Don’t Be the Bank

November 7, 2017

If you have adult children, you know that many Gen Xers and Millennials are having a hard time financially. Jobs are scarce and college grads are strapped with enormous student loan debt. With dwindling resources, parents are becoming the last resort safety net for needed cash. One day, you might be asked to become their banker.

Naturally, our first tendency is to help them out of their financial problems. It can be a stressful and emotional challenge for any family, but as parents, we also must strike a balance for them and ourselves. Use some wisdom. Remember, when a stewardess demonstrates how to place the oxygen mask on your own face before attending to the child, that’s not being selfish. It’s called enlightened self-interest.

Here are a few things to consider when you’re struggling to make the right decision:

  1. Your own retirement funds must be your first priority. If you drain your savings to help your kids, you’re actually gambling with their future by putting them in a worse situation, because the time might come when you have no resources left to support yourself. If you don’t even have retirement funds, you certainly can’t afford to bail out anybody else. And remember, you’ve probably gone through lean times too, and your kids have a lot more years ahead of them than you do to work it all out.
  2. Consider the reason they are coming to you for a loan. The loss of a job or a medical emergency certainly takes precedent over a huge credit card bill incurred because of irresponsible spending. Will the money be an investment in a better future for them, or will it be used to pay off their mistakes from the past? If the latter, you risk enabling the continuation of bad habits. It’s also going to give you plenty to think about in terms of how you raised them and what lessons you taught them about real life issues.
  3. Get your spouse involved in the decision and if you have more than one child, consider the impact on them. Will you be setting a precedent? There are bound to be ill feelings of jealousy no matter how tightly knit the family. Are you prepared to deal with those family dynamics.
  4. If you make the decision to give them a loan, do it in a business-like manner. Use it as an opportunity for a learning experience—put the terms in writing, agree on a payment schedule, and consider an interest rate. Sign it and date it. You can find sample promissory notes at most stationary stores.
  5. Once you let them know that you are giving them the loan because you truly want to help them out of their situation, make it clear that you expect a full and timely repayment. Then try not to be a helicopter parent – resist the urge to watch every penny they spend and measuring it against your own values. That’s a sure way to create a strain in your relationship. But if they are late in making repayments, it’s reasonable to discuss how they plan to get things back on schedule.
  6. If the loan is going to be for a sizable amount, you might want to read up on the “applicable federal rate,” which states that if you lend money to family members you must charge a minimum rate of interest set each month by the Treasury, or risk having to pay a gift tax and other income tax consequences.
  7. One final solution might be to collateralize a loan at the bank and have your child borrow from the credit union or bank. In this way, your money stays in a Certificate of Deposit. Consider having your child fill out a loan application that is secured by the CD. They pay the bank back over time on terms arranged by them. The bank sets the loan interest. If the money isn’t paid back, the bank takes your CD! But if they make the payments over time, they’re also establishing a credit rating. The borrower need not meet lending qualifications as the loan is already 100% secured. Generally interest charged is around 2% above the bank rate of the CD.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision. This information is not intended as a recommendation to buy or sell any investment referred to herein. You should discuss tax and legal matters with the appropriate professional. Any opinions are those of Judith A. McGee and not necessarily those of RJFS or Raymond James. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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