Editors Note: Over the next few months, Stacie Rhodes will be sharing strategies for financial readiness for each decade of our lives.
My parents pulled me in front of our computer and unveiled the car they found after a long, intense search – a forest green 2000 Honda Accord. This day had been held in anticipation as I had driven our red Pontiac minivan (“Racin’ Ruby”) throughout my high school career (even to my prom)! The delayed purchase was due to the unwavering commitment my parents had verbally shared with me many times: defined funding and cash financed. They had committed a certain amount of cash toward my first car with the option of purchasing a more expensive car if I chose to contribute money from my personal savings account. It took time, but we did it – purchasing a car with the combined funds for the budget we had outlined. This purchase became the pivotal moment in defining money boundaries in our relationship – boundaries that are essential with the trending dependence of Gen Z.
Recent studies show that almost 50% of Gen Z members considered moving back in with their parents during the COVID-19 pandemic, with 20% indicating they moved in and continue living with their parents. Whether your child is living at home or on their own, the shift from total reliance to independence does not happen without intentionality. Remember, our goal is to demonstrate and verbalize our value system with our children – including financial boundaries. Below are a few financial recommendations while navigating this season with adult children in their 20s.
Clearly outline the expenses you will pay. According to a new survey, nearly half of American parents with adult children still offer financial support – an average of $1,442 a month. Most receiving aid fall between 18-24; one-third are 25 and older, with 1 in every ten receiving support being 35 and older. Keep in mind we have a finite number of resources to fund an infinite number of choices. What are you not funding by providing such support for your adult child? Saying “yes” to them is saying “no” to someone (something) else.
Establish dependent versus independent. Taxes and health insurance are two of the most common conversations around dependency. Claiming your dependent starts with verifying that they qualify as a dependent. However, the more powerful question is which option is more financially lucrative: claiming your dependent or allowing them to file independently. The changes to the tax code from the Tax Cuts and Jobs Act shifted tax advantages for certain brackets that challenge the assumption that claiming your dependent is more advantageous. Ask your CPA to run a comparative analysis with your adult child filing independently to evaluate your credit maximization and tax refund.
Further, keep in mind that your dependents can stay on your health insurance plan until age 26 – even if they are married or file independently! But what is that costing you, and what patterns are you setting? Perhaps they could pay the small cost differential in the family health insurance plan to start building the habit of paying for insurance. Maybe you require they research the cost of a personal health insurance plan to see the true cost savings. Either way, do not keep the true cost to yourself. Prepare your adult child for the reality of paying their bills independently by outlining the costs and communicating the benefits you are offering by keeping them on your plan.
Engage about credit cards, credit scores, and co-signing. The conversation of building credit has likely been discussed or questioned within the family. If you’re not up to speed on how credit is built, brush up on the factors that build your credit score to have an intentional conversation as it becomes more pivotal at this age. Remember that the biggest credit builders are paying on time and the amount of available credit you use (credit utilization). Start encouraging those habits of timely payments and limited use. Remember that adding your child as an authorized user to your credit card can help build their credit so long as you are holding to those healthy habits, but you are liable for payments on any purchase they made on your account.
Similarly, enter any co-signing considerations with caution. While co-signing may allow your family member with a lower score to improve their loan options, you are promising to pay the debt commitment if they fail to pay. You do not owe them your signature. Make sure you think through the financial implications of co-signing their debt choices.
Review and update your account beneficiaries. As you now have an adult child, reviewing your account beneficiaries for all retirement, savings, checking accounts, and life insurance benefits is important. Be honest about the maturity of your adult child and consider if they should be listed as your beneficiary or if additional estate planning is necessary to ensure your assets are appropriately managed. Ron Blue says, “If you love your children equally, you will treat them uniquely.” Children are not entitled to equal treatment. Update your estate plan and communicate your decisions and wishes.
Money is the number one stressor in relationships. With a world full of divisive elements, we cannot afford to take a reactive approach and assume money issues will “work themselves out.” Think through your financial boundaries in each of the above topics and explore questions together as a family. Let’s continue advocating for financial freedom in the next generation.