Much has been made over the last year about the so-called ‘boomerang generation’ – kids who have gone back to live with their parents because the alternative is simply unaffordable. And according to Aviva the numbers are only going to increase – a survey of 1,500 parents and 1,500 adult children in October this year discovered that 20% of children who had recently left the parental nest said they had plans to move back in. But with the cost of living crisis and inflation at its peak, parents are also under financial pressure. Another survey by iD Mobile in November revealed that 40% of parents are currently finding the cost of supporting their adult children a financial strain.
Learning how to support themselves
So, how best to support them. We love our children (on the whole 🙂 ), and we want the best for them. And for most parents, welcoming them back in to the family home is an easy decision. But where do we draw the line when it comes to the amount and type financial support, and might the steps we are taking actually be preventing them from learning how to support themselves?
Credit History
Credit is an extremely important tool in the management of your finances, assuming it is done responsibly; and learning how to use it takes practice. If done well, young adults can develop a positive credit history early on – something that will come in handy as they earn more and take on more responsibility.
However, if you take too much control of your children’s finances, they won’t learn this vital skill themselves. Help them to use credit carefully and selectively. If it’s a credit card, ensure they learn to pay it off each month. But don’t do it for them. And ideally, don’t be the ones providing the credit. That’s not to say you can’t be a guarantor on a mortgage they might take out in the future for example, but help them to learn how to use institutional credit, and do it in their name.
Student Loans
Many parents of today remember their own student loan challenges. It can be a galling thought, however good the terms, to think how long it might take your kids to pay theirs off.
However, assuming they find work, current graduates only begin to pay it back if they are earning over the threshold of £27,295 a year (£524 a week). And with the average graduate student loan debt in mind, at a rate of 9% of the earnings above that threshold, the reality on a £30k salary translates to an actual annual rate of less than 1% of their total income before tax.
So, paying off their student loan – which is as cheap as institutional credit gets – may not be the most efficient way to support them. Particularly if you are under financial pressure or using more expensive credit elsewhere yourselves. And paying it off themselves over time is another step that helps them learn how to budget and take responsibility for their own debt.
Rent
Those of us with children have been setting boundaries since our kids were first born. Why should that change when they are grown-up? However, the same Aviva study found that more than a quarter (28%) of parents who receive rent from their children feel their children are not paying enough. And despite this, only 12% of these households have actually asked their children to start paying more.
This is somewhat understandable, of course. We find it hard setting financial boundaries with our children because we want the best for them and we would often much rather we suffer than they do. The same iD Mobile study found that 66% of parents pay their children’s bills quite simply because they love them.
However, if boundaries are set from the off and financial needs planned for openly from the start, there is much less chance of fall out, and much more chance that your kids will learn to budget effectively. Agree a rent that your children can afford and they have budgeted for before they move in and you can avoid a potentially emotionally charged confrontation further down the line.
Inheritance come early
Although not every parent is in the position to do this, one way to provide your children with future security, and to do it in a tax-efficient manner, is to provide them with capital, or a cash-generating asset in your lifetime. For example, a deposit on a property; or a Lifetime ISA (LISA), which allows you, or them to add up to £4,000 a year (as long as they open it before 39 yrs old), with the government providing a 25% tax free bonus each year. That’s a whopping £1,000 a year. And the amount itself can also earn tax free interest. The only condition is that your child puts it towards their first home or their retirement.
Not only do the two options above become amounts you give them that are free of inheritance tax seven years after they have been received, but the process provides your children with extra security without removing the element of responsibility.
Of course, this may mean less of your money is working directly for you and your income could drop. So, only do it if you are sure can you afford it.
To Sum Up
These are financially uncertain times. No doubt your adult children will need help, if they don’t already. Keeping the dialogue between you open, up front and boundaried will give both you and them the best chance of keeping the relationship harmonious and supportive, while not depriving them of agency and responsibility.
