parenthood

When to cut the financial cord on your kids

By Naomi Mannino • Bankrate.com

Highlights

• Start kids on their financial independence early by having them save for items they want.
• One poll found 40 percent of adults 18 to 39 either live with their parents or have done so recently.
• Get teenagers on the right track with a part-time job and by having them pay part of the bills.

You or someone you know probably has an adult child living at home, according the latest "60 Minutes" and Vanity Fair poll. More than half, 54 percent, of today's parents say there's no set time when kids should stop living at home -- not when they graduate from college, get a full-time job or even when they get married. More and more college-age and post-college-age children are taking advantage of this and living at home.

How old is too old?

Forty percent of American adults ages 18 to 39 either live at home or have done so recently, according to one poll for the National Endowment for Financial Education. That's alarming, as the findings exclude students and include "kids" up to the age of 39. The same survey found that these adult children are having a financial impact on their parents, too. Of surveyed parents with adult children living at home, 26 percent have taken on debt to support their kids, and 7 percent have delayed retirement.
This begs the question for the 46 percent of parents who think kids should live their own lives at some point: When should you cut the financial cord?

Start early

Children should begin earning for themselves at an early age by contributing to household chores and taking on extra tasks to earn cash, says family finance expert Ellie Kay. Make sure children understand their responsibilities, and contributions will increase as they get older.
"If you set a precedent that you will just hand over cash every time kids ask, the problem can exacerbate as adult financial responsibilities and mistakes take over," she says.
David Bakke, a personal finance reporter, says his parents gave him the rule that if he wanted to buy something, he had to earn the money to pay for it. Today, he says it's "one of the best things my parents did for me."
This system also applied to Andrew Schrage, one of Bakke's reporting colleagues. Schrage's parents made him save up for a car as a teen. "Although, they did sell me one of their old cars at a significantly reduced rate and (paid) for my auto insurance into my late teens," he says.
Kay agrees that if a teen wants to drive, he or she should pay for his or her own car. She also thinks teens should be required to pay for a portion of their auto insurance, so they appreciate what it costs.

The entitlement generation

Entitlement is especially prevalent in kids today who did not earn their own way in and have no idea what items cost, Kay says.
"As parents, we owe our children food, clothing, health care and shelter, not fun with friends, designer clothing, cellphones with data plans, a car or a party-school college experience," Kay says. "If kids want those things, they need to earn it for themselves. Otherwise, they feel entitled instead of appreciative."
She emphasizes that when kids work for things, they value them more. And this includes a college education.
Students who choose to work a moderate amount toward their college expenses often do better academically, according to the nonprofit College Board. Two-thirds of full-time undergraduate college students receive some type of financial aid. About 61 percent of that aid is in the form of grants, scholarships, federal work-study, tax credits and deductions that do not have to be repaid. The remaining 39 percent of financial aid dollars are in the form of loans.

Start cutting the cord on college financing early. Kay says to let teenagers know a portion of their time must be spent earning money for college, whether it be from a higher GPA or excelling in extracurricular activities. Kay says researching local, affordable schools; applying for state scholarships, grants and work-study programs; or joining the military are all ways to reduce college costs and earn money for college tuition and living expenses.

She adds that raising adults who take responsibility is the goal because that time period between ages 18 and 22 is when you should be cutting the cord on most financial responsibilities.

Credit concerns

"Giving teenagers access to your credit card sounds counterintuitive, but avoiding the topic is a horribly misguided approach to teaching kids how to use credit and achieve a good credit score," says John Ulzheimer, president of consumer education at SmartCredit.com. "You have to assume they will use a credit card, so teach them how to use it sooner rather than later. Adding your older teen to your credit card account is the equivalent of driver's ed and a learner's permit when it comes to credit usage," he says.
Ulzheimer and Kay agree on never co-signing for loans or credit cards for your kids, no matter what age. "If you co-sign, they control the card or loan but you have equal debt liability if an account defaults. It puts your own debt-to-income ratio and credit score at risk," says Ulzheimer.
Kay says, "The baby boomer trend is to bail out their adult kids repeatedly, which deteriorates parents' own wealth and retirement."

When to cut the cord

A "boomerang kid" is an adult child who returns to live at home again later in life."When a boomerang fails to launch or refuses to leave home, you've got to cut that cord," says Kay. "Make it as uncomfortable as possible for that adult child to live at home. Instead of feathering the nest, add a few pine cones to make leaving the nest seem more attractive -- and then they will fly."

When to start cutting the financial cord:

• Start cutting the financial cord early. If your young child wants designer duds or a fancy gaming system, have him or her earn it by doing chores around the house and saving money from birthdays and events.
• By age 16, expect your kid to work for you with chores or at a part-time job. He or she can use this money to pay for a cellphone bill, a portion of car insurance and gas on your car, and as savings for his or her own car if he or she is driving.
• If kids are living at home at age 18 and older and are not in school, they should be paying rent -- barring a tragedy or extenuating circumstances. Try to make the situation temporary by increasing the rent every three months or so they're still living at home. A written, well-planned exit strategy is your best friend when it comes to a grown child asking to live at home.

When to stay connected a little while longer:

• If a college student wants his own credit card, keep him as an authorized user on your card while teaching him sound credit principles until he is 21. New credit card rules make it difficult for those younger than 21 to get their own credit cards without their own income or assets.
• If your adult child needs help with health insurance, keep him or her on your plan as long as it's financially feasible for you. President Barack Obama's Health Care Reform/Affordable Care Act allows children to remain covered under a parent's health insurance until age 26.

Posted:March 2, 2012