If you have children, you want to give them every opportunity in life to succeed.
The bank of mom and dad is something everyone has relied on at some point. For student loans, phone bills or help with a down payment, parents are often willing to give out some extra cash to their kids. But what if that comes at a cost they can’t actually afford?
We recently spoke with BDO Licensed Insolvency Trustee (LIT) André Bolduc from our Ottawa, Ontario office about the consequences of stretching the bank of mom and dad too thin.
André told us a story of a woman who accumulated a significant amount of debt while trying to help one of her adult sons with his own expenses.
Cynthia, a pseudonym, lives in Ottawa, is widowed and in her 60s. She works part-time and receives a widower’s pension. She has a modest home with a mortgage and three children, all of whom are grown up and living on their own.
One of her children bought a car for his own family but struggled to afford the payments. He turned to his mother for financial help, which she agreed to give him.
Cynthia used credit cards to help her son afford the car payments but by doing so put herself into a significant amount of debt.
But like many people, it took her a while to admit that it was a problem.
She was also worried that if she stopped helping her son financially he might cut her off from her grandchildren.
“It’s much harder for people to say no to family because you have so much more than just money at stake,” André explained.
The bills continued to get more expensive. And she began to receive calls from her credit card companies about falling behind on minimum payments.
After hearing about BDO on the radio, Cynthia was curious. She decided to see what she could do to get her debt under control.
When André first met Cynthia, she had accumulated over $50,000 worth of debt trying to help her son. She knew there were options out there to help her reduce the financial burden but didn’t know what they were.
She really wanted to avoid declaring bankruptcy. “For her, declaring bankruptcy wasn’t an option. She wanted to pay back as much debt as she could,” André explained.
André walked her through another option, the consumer proposal. A consumer proposal is when an LIT, like André, negotiates with your creditors on your behalf to lower the percentage of debt you pay back. This can provide immediate debt relief and help people regain control of their finances.
In Cynthia’s case she went from paying over $800 a month in credit card payments to a monthly payment of $250. In other words, André was able to reduce her debt load by 70%.
Cynthia’s first meeting with André was longer than a typical initial consultation. “I looked at her situation and had to find a way to tell her that she can’t afford to give any more money to her kids. It was hard for her to hear because parents don’t want to let their children down,” he said.
She was able to have that hard conversation with her son. And having the support from her LIT helped her choose the right words and feel like she was doing the right thing.
Family finances are tough. But what can parents do who are struggling with providing too much financial support for their kids?
Here are some practical steps you can take.
“Having a family AGM (“annual general meeting”) where you sit down with your older kids and discuss the budget for the upcoming year for things like vacations, family projects, birthday and Christmas is one way to teach simple financial literacy skills to your kids,” André explains. If you have these regularly your kids they will get into the habit of thinking about money on their own and bring those lessons with them in adulthood.
If you have adult children who have children of their own, you can discuss the needs of their own family and how much support you can offer. That may mean helping with the costs of organized sports, as well as coordinating gifts for birthdays and holidays. Don’t forget about saving for education, too, and discussing how best to contribute to RESPs.
Letting your kids have a say on spending choices that affect them is another way to get your kids to think about money. It's how you prevent future problems from happening.
“You can involve them in decision making. Ask them if they would rather do a big expensive summer vacation or do multiple smaller, less expensive, things. It allows them to be involved and it helps them understand the value of money. You get them to start to think about what you can afford and what you can’t.”
Children should remember that asking parents for money is a lifeline that can only be used very seldomly. It’s important to be strategic when offering to help adult children with money issues. You should be able to help them set goals and a create a roadmap. and how much money you would need to give clearly. When there’s no obvious timeframe, goals or specific dollar amount, that’s when things can quickly spiral.
“Providing on-going support without identifying the underlying issues and failing to ask the difficult questions is bound to end badly,” André points out.
Essentially, if using the bank of mom and dad puts both the parent and the child into deep debt, then it helps no one.
This doesn’t mean that you can’t help your kids out, but you don’t want to put your own financial situation in peril.
“It’s OK to help your family financially, but only if you can afford it,” André said.