Closing the Bank of Mom and Dad

The phone rings and you cringe. Your adult child probably isn’t calling just to say hello. He or she needs money again.

If this sounds familiar, you may be in the same situation as more than 1 in 3 American families who give financial support to adult children, according to the nonprofit group American Consumer Credit Counseling. Typical reports describe children as spoiled members of the “me” generation who failed to launch, while parents are portrayed as helicopter moms and dads who are letting these “boomerang kids” return home, derailing their retirement.

In reality, of course, nothing is that simple — especially as student loans and stagnating wages may place a large burden on millennial grads.

Whatever the case, if the financial support has a negative effect on the relationship between parent and child, it’s time to make a change. It isn’t easy, and most parents simply ignore the issue, hoping it will go away, or they may offer a painful ultimatum, kicking their kids out or cutting them off.

What to do

There is a middle path between supporting adult children indefinitely and pushing them out of the nest. Here’s some advice:

1. Address the elephant in the room

Simply having the initial conversation can help immensely because it breaks the cycle of guilt and resentment, opening the door for change. Talk about what your adult child’s income and expenses look like to determine the actual shortfall, then build a plan together for that amount.

2. Make a game plan for change

The ultimate goal is for the adult child to be financially independent. That could mean spending less (which, with discipline, can be achieved in the short term) or earning more (which may take some time or career training to achieve). For now, the aim is to heal the relationship while also making a plan to resolve the financial problem.

Continuing the financial support may seem counterintuitive, but it may actually relieve stress to agree on a monthly transfer of a set amount of money — for a specific amount of time. You may be giving money to your child on a random, unpredictable basis. Your child may be underestimating his or her cost of living, and as a parent you may feel blindsided by requests for cash. Changing to a prearranged plan can be beneficial, since both parties will understand the parameters, and it provides small, achievable steps to end the cycle of dependence by a certain deadline.

3. Implement the game plan

Once you and your child have determined the monthly amount needed, I recommend that you create a new checking account. This account will have all of the funds needed to cover six to 12 months of the child’s shortfall in income, plus 10% to 20% more than you think is needed. This avoids problems when things cost more than the child expects — he or she doesn’t have to ask for more, and the parent does not give any more.

Set up automatic monthly transfers from this new checking account to your child’s own account on a day that makes sense for his or her bill paying.

If you as the parent are in the distribution phase of retirement, plan for the withdrawal as part of your normal portfolio distributions for the year.

Commit to a time frame. A year or two may be good so your child can make major changes to increase income or decrease spending. Your child’s priorities should be to better manage cash flow by sticking to a budget and start to save for emergencies so there is no need for help from Mom and Dad.

Breaking the cycle

Many families would benefit from family therapy. What I can do as an advisor is provide some solutions to alter financial behavior.

If addiction or mental illness is part of the picture, the issue needs to be treated by a mental health professional before you address the financial problems. Otherwise, the cycle will simply continue. However, if that is not the case, this framework can be a helpful tool to break the cycle of financial support and improve the relationships between parents and their children.

Ted Halpern is the president and founder of Halpern Financial, an independent, fee-only wealth management firm with offices in Rockville, Md., and Ashburn, Va.

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