Is Helping Your Kids Reduce Debt a Good Idea?Apr 24, 2019
Getting ahead in today’s world isn’t always easy. Millennials face personal, professional and financial challenges that didn’t exist for older generations. As a parent, you want to help. But what’s the best way to support your adult children when they’re trying to reduce their debt or make a down payment on a home? The answer may not be what you expect.
A significant number of Canadian parents are putting their own retirement in jeopardy in order to help their children by offering money for debt reduction, mortgage down payments and even everyday expenses.
A recent RBC poll found that 48 per cent of Canadian parents of children between the ages of 18 and 35 are still providing some type of financial support to their 30 to 35-year-olds.
In B.C., annual parental help adds up to an average of $6,818, much higher than the Canadian average of $5,623 for 18 to 35-year-olds and $3,729 for those aged 30 to 35.
RBC learned that more than a third (36%) of these parents are concerned about how their financial help is going to impact their own retirement savings. Another third (33%) are afraid that they are going to have to delay retirement in order to help their kids.
Do you fall into either of these categories? It’s a good idea to take a close look at how your financial assistance is impacting your own finances. If you aren’t sure how to juggle competing goals, a financial advisor can help you reset your priorities and focus on building your retirement savings as you get closer to the end of your career.
Should parents help with mortgage debt? Here’s what to consider:
In cities across Canada, millennials are finding it difficult to get into the housing market. Housing prices are expected to fall in Kelowna, but first-time buyers may still be shut out of the market because of the mortgage stress test, which has lowered their purchasing power.
As a parent, you might consider offering your assistance with the down payment but helping your child purchase a home that they realistically cannot afford can be risky. A drop in income, rising interest rates or unexpected home repairs can lead to a larger debt load and financial stress for your child (and possibly you too).
Start by having an honest conversation with your son or daughter about their financial situation. If you’re a homeowner yourself, you know that owning a home can be expensive. Here are a few questions to ask your child before he or she makes the decision to buy a home — and before you promise your financial assistance.
- Will you be able to save for retirement while you’re paying the mortgage?
- Are you prepared for emergency expenses?
- What about your existing debt load?
One way for your child to determine if they’ll be able to survive home ownership is to live on a homeowner’s budget before committing to a mortgage.
Here’s a calculator that can help you determine how much home your child can afford.
If offering money for a down payment is important to you, think about the details: How will giving financial help impact your retirement? Do you need your child to pay the money back within a specific timeframe? If so, it’s best to have a written agreement so everyone knows what to expect.
If you decide you cannot afford to help with a down payment, consider helping your child in other ways. For example, if they need help managing their current debt load, review techniques like the avalanche method of debt repayment. Paying off their student loan or credit card debt will allow them to focus their income on saving for a down payment.
As parents, it feels good to help our children succeed. Whether you’re thinking of helping your millennial get into the housing market or reduce their debt, go into it with a clear view of how it will impact each of you so you can make decisions that will benefit both of you over the long term.
It can be tough to say no to your adult children. Boomer & Echo has some advice for parents who can’t financially help their kids.
How is the financial help you’re giving your adult kids impacting your ability to retire? Tell us your story on Twitter. #LeaveDebtBehind #Housing #Boomers