Published December 13, 2012
Grandparents are known for spoiling their grandkids, but it’s important to balance gifting with their own financial and retirement goals.
Although 96% of grandparents spend money on their grandchildren, 55% have not cut back on spending despite the economy, according to an AARP survey. Those affected by the economy cut spending in areas other than gifts to grandchildren—good news for grandkids, but bad for grandparent’s budgets.
“To really benefit the family unit the most, the first priority of the grandparent should be to take care of their financial well being,” says Scott Halliwell, certified financial planner at USAA.
To preserve your retirement savings, include all presents and activities with grandchildren as part of the budget.
“If you have a general budget, gifting should be a line item in your budget and you should stick within your means,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial.
Grandparents should avoid feeling like they have to overspend on their grandkids and keep their retirement and savings a priority. “If it’s affecting your ability to meet your obligations or is dipping into retirement savings, that’s a sign that it’s excessive spending,” says De Baca.
What You Can Afford to Spend
Grandparents need to create a grandkid spending plan that will allow them to be financially comfortable later in life. “First thing, analyze what you have in assets—your inflows and what you’re spending,” says Michael Eisenberg, a certified public accountant in Los Angeles. He says if you want to give a gift, consider whether you’ve enough money to live on and if the gift will affect your standard of living. Reviewing your budget will help you figure out whether you can afford ongoing gifts.
As you develop your budget, Eisenberg advises considering whether your expenses will be higher in years to come and you’ll have less discretionary income as a result. “If over a five year period, if your cost of living goes up between 10% and 15%, do you have enough in savings to cover these expenses?” asks Eisenberg. For someone living on a fixed income, he suggests figuring out where the money will come from.
Once you cover your living expenses, which include housing, food, medical expenses and clothing, any leftover discretionary income should be budgeted. “If you’re concerned about your financial wellbeing in retirement, think twice about giving money to grandchildren,” says Halliwell. So that you can comfortably afford to give to your grandchildren, you need to have a good grasp on your own finances and know what you need to live.
Many people, including grandparents, spend without consideration for their own financial picture, says De Baca. “If in fact you’re contributing because the parents have financial needs like private school, extracurriculars and vacations, having open discussions about what you can and can’t do is important.”
Instead of paying for items as they come up, Halliwell suggests “sponsoring” activities by choosing one with a preset price tag—this can be more important to the child than giving money as a gift. “If they can put the ‘help’ clause with an activity, it can be easier for a grandparent to control their spending without commingling finances with the parents,” says Halliwell. Parents might be less likely to ask for money if they know what a grandparent is planning to do for the grandchildren.
“Telling your child or grandchild that you can’t afford to do that is not a shameful thing,” says Halliwell. Explaining that you can’t afford to do something can become a teachable moment. “It doesn’t make you a bad person but can be a positive influence because you’re teaching them how to be financially responsible,” says Halliwell.
It’s Not All About the Money
Experts recommend looking for nonmonetary ways to spoil grandchildren. “Giving a package of stickers and spending an afternoon together might be as valuable as a big toy they might forget about tomorrow,” says De Baca.
Activities like going to the park, exploring, or attending a kid’s baseball game are all free gifts that create long-lasting memories. “Be an active participant,” says Eisenberg.
Spending time and communicating regularly whether it’s over the phone, through letter or even on e-mail or Facebook doesn’t cost anything and brings joy to the younger generation.
Even though you may want to see your grandchild enjoying your gift, Eisenberg suggests considering whether you’d rather give your children money now or to wait and give an inheritance so that you can be sure your life is comfortable. “If you decide you can’t afford to give, don’t give. Sometimes kids anticipate, expect or demand gifts but the grandparents have to say they don’t have it.”