Many millennials grew up turning to mom and dad for a little cash infusion when funds were low, or they wanted to go out with their friends. But as this generation enters the workforce, many are finding themselves on the other side of the table.
“Many millennials are finding themselves in a ‘sandwich’ predicament,” says Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank. “They not only have to prepare for the financial needs of their own children, but also of their parents who are increasingly needing financial support.”
According to Ameriprise, 34% of millennials have helped their parents pay for groceries because they weren’t able to, 27% have helped parents pay utility bills and 20% have helped with rent or mortgage payments.
Certified Public Accountant Ernest Almonte says the decision to lend money to parents is personal. “If your parents come to you, they obviously have a problem and you need to decide if you’re willing to help them. You don’t want to transfer their situation to create a bad situation for you.”
Being confrontational won’t solve any problems and emotions can run high because family is involved. Experts recommend taking a breather when the money request first comes in to make sure you fully understand the situation before making a lending decision.
Before writing any checks, experts recommend asking these five questions:
Question No. 1: Can you afford to help your parents?
“You don’t want to create long-term financial harm for yourself,” says Scott Halliwell, certified financial planner at USAA. “Before you dedicate a lot of financial resources to your parents, think about your own situation and whether there’s another way to help without having to give money.”
Evaluate what you can afford to give and why your parents need the money, says San Diego-based certified public accountant Leonard Wright. “If they’re coming to you for food, that’s one thing, if they partied it up, that’s another. Maybe that’s a situation where you don’t help and talk about where they spent their money.”
You also need to consider what lending your parents money will mean for your own financial future. “You should be very aware of the consequences of the decision you’re making,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial.
You also want to make sure the money isn’t a temporary fix to a bad situation. “No child should abandon their parent in a time of need, but sometimes, similar to when a child asks a parent for money, a little bit of tough love is in order,” says Halliwell.“Sometimes it’s okay to say that you understand your parents are in a difficult spot, but that you can’t fix it.”
Question No. 2: How do your parents spend money?
Although the process can be awkward, experts recommend reviewing your parents’ budget to understand their spending habits.
“If your parents are having problems meeting today’s goals, you’ve got to go through and assess where they’re spending money and where they can save,” says Wright.
This can also be an opportunity to share the lessons you’ve learned about following a budget, as well as saving for retirement and emergencies.
“Take your own budget from a category standpoint, but not the actual numbers, and share that with your parents to help them understand how to bucket needs, wants and savings,” says Katherine Dean, managing director of wealth planning, Wells Fargo Private Bank. A good rule for budgets is to spend 50% on your income on needs, 30% on wants and to save the remaining 20%.
Question No. 3: How much financial help can you provide?
If you do want to help them, figure out what you can afford. Take a look at all your expenses and categorize your spending by needs versus wants. Aid to your parents should go in the wants column until you know you can afford it.
“Being able to help is all about the child taking a look at their personal finances and determining if there’s extra money,” says Halliwell. “If there isn’t extra money, then the child and parents need to make sure there’s a really compelling reason to do it.”
Almonte adds that it doesn’t help you to destroy your credit and family situation to help someone else. “If it doesn’t destroy your financial future, figure out what you can give up so you can gift or loan money to your parents and how much money can you free up from your monthly budget to help solve your parents’ problem.”
Question No. 4: Is it a loan or a gift?
Treat any loans to your parents like a business transaction with conditions, advises Wright. “A banker would never lend money without knowing the situation, and it’s the same thing with mom and dad. If mom and dad can’t share that information, you can’t help them out.”
To make the loan less emotional, sign a document with your parents outlining the payment terms and what will happen if they don’t pay you back. “Even though it’s called a loan, it creates problems after the fact when you try to collect money because it puts the son or daughter in a tough situation with the parents,” says Almonte.
Experts agree that it’s best to think of the loan as a gift and to adjust your own financial situation accordingly. “If they can’t pay you back, reconcile how that will affect your ability to pay your bills,” de Baca says. “If you’ve a partner, consider how this would affect your relationship— take their opinion into consideration and what would be equitable if the other set of parents need help.”
Question No. 5: Are there other solutions for your parents?
Your financial assistance may not be the only way for your parents to solve their financial issues. “Ask your parents if they’ve done everything possible beyond coming to you,” says Dean. “That can open up a discussion about a job, the budget and whether they have other resources available.”