How should you give money to your kids? So, if ...
How should you give money to your kids? So, if you’ve made the decision to help them out, the question now is how to go about it so that it’s a positive experience for both parties.
 
As a side note, this is not a blog. We are not trying to tell you how to raise your kids. Like all of our topics, we’re simply discussing some financial strategies that we have found to be the most effective. We care about our clients, and definitely want to try and do everything we can to protect the B.O.M. / B.O.D. (Bank of Mum; Bank of Dad) – because we know they’re not bottomless.
 
How to loan or give money:

  • Give money as a finite amount. If it’s a one-off payment, tell your kids that. 
  • Make it clear if the money is a loan or a gift. If one party thinks it’s a gift and another thinks it’s a loan, it won’t work. Not to mention there will be a big hole in the retirement budget if parents expect it back but don’t ever get it. Be clear – and don’t change your mind. And if it’s a gift, don’t bring it up again. 
  • If it’s a gift – be honest and tell your other kids, too. We’ve seen examples in families where the kids who are not so good with their finances get given a handout. And that’s not really fair on the others – the ones who are good at budgeting end up being punished. 
  • If it’s a loan - be realistic about whether the loan is necessary. From your children’s perspective, it’s very easy to accept money from someone. As a rule of thumb – if you don’t want other people to know that you’re giving it to them, think about why.
 
What to do once the decision has been agreed on:

  • Get it in writing so everyone agrees and knows the terms. This might seem like overkill but it will save arguments 5 or 10 years down the track. The written agreement can be short and simple, and can be changed if needed. For example, ‘we’ve loaned you $10,000 and expect it back within 10 years, with no interest’. Or state the amount you’re giving over the time period – for example ‘we will pay your rent for the first year of university’.
  • Set up a separate bank account. Until it’s fully paid off, the debt is still there. Think about it this way – if the money was borrowed from a bank – regular payments would need to be made. Don’t give yourself an opportunity to say, ‘ah, don’t worry about it this month.’ This way, even though you have loaned your kids money, it’s still a good budgeting lesson if you create a set amount per week or month that they have to pay you back. Similarly, you are teaching them about income if you are giving them the same amount of rent money each week and sticking to it.

As always, we recommend you sit down and consider your options rationally. If it helps both parties in the long run, then you can start to think about how you will go about giving your kids money.
Published by Dallas Davison, Michael Hogue and Ali Hogue. November 19, 2020