inFocus: Are you a cash machine for your children?

Date: September, 2015 boomers giving money to adult children

You are in your 50s or 60s and looking forward to enjoying retirement life in a few years. You have enough savings in your RRSP and are ready for never-ending vacations on the beautiful beaches in Florida. This morning, you receive a phone call from your son asking for financial help to close on his first house. Despite knowing this will shatter your retirement dreams, you agree to help anyway.

If this sounds familiar to you, you are not alone. According to an Ameriprise Financial survey, 30 per cent of baby boomers admit that money spent on adult children has negatively affected their retirement savings. This financial dilemma can be avoided by teaching your children financial literacy and helping them become financially independent at an earlier stage. Here are some tips.

Start the money talk by sharing your experience:

Remember how excited you were when you taught them how to walk their first steps? But you probably neglected the importance of providing financial guidance before they moved out of the nest. Due to a lack of financial literacy, many young adults get into deep financial difficulties, and suffer from depression as a result.

It is important to discuss money matters with your children earlier to help them avoid poor decisions. Start with your own experience of financial failures, and how they can avoid making those same mistakes. Personal stories are inspiring and relatable. Once your children are more familiar with money-related topics and your experiences with money, they will be more open to receiving your advice.

Help them put financial matters into perspective and set financial goals:

Many young adults avoid considering their finances. To some, being concerned about spending can make them look cheap. To dispel the myths, you need to help them see what money management can bring them. Relate money and financial planning to the realization of their dreams, lifestyle and financial freedom.

When your children start to see how saving today can help them take that European trip sooner or to bring their dream of opening a coffee shop closer to reality, they will become disciplined with their spending habits and start to think about their long-term plan. Ask your children what they want to achieve in life and how much money they think they need to get there. Then, work with them to set financial goals and draft a detailed action plan. Help them review their plan once a year.

Teach your children about budgeting:

American Express suggests that generation Y (those born in the early 1980s to the early 2000s) has boosted fashion spending by 33 per cent, travel spending by 74 per cent, and fine dining spending by 102 per cent. Young adults finance these luxurious lifestyles by loading expenses onto their credit cards and turning back to “the bank of mom and dad” for help.

To avoid becoming a cash machine, you should teach your children about budgeting. Explain the difference between assets and liabilities. For example, buying a car with a car loan is buying debt, and is not an asset until the loan is paid off. Tell them that small recurring expenses add up to a fortune on an annual basis. Five dollars spent on a coffee per day is equal to $1,800 per year (read: a round-trip ticket to Europe). Help them find a budgeting app to download onto their smart phone or tablet to keep track of their expenditures.

Explain saving and investing:

Encourage your children to save and begin investing early. Teach them about the power of compound interest and the risks and rewards of different types of investments. If they are not comfortable with making investment decisions or simply do not have time, you can recommend they seek a trusted financial advisor.

Be clear and honest about your expectations when offering financial help:

Your children may still be financially dependent on you at some point. Remember, you are not a cash machine! You can teach your children to be financially independent while helping them, by setting clear parameters. For example, if you are asked to pay off some of their debt, you can negotiate an alternative arrangement by offering them an interest-free loan with a specific repayment schedule. This way, they will benefit from your help, but they will also understand you have certain expectations of them.

With the tips above in mind, you will be ready to embark on the journey of preparing your children for financially successful and independent lives – and you will be able to enjoy your well-earned retirement without anyone coming to you for instant cash-withdrawals.

Connect with the Author

Rubie Nguyen, MMPA, CPA, CA, Senior Staff Accountant, Audit & Advisory

Rubie is a Senior Staff Accountant in the Audit & Advisory Group. Her professional experience includes providing assurance and advisory services to clients in real estate & construction, pension boards, food services, automotive dealerships, manufacturing, retail, and retirement and long-term care facilities.

You can reach Rubie at rubie.nguyen@crowesoberman.com or https://ca.linkedin.com/in/rubienguyen.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.

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Originally published in the Summer 2015 issue of inFocus.

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