Don’t touch my wallet! How to get your kids off your payroll

Published: Saturday, 13 Dec 2014 | 9:00 AM ET

By: Ivory Johnson, CFP, ChFC, Founder, Delancey Wealth Management, LLC

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The burdens of stagnant wage growth and student loan debt make it increasingly difficult for young adults to gain their financial footing. Fortunately, just as parents teach their sons and daughters to cross the street or ride a bike, we can also, in the same way, train our children to become financially independent.

Right now, 14 percent of adults between the ages of 24 and 34 live with their parents, and since it costs $245,000 to raise a child to 18, neither party benefits from these extended stays. As a consequence, parents must lay the groundwork for a move-out date years before it ever takes place.

A credit card…at 16?

For instance, landlords and potential employers require good credit. It makes perfect sense: What better way to determine if a young adult is responsible?

By the age of 22, however, children have rarely developed a credit history, and if they do, it oftentimes reflects poorly on them. According to credit rating bureau Experian, millennials have the lowest average credit score of any generation.

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One option is to walk them up the adult ladder one rung at a time. You can begin by giving them a credit card at the age of 16 in their name from your account—with a low maximum-spending ceiling. When you think about it, it’s really no different than giving them an allowance, except now you can see how they spend their money.

In the process, you also accomplish two important objectives: They build a relationship with the credit card company while also becoming accustomed to using credit wisely before those Visa applications flood their freshman dorm room, both of which can lead to healthy conversations about financial literacy (i.e., why it’s important to pay your bills—all of them—on time).

“Somebody taught us how to kick a soccer ball, drive a car and write a good book report. Creating the habits to be a self-sustaining financially independent adult are no different.”

Of course, that’s only the first step. Once they reach 18, put their cell phone in their name and have them apply for their own credit card, either a secured card or one with a low maximum-spending limit. Again, they’re establishing credit, but you’ve also moved them up another rung in the adult ladder.

You can still pay the bill while they’re at college, but it wouldn’t hurt to administer some adulthood training when they use their summer job income to pay two months of bills.

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By then, they’ll understand the program, so at the age of 20, put the car insurance in their name if they have their own vehicle. Sure, it’ll cost more money, but if they’re involved in an accident, you won’t be on the hook for a civil lawsuit. It’s also a great opportunity to remind your kids how speeding tickets increase the cost of the premium when they pay the bill in August.

When they reach 22, they will have had their own credit card and cell phone accounts for four years and car insurance in their name for two, so they should be accustomed to paying bills.

They will have established good credit and the habits to maintain it, giving them an advantage in the job market. Moreover, convincing them to save money will be a far less daunting task, and—who knows—maybe that will prevent them from hitting up mom and dad later when they buy their first home.

Finally, your children will have psychologically begun the process of breaking the economic bond between themselves and you, their parent. All of their affairs, from credit cards to cell phones, will have their name on it. The next step from there is complete autonomy—the ultimate goal.

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Nobody learns algebra on their own. Somebody taught us how to kick a soccer ball, drive a car and write a good book report. Creating the habits to be a self-sustaining financially independent adult are no different.

While our children need hand-holding, there comes a time when they must walk on their own two feet. All it takes is a whole lot of planning and a little bit of faith.

Ivory Johnson, CFP®, ChFC, is the founder of Delancey Wealth Management, LLC and has over 20 years of investment experience. He can be followed on Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Delancey Wealth Management, LLC, A registered investment advisor and separate entity from LPL Financial.