageous luck or taking huge risks for quick gain. Therefore, one of the most vital lessons you can pass on is the value and importance of creating wealth slowly.

Real financial independence is not the result of a lottery win or riding the back of an investment boom — rather it is the result of forming sound investment practices such as:

  • Allocating a certain proportion of your regular savings toward longterm wealth creation plans
  • Utilising available tools that accelerate wealth, such as superannuation tax incentives
  • Diversifying investments beyond bank term deposits and into a variety of asset classes that relate to your investment time horizons
  • Planning for contingencies (such as sudden loss of income or emergency expenses) by establishing an emergency savings plan and personal insurance protection plans
  • Seeking the advice of a financial adviser to coordinate all of the above, and to develop a lifelong plan and strategy for wealth creation.

Start the conversation now
Delaying the steps outlined here may result in an ongoing cycle of dependence that will only become harder to break if it isn’t addressed. Begin the conversation with your children now, and ease them toward financial responsibility with some positive encouragement and agreed goals on budgeting, spending, debt management, saving, and investing.

What ideas have you found useful for encouraging adult kids to take on financial independence? Share your thoughts below.

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