Bank of Mum and Dad? Put Yourself First
Parents helping out their children (and grandchildren) financially is a tricky topic because it’s so caught up in emotion and love that it’s not always easy to make sensible decisions. I have two kids and I love them dearly – but there’s a reason it tells you on the airplane safety briefing to put your own mask on first before you help your children.
In the same way, financial support for your family is a case of secure yourself first.
If you have surplus capital and want to support and help your children, then go right ahead. But if you haven’t got your own house in order yet, you shouldn’t really be helping other people out.
I use a saying: Now, Then, Them.
The first thing we should focus on is securing our financial NOW, by having the right foundations in place. Let’s make we have an emergency reserve of cash set aside, let’s make sure our debts are repaid, let’s make sure we’ve got a will and a power of attorney.
THEN let’s make sure we’re planning for our financial future: paying the mortgage down, having a clear pathway, looking forward to a rosy retirement.
And only after that comes THEM. Only once you’ve got yourself in order are you in a position to help others, be it family or perhaps your local community.
Helping out can be a false economy otherwise: if you haven’t secured your retirement income when you get older, you might become a financial liability on those you’re seeking to help. Plus, this is the time of life when you should be looking after number one.
Why you’re first in line
If you’re approaching your retirement, you’ve put your hard time in. You’ve gone without holidays, without luxuries, and you’ve seen a very different picture for our economy in the past. It should be all about your rewards now, your time to enjoy life.
If your preferences as an individual are to help others before self – a trait common in nurses for example – then you naturally want to put your family first. But don’t miss out on your own bucket list, dreams and aspirations. You’re not going to get a second chance at this, there’s one run through, so we’ve got to make sure we make the most of it and enjoy it.
You have to secure your own future first. You will need more money than you probably expect in retirement. As a very rough guide, take your monthly outgoings and multiply them by 300 to get the figure you need to have saved: if your expenditure is £1,000 per month, you’ll need around £300,000 for your retirement.
The rule is only an approximation, but it helps to illustrate the numbers involved and shows why you need to be your first focus.
Ways to help
Outside of weddings or simply paying off debt, the three main reasons parents help their children and grandchildren financially are:
This is a great area to help in, particularly given how expensive it can be to go into higher education nowadays. Financing some or all of their education costs has a long-term impact on your children, and is straightforward.
Buying a home
If you’re looking at property, then it’s important to protect your assets within the family. If you were to gift your son or daughter money for a home with their partner, if their relationship fails in the future then that gift may partially or wholly disappear from your family. This is where a trust can really help you.
A financial planner can help you understand how a trust will protect any money you gift, keeping it within your family in the event of the couple’s relationship breaking down.
Starting a business
When investing in any business venture, you have to be very careful. Statistics show that most first businesses fail within five years, so however brilliant you think your children’s idea is, try to evaluate it objectively and harshly. The probability of them creating the next Facebook or Netflix is highly remote!
What, why how: equity release
If you have your retirement covered but the money you could use to help your family is within property at the moment, you have a couple of options to realise your asset.
The most cost-effective way of doing this is to simply move home. Downsize, release the capital tax-free, and then you have a lump sum you can gift or otherwise use.
But of course, we get attached to our homes, and the thought of change can be too much. That’s where equity release comes in, to free up funds on your current property without the need to move.
This is what is known in the US as a reverse mortgage: you borrow a chunk of the value of your home, but rather than making monthly repayments, interest is added to the amount you borrow. The amount you owe grows, but you don’t pay anything back until your property is sold or you move out, usually upon death or when you go into a care facility.
If the provider is a member of the Equity Release Council, there’s a ‘No negative equity guarantee’ that the amount you borrow plus any interest will never exceed the value of your home; you’ll never owe more than it’s worth when you pass away.
The rates of interest on equity release products have come down significantly, they’re a lot more affordable than they used to be, and they’re now very heavy regulated. That makes them a valid consideration if you don’t want to downsize and move, but would like to be able to gift something to your family.
When it comes to finding the right person to help you with equity release, I’m a big believer in independence; if you ask the butcher for nutritional advice, they’re going to tell you to eat meat! Make sure you talk to someone who is not tied to a particular provider, rather than just the first name you see on a TV advert.