Is Giving Money to Your Parents a Good Idea?
As your parents get older, they may turn to you for financial support if they find themselves in a difficult situation. If you have ever been in a similar situation and borrowed money from your parents, you may want to return the favor, especially if they are persistently demanding money. However, you need to ask yourself some basic questions before you make a decision about giving money to your parents.
Do You Have the Money?
Above all, the decision of whether to give money to your parents should come down to your own financial situation. Consider your capacity to give from two angles:
- Current means: Giving money to your parents makes sense if you are in a situation that allows you to budget a set amount to send them each month. If you don't have the funds, however, it's in your best interest to decline the request. Don't go into debt to support your parents—you'll put yourself at a financial disadvantage even if it helps them. Debt, after all, can increase your credit utilization ratio or lead to late payments, both of which can decrease your credit score and hurt your prospects for getting a mortgage or other loan.
- Future needs: If you need the money for an upcoming expense, you may also need to say no or consider extending them a loan. Giving a monetary gift to your parents might prevent you from making a down payment on a house, for example. Even if your parents are urgently demanding money, don't promise them funds that won't be available in the future. However, if you have money available in an emergency fund, and can easily replenish it, you may want to consider giving some of that money to your parents.
Consider allocating some of the money in your emergency fund for your parents' needs, but replace any money you withdraw so that the fund always amounts to roughly three to six months of living expenses.
What Are the Extenuating Circumstances?
It's equally important to consider the specific problem your parents are facing and then determine whether or not giving money to your parents is the solution. Having a discussion with your parents with a financial advisor present can help you identify their need for assistance in a non-combative way.
Providing monetary support may make sense in any of the following situations:
- Job loss: If your parents are still working, but one of them lost a job, consider giving them a loan to help them put food on the table while looking for a new job. Your parents can repay the money at an agreed-upon timetable when one of them secures employment.
- Illness: A similar reason might be that one of your parents is ill and is not able to work. As a consequence, they might be facing serious medical bills. Giving money to your parents in this scenario can enable their financial recovery as they make a physical recovery.
- Essential repairs: These are one-time instances that may warrant help. Your parents may need help with a car repair, for example.
However, if your parents are demanding money because of unhealthy spending behaviors like gambling or shopping addiction, complying with the request may actually hurt them. A steady supply of money from you may enable them to continue these behaviors and put them into serious debt, so you're better off encouraging them to seek help from a credit counselor for their issues before you help them out. These professionals will review your parents' financial picture and identify problems that you may not be able to spot yourself during an initial (sometimes free) session. They will then recommend solutions for better money management.
If you extend your parents a loan, there's always a risk of default and the permanent loss of the funds you doled out. Plus, if you don't charge interest or you charge below the market interest rate, the IRS may characterize your loan as a “gift,” and you, the lender, might have to pay gift taxes on it.
Does Your Spouse Agree?
Once you are married and your finances are combined, if one spouse isn't comfortable with giving money to your parents or theirs, you shouldn't do it. If your spouse agrees, take the time to have a clear conversation about the expectations of the financial support and what to do if your own circumstances were to change. Never hide these types of transactions from your spouse.
Moreover, it's important to treat both families equally. One spouse's parents may not need help, but if both are in tight situations, you can cause marital tension by helping out just one family. Of course, if extenuating circumstances like addictions or excessive spending apply, you may need to set clear limits on one family and find different ways to help.
What Other Kind of Help Can You Give?
If, based on the above questions, you decide that giving money to your parents isn't an option, make a concerted effort to help your parents through non-financial means.
For example, you might be able to drop off groceries for a set period of time to help them save money on gas. Or, if they need repair work done, you might be able to help out with the labor to reduce their maintenance expenses.
Helping to keep some of their monthly costs lower can help them cover their other expenses. If you have siblings, ask if other siblings that live nearby can aid in this effort so that you don't have to shoulder the burden alone.
The extent of financial help your parents need may change when they reach the age when they are on a fixed income. Even then, realize that you're generally not responsible for your parents' debts when they die unless you cosign their loan or sign on as a guarantor on the admission form of a nursing home or other health facility.
What Are Your Limits?
It's important that you set clear boundaries with your parents when it comes to giving money to them, just like they should do if lending money to you.
You don't want to create an unhealthy reliance on the money in perpetuity, and nor should you encourage them to spend the money frivolously and keep asking for more. If you can help, establish a plan for payments that clearly spells out the payment amount and duration and any expectations for how the money should be spent. Set up a timetable for repayment if extending a loan. If you cannot help, explain the reasons why and offer an alternative solution.
These rules also apply to giving money to extended family members, which is an option if you have a healthy financial family history. When your mom or dad asks for money, this may also be a good time to talk about the expectations for caring for your parents as they age and set up guidelines that will work for your family.