How to prevent your kids from living in your basement

In the pilot episode of HBO's "Girls," 20-something protagonist Hannah Horvath is out to dinner with her parents when they hit her with the bad news. Since graduating from college two years earlier, Hannah has been toiling as an unpaid intern in Manhattan while trying to make it as a writer. Her parents have been supporting her, but decide they can no longer do so and fly in from Michigan to tell her they are turning off the money tap. Tonight.

"We can't keep bankrolling your groovy lifestyle," her mom says.

Right idea, say financial experts who see a growing reluctance to cut such cords hurting young adults as well as their parents. But there are much better ways to go about it, they quickly add.

"Ultimately, you have to cut them off," says Brad Klontz, a financial psychologist and author of Mind Over Money (Crown Business, 2009). "But you have to give the kids fair warning."

The phenomenon of parents' heavily subsidizing their grown offspring isn't new, but it has become more widespread since the Great Recession. One-third of parents surveyed in 2007 by Ameriprise Financial said they were making rent or utility payments for their adult children, and one in five said they were paying down their kids' credit-card debt. A follow-up study in 2012 found that 93% of parents were now providing some form of support to their adult children, while more than half were allowing them to move back home rent-free.

And it's no longer just writing a check for major expenses or making up the pullout bed in the basement, experts say. Now it's also paying the cell phone bills and the auto insurance premiums, if not the car payments themselves. One recent study even found that more than 10% of parents were still paying for their grown kids' iTunes downloads.

"The number of my clients who face this problem is at least 30% higher than it was in 2007, when I first started seeing its impacts," says Kimberly Foss, founder of Empyrion Wealth Management and author of the upcoming Wealthy by Design (Greenleaf, 2013). The ongoing economic malaise is keeping more college graduates from finding good jobs, she explains, while the explosion in student debt has further narrowed options for kids and parents alike. "I don't see anything materially changing," she adds.

There are ways to address the problem, though, and doing so can be crucial for all concerned.

Many parents, for example, are dipping deeply into their own financial reserves to offer support they can't really afford. A 2012 survey of parents with adult children living at home by the National Endowment for Financial Education found 26% have taken on debt to support their kids and 7% have delayed retirement. "The number-one referral I get from financial advisors is families who will be running out of money in a few years because they are supporting their children," Klontz says.

While this assistance is usually given only with the best intentions by parents who feel it's their duty to continue providing for their offspring, it can wind up hurting the kids as well. Poor fiscal habits are reinforced and actually encouraged, often making the recipient even more financially dependent. Guilt for accepting the help can easily grow into resentment. Creativity, motivation and drive may suffer.

1. Cut them off Klontz and Foss are among the many that say the only solution is tough love all the way down the line. Parents have to accept that this behavior can ultimately drain their finances, and children must be made to see that it could have negatives for them as well. Families that have already held at least some discussions on budgeting and fiscal responsibility will have a leg up. Such conversations, unfortunately, are all too rare.

2. Draw up realistic plans Nonetheless, there are ways to start building a proper foundation even when the kids are no longer children. If graduation is still off in the future, a few evenings at least six months beforehand should be set aside so parents can help their kids think through and draw up a realistic financial plan.

These nights could include a session or two with a free budgeting website like Mint.com. "It's never too late to have that conversation," Klontz says. An explicit list of any expenses that will be subsidized for the short term should also be drawn up — with cut-off dates clearly spelled out for each.

3. Lend a hand at the start Whether and how much any parent helps their child is a personal choice dependent on many factors, of course, although experts believe it isn't a bad idea to offer a little assistance at the start if that's possible. But make it a limited time, a year or two tops, and be upfront about when it will end, they emphasize.

"This way," Foss says, "you can wean their dependency off slowly as they take control of their finances." For example, she suggests offering funds to get them set up in an apartment while keeping them on the family auto insurance and cell plans after they graduate. At the same time, though, let them know that they'll be expected to take over responsibility for the apartment in six months and for the insurance and cell payments six months after that.

4. Allow them to fail and help them up As much as feasible, parents should also remain involved as their kids learn to get up on their financial feet. And they shouldn't be afraid to let them fall and skin their knees once or twice. "That's the only way they'll learn," Foss says.

It's true that these procedures can be tough on everyone. But the alternative — tapped out parents, eventually forced have their guilty children move in — could be far worse. After all, can you really imagine Hannah and her folks sharing a tiny New York apartment?

--Written by Howard Rothman for MainStreet

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