VOL. 127 | NO. 77 | Thursday, April 19, 2012
Rays of Wisdom
Dana and Ray Brandon
Don’t Be Your Kids’ Piggy Bank
By Ray and Dana Brandon
Ray’s Take Whether 5 or 55, kids tend to turn to their parents first when they encounter financial difficulties. There’s nothing inherently wrong with that, but there can be a lot wrong with bailing them out with no consequences or questions asked.
It might make you feel like Superman or Superwoman, but you won’t do your children any favors by making money problems disappear. In fact, you may be encouraging future poor financial decisions.
If there’s no sting there’s no lesson learned – and you won’t always be around to fix things. If you can easily afford to help and are inclined to do so, it may be better if you make a formal loan, complete with interest, rather than an outright gift.
Put the details in writing, including the amount of the loan, its duration, the interest rate, and monthly payments. This provides a set of expectations all around. If you feel uncomfortable doing this, blame your financial adviser or the IRS: you need proof that the money you’re providing is not a taxable gift.
Whether you help or not, ask how the financial need came about. If you’re being asked to help, you have a right to know. It may be that you can help some other way, such as working with your child to develop a livable budget.
A very formative part of my childhood occurred when I sent $12 to a record club that went bankrupt before I got my record. I became a general creditor in the bankruptcy court with lots of forms and lots of waiting, ultimately receiving half my money back. My parents could have avoided a lot of whining and aggravation by just giving me my $12 back, but they didn’t, and I’m a much more careful person for it.
I learned a valuable financial lesson. It’s one I’m glad to pass on to my own children in the hope they’ll take care with their own financial decisions throughout their lives.
Dana’s Take Polonius was right, “Neither a borrower nor a lender be, for loan oft loses both itself and friend.” I might add “and family” to that maxim. Besides encouraging poor fiscal responsibility, giving – or even lending – money to any family member also has an impact on personal relationships. Even if only the two parties involved know about this transaction, it can make things uncomfortable at family gatherings.
In effect, providing financial help changes the balance of a relationship. The person who took the money is now beholden to the person who provided it. Eventually, this could lead to resentment on the part of the borrower or the lender. That tension can lead to misinterpretation and hurt feelings.
Ultimately, the cost of providing needed money to a child or family member could go far beyond mere dollars, and that is a cost no one wants to incur.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at email@example.com.