Have you thought about moving back home with your parents? Have you considered asking them for a loan or gift? I recently read a real estate industry article which points out that student loan debt is preventing our generation from buying our own homes. Some of us are moving home to their parents (likely the often unemployed Occupy Wall Street folks), while the rest are living on their own but cannot afford or qualify for homeownership. Perhaps we can all use some extra financial help from our parents? They have most of the wealth in America anyway…I know it sounds irresponsible, but maybe in these tough times it isn’t?
Faced with mounting student loan debt, poor job prospects and stagnant wages, an increasing amount of 25 to 34 year olds (a prized demographic for the housing sector) have moved back in with their parents. Almost 6 million 25 to 34 year olds now live with mom and dad, up 26% from when the recession started in 2007. Today’s 36.8% homeownership rate for 25 to 29 year olds is at its lowest level since 1999, and homeownership for 30 to 34 year olds is at its lowest rate in 17 years.
What is Economic Outpatient Care?
Economic Outpatient Care is a concept I first read about in The Millionaire Next Door. It refers to all financial support provided by parents to their working adult children. EOC ranges from letting adult children live in your home, to providing funds for car down-payments, house down-payments, private school fees for grand children etc. The Millionaire Next Door points out that “prodigious accumulators of wealth” do not engage in this practice, however I would like to challenge that idea in this article. Some young adults have parents (or grandparents for that matter) that are accumulating assets on their behalf but might not realize how badly they are struggling. For the most part, our parents either think we’re doing great or feel the need to help; but do yours have the right information about your situation? Do they even know that they can help you?
A new model for EOC
I have recently developed some criteria that parents can consider, to allow them to help their children as much as possible while spoiling them the least. They can provide funds that:
- Protect their adult children from unforeseen events, or
- Prepare their adult children for future events (foreseen and unforeseen).
Protection from unforeseen events
When young people have financial difficulties, they often have inadequate insurance; their parents can certainly help with this. This includes anything supporting purchases of health insurance, life insurance, or even short-term and long-term disability insurance. Also, people living in apartments might not have sufficient insurance for their belongings or even personal liability. Your parents probably have a long-standing relationship with an insurance agent who can get these additional policies set up for you. You might also ask their help with the purchase of extended warranties on your vehicle or other expensive items that you have, to help bring more predictability to your budget.
Preparation for future events
Along with car repairs, family-related travel ranks high among the most common reasons for credit card debt among young adults (see this book). Today’s young adults are incredibly transient, and more likely than previous generations to live far from family and friends. Parents can help here by financing the child’s trip home for holiday visits. There is no known correlation between a person’s salary and the amount he or she might spend for family-related travel, therefore it is quite possible to be “successful” and not be able to afford all of it. I have spent many holidays in Houston [in good company] because I didn’t think I could afford travel to visit close-family, and still avoid further debt. Are you going through the same thing?
If you have children and have little money, then you probably haven’t saved much for their college education. You can definitely ask your parents to begin contributing to different savings accounts that your children can use for college in the future. They can participate in programs like Upromise.com for this purpose, or even help you fund retirement accounts (401Ks & 403Bs, IRAs, Roth IRAs) on your behalf (or your children’s) so you can benefit from annual contribution limits. Admit it: you have the unique dilemma of qualifying for all these accounts, and not being able to afford the contributions.
Terms and other practical considerations
If you are going to make the case that you cannot afford certain things, you should open up your finances to parental scrutiny (I know, this isn’t fun). This will likely push you to achieve the next level of independence sooner because you will definitely disagree with your parents in this process. When I was in school, I used to borrow money from my brother (occasionally), but to make it easier, I always let him know before any major purchases I made. Since my financial decisions could put him at risk, I felt he deserved the opportunity to help prevent the worst ones. You can imagine that I did not enjoy explaining the priorities I set for my own money but it is a price I gladly paid for that extra bit of security.
Somewhere along the line, you and your parents (or in my case, sibling) will have to discuss what luxury items are [in]eligible as a basis for additional support. Maybe they can subsidize a two-bedroom apartment so you can have a home-office as you develop a small business? Perhaps even buy a house and rent it to you so you can live in the suburbs – or just cosign your mortgage? You must agree on specific income levels under which you will get this support – or a very limited number of years (no more than ten). This is where your parents’ belief in your professional talent really helps!
I recommend that you get professional assistance in this negotiation process to help legitimize your case. If you solicit the assistance of a CPA, you will be amazed at the possibilities for structuring parental support of adult children (these things have many tax and estate planning consequences). If you or your parents do not have a CPA, Tax Season is a great time to find one; some of these “possibilities” for structuring parental support can reduce you or your parents’ 2011 tax liability if implemented before April 17, 2012. The most important thing for you and your parents to understand is that it is possible to simultaneously provide you with the help you need as a young adult in today’s world, without spoiling you [any further]. That point of compromise will come from honest, thorough judgment from all parties involved.
Are you in need of some Economic Outpatient Care? Do you think that your parents or grandparents (or other well-to-do relatives) would consider this?