dependent kids

by Joseph Pecoraro

Watching a child graduate from college is a joyous moment for all parents.  However, that joy can turn into stress and concern rather quickly.  We have successfully helped many clients navigate the expense of college tuition, books, room, board and other miscellaneous expenses that are not accurately represented on the “all-in bill” the college sends.  At the end of the financially draining part of our clients’ lives, I like to ask the question, “How long will your child be on the payroll for?”  Some clients laugh off the question and talk about the great job their child just landed and how they plan on moving out soon.  Other clients share a disconcerting look.  That is when we know we can help.

Turning a child from a dependent into an independent is complicated.  There are 2 factors at work here.  I’ll start with what I believe is the secondary factor – financial.  Many college graduates are not properly equipped to understand all the financial obligations they are handed all at once.  With student loans at an all-time high, many graduates were not taught the effect of interest rates on their loans.  Nor do they realize the cost of rent, renter’s insurance, car insurance, cell phone bill, gas/public transportation, food, etc.  These bills can pile up and it is easy to turn back to mom and dad for help.

The primary reason it is complicated is emotional.  As parents, they have been the supporter of their child from day 1, minute 1.  They have been paying the bills since the beginning and many times the child does not understand that this will be coming to an end.  It is not easy to turn off that emotional switch, or even dim it a little bit.  No parent wants to see their child struggle but unfortunately, that is a part of life.  When a child turns to their parents for help financially, the emotional heartstrings are pulled at.

There are ways to start the financial independence conversation and we will outline some of the most effective techniques we have learned and used.

  1. Start early. If you are a new parent, it’s never to early to start the conversation.  I am not advocating reading ‘Rich Dad, Poor Dad’ at bedtime but teach them the value of saving.  We have a client who shared a story with us.  When his daughter would babysit, he would make a deal with her.  If she put the money in the bank then he would match it.  He said more times than not, she would put the money in the bank. Until she was old enough to understand negotiation and she would negotiate a savings rate if she only put half in.
  2. The value of a dollar. Unfortunately, the formal education provided to children does not always cover concepts such as the impact of interest rates, the power of compounding interest, paying themselves first, etc.  Most of the education on these topics fall on the parents, who may not be properly equipped.  Talking through these topics as a child begins a college search process is a great place.  This is the time a real-world concept can be used to drive home a point.  For instance, if a child wants/needs to take out a loan for college show them the amortization table of the loan.  This could help illustrate the impact of interest rates.
  3. Build a cash flow. If a child has recently graduated and started a new job, set-up a simple cash flow.   Show them the effect taxes can have on income. Illustrate 401(k) savings, rent, insurance, cell phone bills, etc.  The visualization can help solidify what you have been trying to teach them about money.
  4. Set Timelines. When the time comes to let a child become independent set a timeline and stick to it!  For instance, set small hurdles along the way.  Weening off car insurance, car payments and cell phone plans over time can make the financial burden a little easier.  It is not easy to cut a child off cold turkey and it is not easy for the child to digest the large obligations all at once so setting a timeline allows that to happen easier.

These steps may be easier said than done and we understand that.  After all, it is your baby boy/girl we are talking about here.  If you do not think you can handle this or if it is becoming increasingly difficult, remember you have an ACM advisor who would be happy to help.  By introducing an outside person into the situation your child may be more comfortable opening up and listening to suggestions.

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