Bail out the kids?

When Beth Carter, 56, and her husband Peter, 57, learned that their daughter-in-law Alicia was pregnant, they broke open a bottle of champagne to celebrate but joked that it might be the last bottle they could afford for a while. When our son [Ross] called, he had panic in his voice. Ross and Alicia, both in their mid-twenties, were struggling already to pay rent and meet their student loan obligations on entry-level salaries in their field. They also had incurred credit card debt, largely due to their wedding.

"Ross didn't ever actually ask us if we would help out, but he shared his concerns that they would be able to make it financially. It was Peter and I who offered to pay off their credit cards, and give them a little extra. [It] made the difference in Alicia's ability to stay home for her full maternity leave," says Beth in a telephone interview. "I wanted my grandchild to have that."

And when Steve*, 23, was fired from his third job, his father, Russ*, 54, let him move into an apartment in the basement. "I don't pay for cable or a phone or anything like that, but I make sure he has the basics," says Russ in an email. "It does bug me, but I wouldn't be able to handle it if my kid went on welfare."

It's a question many parents will face with their grown kids: if the kids get into a financial bind, or want to invest in something like a home, should parents give or lend them money?

Setting the stage for failure?

Research indicates that it's something parents should do at the very least with caution. In their bookThe Millionaire Next Door, authors Thomas J. Stanley and William D. Danko state, "in general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more."

In other words, if your kids get used to you bailing them out, they may not be as careful as they would otherwise. And there are other pitfalls as well: if you help your children to invest in a home in a neighbourhood they otherwise couldn't afford, they may go into debt trying to maintain their home or "keep up with the Joneses." If you subsidize private school tuition for the grandkids, they may want the activities and vacations that their peers have.

But in an article written forMSN Money, columnist Liz Pulliam Weston notes that even though financial experts agree with Stanley and Danko, many of them also have given their own children financial gifts. Her analysis? Children of baby boomers really do have a harder economic row to hoe -- and it's with an understanding of that reality that their parents are bailing them out.

Unemployment or underemployment, lower starting salaries, higher student loans, and the siren call of credit card debt are all contributing to very real financial problems for todays younger adults. And layoffs and restructuring can lead to genuine emergencies for young families.

Financial planner Alexandra O'Brian, 48, says, "There isn't a hard and fast rule that will apply to every situation. Sometimes, helping family really is the first consideration. I find this is especially true when grandchildren are involved."

How to decide?

If your child does approach you for help, consider the following:

- Take your time to decide: you don't want to make this decision during a short phone call.

- Ask yourself whether the gift or loan will affect your relationship with your child, or with other children. You don't want to create sibling rivalry or find yourself resenting your child's daily spending habits.

- Be careful of putting yourself into financial difficulty: it's a new truism that you can borrow money for tuition much more easily than for retirement

- Offer advice before money: sit down and go over all the financial options with your child. But let your child take the lead in formulating a plan: its important that he or she be the person in charge of his or her finances.

- Distinguish between an emergency and a pattern. It may be okay to step in once: if you find yourself writing yet another cheque, ask why.

- If you loan money, write it down formally, including a payment plan. If your child doesn't know how the money will be repaid, decide whether you want to make it a gift.

- Get an expert involved: a financial planner or a debt counselor can provide expertise -- and an objective eye.

- Draw the line: once you've made a decision, stand firm.

* Last names withheld for privacy considerations.

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