Kids are expensive—and worth it! In a recent survey, an overwhelming majority of parents (94 percent) say parenting is the most rewarding aspect of their lives. But if you think the expenses end when the child turns 18 or graduates from college—think again! Many parents support adult children in various ways.

According to a recent study by Merrill Lynch and Age Wave, 79% of parents in the U.S. provide financial support to their 18- to 34-year-old adult children. This amounts to $500 billion spent annually—twice what those same parents contribute to their retirement accounts ($250 billion).

According to two different surveys (the above mentioned and a 2015 TD Ameritrade study), parents spend as much as $7,000 to $10,000 annually on their adult children. Alarmingly, it does not appear that many can afford to do so. The Merrill Lynch study states:

Eighty-two percent of parents say they are willing to make a major financial sacrifice for their adult child. Half are willing to draw down savings, while 43% are willing to curtail their lifestyles. One-quarter of parents say they are willing to take on debt and pull money from retirement accounts.

How long should you support adult children financially? Should you give them money? Are loans any better?

Let’s take a look at the phenomenon of subsidized adult children, consider the impact of such subsidies, and consider if there are better alternatives.

Are your adult children draining the Family Bank?

Thomas J. Stanley, author of The Millionaire Next Door and The Millionaire Mind, writes at length about “economic outpatient care,” or EOC. This is the phenomenon of adult children who remain partially financially dependent on their parents for years or even decades—often maintaining lifestyles they could not otherwise afford through continued subsidies.

While Stanley’s books examine families of at least moderate wealth, the trend is also widespread among families from the working class on up. Today’s young adults are less likely to become financially independent after graduating from high school or college. They are more likely to “boomerang” back home and more likely to live with parents than a spouse, according to census bureau figures. Today’s young adults are also more likely to drain resources from parents—including many who cannot easily afford to provide the support.

Let’s look at where the money is going. According to the Merrill Lynch/Age Wave study:

• 60 percent of parents pay some or all of their child’s grocery bill.
• 54 percent pay for or subsidize their cell phone bill.
• 47 percent help with car expenses.
• 44 percent pay for school expenses.
• 23 percent pay all of their children’s rent.

Vacations (likely with the parents), student loans, and occasional big-ticket items such as weddings are also on the list. And up to one quarter of parents help their children purchase homes. According to Money.com, down payment assistance from a parent averages $39,000.

The financial support comes by different means. Some parents pay their children’s expenses for them. Other parents give money directly to their children. Some provide loans—often with no formal agreement for repayment.

So… where does the money come from?

• 50 percent of parents use their savings.
• 43 percent shave their own expenses and live a less comfortable lifestyle.
• 26 percent take on debt.
• 25 percent pull money from retirement accounts.
• 19 percent choose to retire later/work longer.
• 14 percent refinance their home.
• 8 percent go back to work after retirement to help their children.

Given the level of sacrifice sometimes required, why do parents continue giving? The reasons are many, but some of the study participants’ responses indicate a strong emotional element. A majority of parents (61 percent) said they rely on their adult children for emotional support. Three-quarters receive advice. Even greater percentages agreed it’s their responsibility to help their children—and that someday it will be their children’s responsibility to help them.

“My kids are out of the house, but I want to stay close to them and support them in any way I can,” said one focus group participant. “I even feel a responsibility to help them sustain the lifestyle that we’ve had together.”

Many expressed internal conflicts about their financial choices. Nearly half say they wish they had established clearer boundaries with their children about what financial support they are willing to provide.

“Compared to all I’m spending on my two adult children’s upkeep, having them boomerang back and live at home would be relatively inexpensive,” said another focus group participant.

Signs of healthy giving or lending to children

It’s wonderful to be able to help support adult children financially—but there are healthy and unhealthy ways to do it. You’re probably on the right track if the following things are true:

The money empowers the recipient. The gift or loan enhances their skills, earning ability and future wealth rather than subsidizing a lifestyle they cannot otherwise afford.

There is clear communication about expectations. Written contracts (always with a loan) or intentions (recommended for gifts—especially if you have a preference as to the use of the money).

There are healthy and respectful boundaries. There is no begging or manipulation on the part of the recipient, and no shaming or rescuing behavior on the part of the parent. (Positive or negative behaviors begin young—so watch that you establish healthy boundaries from the start!)

There are consequences if agreements and contracts are not honored. While some situations (such as an interruption in employment) could require re-negotiation, parents should resist fulfilling their children’s responsibilities for them.

The parent can clearly afford the gift or loan. A parent should not compromise their own financial security to help a child. Instead, they should model what it looks like to safeguard their own financial well-being.

When helping a child hurts the parent

Giving or loaning money isn’t always healthy. While it is natural to want to help a child, parents need to make sure their own needs are taken care of first! After all, your own financial independence is a tremendous gift to your adult children.

Parents help their children best by:

• Staying active and healthy.
• Continuing to do work they love as long as they can.
• Being a financial role model with healthy money habits.
• Raising children to be financially responsible.
• Maintaining life insurance—especially life insurance with long-term care and terminal illness riders. This would allow the parent to access a portion of their own death benefit if needed. (Contact us for more information.)

Sometimes kids genuinely need assistance and parents are happy and able to provide it. But when a parent compromises their own financial security to rescue a child financially—the parent may be setting the stage for their own dependence later in life. This is clearly counter-productive. And it might not help the child, either!

When supporting a child hurts the child

Giving or loaning money can be a sign of financial enabling. In psychological terms, enabling is a term that means doing something for another that they should learn to do for themselves—and allowing the enabled person to remain irresponsible.

Sometimes parents give money to adult children who have not taken responsibility for themselves—often preventing the children from taking responsibility. Unfortunately, this happens even when the parents cannot afford to provide the help they are giving—thus harming both parties.

Rick Kahler, a pioneer in the field of financial therapy, says “financial enabling usually ends up damaging the relationship, which is usually the opposite of the enabler’s intent.” In “When Parents Can’t Say No: Financial Enabling,” Kahler offers this list of warning signs:

1. Sacrificing or jeopardizing your financial well-being for children.
2. Having trouble saying “no” to children’s requests for money.
3. Repeatedly being taken advantage of financially by your kids.
4. Lending money without a clear agreement for repayment.
5. Feeling resentment or anger after giving money.

Relationship psychiatrist Dr. Laura Dabney says that prolonged financial support of an adult child is unwise, even if well-intended. It can undermine self-esteem and stop them from learning to overcome obstacles on their own.

“When you write your first rent check or car loan check it feels so good to be able to face some problem and fix it for yourself,” said Dabney in a media interview. She recommends that parents resist stepping in to save their kids from pain or consequences because they can “start to get the impression that they can’t solve problems on their own.” Instead, Dabney suggests, parents should open a dialogue with their kids to get them to think more globally rather than just seek a quick fix for their immediate shortfall.

If you decide to help your children out—for instance, pay off student loans or dentist bills—we suggest you give them the money and have them make the payments. This way, they have an experience of managing the cash flow (even if some of it came from your pocket). But don’t enter into any such arrangement without communicating boundaries, such as, “I’ll pay your cell phone and car insurance only while you’re in college”—then remind them of your agreement.

Family Loans vs. Gifts

As we argue in our newest book, Perpetual Wealth, sometimes loans make more sense than outright gifts. It really depends on many things… such as if a parent who wishes to pay for a child’s college expenses can afford to do so. Parents should not sacrifice their own financial future to keep subsidizing an adult child. However, wise lending for strategic purposes can actually help a child on the path to independence.

Properly done, loans can be a win-win opportunity. With a loan agreement in writing (that includes an interest charge and consequences for non-payment), children must consider if it is worth it to them to borrow money for the intended purpose. Likewise, parents have a vested interest in making sure the loan will be a good investment that provides a benefit. Whether the loan is for a car, a home down payment, trade school tuition, or seed money for a business, it should be a sound loan.

Your neighborhood bank does not just give money away or loan it without paying attention to how the loan will be repaid. In the same way, you must protect the integrity of your “Family Bank”!

One reason we like using whole life insurance for family lending is that a policy’s cash value can be borrowed against while the collateralized cash keeps growing. The parent (or other policyholder) does not need to disrupt investments or incur a tax bill or possible penalties. No one needs to use a high-interest credit card or pay refinance costs. Whole life insurance was literally made for “Family Financing.”

So… how can parents support adult children without encouraging dependence?

We wrote a book about this question—and specifically about how to raise financially responsible children and foster generational wealth. Learn about Perpetual Wealth and the basics of Family Lending in “The 4 Cornerstones of Generational Wealth.” And for a limited time, you can sign up to receive a complimentary copy of the Perpetual Wealth PDF!

—Kim Butler and Kate Phillips