It can be difficult to say no when your kids come to you, tail between legs, asking for a loan. But new research has found that emptying your pockets for adult kids does them no favours when it comes to their longterm happiness, health and financial security.
Researchers from Curtin University investigated the impact of intergenerational financial transfers and found that while unlocking the vault at the bank of mum and dad may relieve the child’s financial burden in the short term, it does nothing for their overall happiness, wellbeing and financial security in the long term, no matter the amount they receive.
Not even large sums of inheritance or cash payments were enough to make an impact, with the study’s lead author Professor Rachel Ong ViforJ, from the School of Economics, Finance and Property at Curtin University, saying children are more likely to succeed financially because of their skills and education rather than monetary gifts.
“Some people have few economic concerns, no matter what their personal income or level of debt is, because they are able to access family wealth via inheritances or through parental cash transfers from surviving parents, which can have a significant advantage on those fortunate enough to be a beneficiary,” she said.
“Previous associations found between family wealth and health are likely to have flowed through non-financial channels such as inherited characteristics, acquired skills and social capital, rather than financial transfers.”
The study comes after Canstar released data in 2017 that showed half of Australia’s Generation Y had borrowed money from their parents after they turned 18. According to Canstar’s research, one in five 18-37 year olds borrowed money from their parents weekly or monthly and 30 per cent borrowed every year or two.
A second survey from the same year, this time from the Commonwealth Bank, also revealed one third of working Aussies were spending more than they earned on a monthly basis, making it difficult for them to get ahead and stay out of debt.
While lending money to your kids may not do much for their financial security in the long run, as the Curtin University study found, shutting up shop and refusing to help your kids out of a tight spot isn’t an option every parent is comfortable with.
If you do decide to lend money to your children, financial experts advise drafting a formal document to make clear the transaction is a loan, not a gift, and establishing a clear plan for repayment.
If the loan is for a house deposit, it’s advisable to use a bank as a third party to ensure the particulars of the loan are clear to all involved.
If you decide to lend a sum of money directly rather than via a joint borrowing or guarantor product, it’s vital to carefully document your agreement.
It’s best to have the written loan agreement acknowledged by you, your adult child, and if appropriate, their spouse or partner. That’s because although a verbal contract is legally binding, without written evidence it may be difficult to later prove the terms of the agreement.
Likewise, writing an I.O.U. note but failing to have it signed won’t be as helpful as a signed document should the worst happen.