It’s that time of year again, college graduation is upon us, and with schools on Summer break many empty-nesters will suddenly find themselves with not-so-empty nests…and, if they’re not careful, empty wallets.
Recent census data suggest that young adults (aged 18-34) are more likely to be living with their parents than in any other living arrangement, with nearly 20% of college graduates returning home. Unfortunately this trend can have serious financial consequences for both parents and their adult children.
Moving back home to live with your parents after graduation can lead fully capable adult children to fall into old habits from childhood; moreover, these habits can be reinforced by the expectation that mom and dad cover all living expenses.
It’s important that parents set boundaries and expectations, not just to protect their retirement nest egg, but to set their children up for success and a life of financial security. Whether a child is currently unpacking their old room or you expect one to land back at home in the future, here are the key conversations to have with your children.
Encourage financial independence early
For parents whose children might be future co-dependents, one way to avoid a challenging situation post graduation is by having money conversations early. Before going to college, your children should understand the cost of living. That means knowing the difference between essentials (mortgage, food, utilities, transportation, taxes etc) and discretionary spending (dining out, travel, Netflix, etc). All these expenses can really add up, and you should be honest with your kids about these costs and what type of income is needed to pay for them.
Having this understanding can eliminate “sticker shock” that many kids face when starting their journey to financial independence. It’s also important to discuss the ins and outs of credit cards, credit scores and of course any school loans. This is an often forgotten, but crucial, conversation.
Many college students fall into bad habits with credit cards, or spend surplus funds from tuition loans, which can have monumental implications when they’re trying to get off on the right foot post graduation, setting them up for a challenging financial future.
Set expectations during and after college
Another opportunity to set the stage and instill positive financial habits is by setting expectations. For parents supporting their children financially in college, make sure there are strings attached. Along with a check for tuition should come a series of expectations your children must adhere to, whether it be keeping a minimum GPA, holding down a part-time job, or getting involved with professional or academic societies.
If they’re used to meeting certain requirements to receive financial support during college, they’re less likely to take advantage of financial support after college. If you really want to help your kids master their cash flow, require them to keep a budget of expenses with an overview of where their money is going and send it to you once a month. This way they can begin to understand how much it truly costs to maintain their lifestyle, even if their parents are footing the bill.
Setting a strong financial foundation is a continuous process that doesn’t just begin, or end, with college graduation. Parents are not talking enough with their children about financial topics, including saving, investing, budgeting, debt and more. Serving as a resource to prepare your children for “financial firsts” as they get on their feet can be time consuming, but it’s time well spent.
Discussing the importance of building an emergency fund, maximizing 401(k) contributions and living below their means before they even start their first job won’t just help them now, it will increase the likelihood they won’t be co-dependent in the future. Helping your kids establish a foundation of self-sufficiency will set them up for success over their lifetime.
Create a unified front before they unpack
Before having an adult child move back home, it’s crucial for parents get on the same page. Why is your child moving back home? Is it out of financial necessity, or are you encouraging it because you miss them?
If the latter, think about how having a child move home can instill bad habits for them over the long term, this can hurt them too. Consider a hobby that doesn’t involve hindering your adult child’s growth or your plan for retirement.
If the former, it’s time to do the math and consider some important questions. How will this lifestyle change impact your retirement goals? What will be the added cost to the household, and can you afford it?
Covering costs up to a few thousand dollars each year might seem small, especially compared with the costs of tuition, room and board. However, when that number goes on for years, it adds up, especially considering the missed opportunity cost if those dollars were otherwise invested.
These are tough considerations for any parent, but they’re critical. Today, about four in every ten households are predicted to run short of money in retirement. Once the financial realities of an adult-child dependent are quantified, it’s time for an honest conversation about expectations.
Have your game plan ready
For children who are employed and have the means, set the expectation for contributing to household costs — such as paying rent and paying toward groceries. What’s more, establish a timeline for how long they can live at home and stick with it.
For unemployed children not in a position to contribute financially, discuss other ways they can contribute their time to lessen the burden of household tasks, errands and chores. If adult children understand the timeline and corresponding expectations, they’re less likely to overstay their welcome.