Most of us with kids, will at some point (in fact many points), end up providing them some form of financial support. Guest writer and psychologist, Nick Petrovic, talks to RaboDirect about the key things to consider before putting your hand in your pocket.
When a child turns to their parents for help, the natural reaction is often to assist without question. When finances are involved lending money to family, however, the associated risks should not be ignored. After all, for many parents the wrong decision could mean losing what they worked so hard to achieve, in turn rendering them unable to help in future.
Needs vs. wants
When a child is in need, a parent will do whatever they can to help. However, there is a big difference between a child driven by necessity and one driven by desire, and parents should not feel guilty by choosing to look at all the information before making a decision. Does your child have other avenues? Is this simply a shortcut? Does your child understand the gravity of the risks to your financial standing?
What seems like a stellar business idea to your child may be sounding alarm bells in your mind. Conversely, as parent you may be biased and feel that your child is destined for success. Being objective is the first step to making a good decision. Ask yourself, what would you advise a friend to do in your situation? If you’re dealing with a substantial amount, or evaluating a proposed business plan, it can also be helpful to bring in an unbiased person to help with your decision.
Look at past behaviour
We all like to think our children are without flaws, but considering past mistakes and negative financial behaviours is crucial when deciding if and how to assist your children financially. The common trap parents fall into is the notion that they can rescue their child (often from themselves) or that a financial boost will “smarten them up” and see them suddenly develop positive behaviours. In reality, humans tend to be creatures of habit. So if your child has not handled money effectively in the past, chances are similar problems will resurface – only this time it’s your finances that will be affected.
Consider the risks
Without falling into pessimism, it can be helpful to hope for the best but plan for the worst. It may seem extreme, but a good rule of thumb is to never invest more than you are willing to lose. A poor financial decision may affect your retirement plan, your credit rating or even ownership of your home. Ask yourself if and how you would bounce back from such events.
Make the terms clear
If you do decide to offer support, it is vital that both you and your child understand the exact terms of the agreement. Is the support a loan? If so, what is the time frame for repayment? If it is a gift, are there conditions attached to how and when it should be used? Being specific will mean less chance of confusion should complications arise.
Refusing to help can often put a strain on relationships. Even when the reasons for your decision are based on logic and wisdom, it can easily become a point of contention. If family financea financial loan isn’t possible in your situation, it’s wise to offer your assistance in other ways to show your child that you are committed to assisting them wherever you can.