Six ways to reduce your child’s financial dependence

It’s no surprise, really. Facing challenging earning environments, an impossible housing market and with an unemployment rate of 12.28 per cent, it’s no wonder today’s young adults are struggling to get moving and stable with their personal and professional lives. What do they do instead? Stay at home with mum and dad, and delay major life events like buying a house.

A lot of the time this makes financial sense – as long as the child is contributing and paying their own way. However, many parents are sympathetic to the needs of their children and continue to provide financial handouts. While this seems helpful it can be quite damaging in the long term, inhibiting self-sufficiency and understanding of money. To avoid these issues, it’s necessary to have a plan to help your children.

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Consider the following six tips to reduce the dependence cycle and ensure your children learn important lessons about money:

1. Be clear about how much financial assistance you’ll provide. It’s important to set a limit on why you are giving money, what the money is for and how much money you’re giving.

Being a human ATM for your children increases poor spending decisions and doesn’t teach money management. Work with your children to establish a budget by reviewing essential living expenses and debts. Then, determine a reasonable amount for support and be ready to say “no” if they ask for more.

2. Schedule monthly reviews. Use this time to review the newly established budget and your child’s financial progress. Not only do regular money meetings keep your child accountable, but they can also be motivational, especially if they realise the gains made toward reducing expenses or paying debt.

The reviews are also good times to ensure your money is being used wisely. Over time, the idea is to gradually reduce your contributions so you can get your child to financial independence.

3. Set goals and match savings. Learning how to establish short- and long-term savings goals is crucial to your child’s financial future. Help your children outline these goals, like buying a car or saving for a deposit, along with the steps needed to reach these objectives.

Incentivise your child to stick with the plan by offering a savings match – like the government’s super co-contribution match – upon reaching a specific goal or milestone.

4. Loan money like the big boys. If you’re planning on lending your child money, make it official with a written agreement, complete with interest. The interest doesn’t have to be big, but it is an important lesson to learn – ain’t nothin’ for free in this world. Outline a repayment plan along with a deadline so your child knows to take your money seriously. At the same time, they can learn what it’s like to owe money to the bank and the responsibilities that come with that.

5. Charge rent if your child is living at home. It astounds me how many parents don’t do this. Again, it doesn’t have to be big, just the action of having to budget their money to ensure obligations are met is crucial to understanding and valuing money.

There are two angles you might take from here: use the rent to offset your household expenses (my guess is that the kids still eat at home and use the washing machine), or you might like to put the money away into a high-interest savings account and when your child moves out, you can provide them with a little nest egg to get started.

6. Teach smart tracking. After years of scraping by and eating two-minute noodles, many Gen Ys fall into the trap of living big when they begin earning steady income. This can be alleviated by helping them find and install apps that will help them track their spending habits to recognise areas they need to improve on and understand the concept of risk versus reward.

Sacha Loutkovsky is a specialist life insurance adviser and director of Orion Financial Group