Adulting

How to know if it's OK to borrow money from your parents once you're an adult

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If you've been thinking about asking your parents to borrow money, consider this: In the U.S., one in 10 homeowners say they aren't comfortable with their retirement savings and haven't been able to save enough as a result of supporting their adult children financially.

That's according to Unison, a San Francisco-based home co-investment company, which surveyed over 2,000 U.S. adult homeowners about the impact of close financial bonds between adult children and their parents. The survey features respondents who have a household income of at least $50,000, have owned a home for at least 10 years and are not retired.

If your parents have ever loaned you money as an adult, you're not alone. The survey found that 92% of American homeowners have supported their adult children financially and 53% are currently providing some sort of financial support. Of those polled, 70% have helped their adult children pay for college and 67% have helped their kids with general expenses.

"Parents are [often] going to say 'yes' to you even if it puts them in a bad spot because they are emotionally attached —right or wrong — to your happiness, success and needs," Priya Malani, founder and CEO of Stash Wealth, tells CNBC Make It. "They tend to sacrifice at the behest of their children."

As an adult, sometimes you have to help prevent your parents from being their own worst enemy. Don't put them in a spot where they may have to make a decision that's detrimental to them in the long run.
Priya Malani
Founder and CEO of Stash Wealth

That's why it's a good idea to sit down and have a thoughtful conversation about money before asking your parents for a loan. "As an adult, sometimes you have to help prevent your parents from being their own worst enemy. Don't put them in a spot where they may have to make a decision that's detrimental to them in the long run," Malani says.

Since talking about money can be a sensitive subject, here are five questions you can ask to get the conversation rolling, according to financial experts.

1. "Do you plan to retire?"

When sitting down to talk, cut to the chase. Ask your parents, "Do you plan to retire?" What they say will help steer your conversation.

"If they say no, ask why. Is it because they love their job, or do they suggest that it's due to a lack of savings?" Malani says. "This will clue you in to their financial situation in a less direct manner."

Another way to ask this question is: "How many more years do you think you'll have to work before you can retire?"

Phrasing your inquiry this way is "a little more direct and puts them on the spot," Malani says. "Go with the version that feels right for the kind of relationship you have with your parents."

If parents aren't on track to meet their future goals, then this may be a sign that they aren't in a position to help you financially either
Marcy Keckler
Vice President of Financial Advice Strategy at Ameriprise Financial

Another question to ask is whether your parents are "on track" to meet their retirement goals, says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial.

"If your parents are on track to meet their retirement goals, consider whether the money they give you will delay their progress or if they have flexibility to help you," Keckler says. "If parents aren't on track to meet their future goals, then this may be a sign that they aren't in a position to help you financially either."

2. "If I borrow money, will it have too large of an impact on your retirement savings?"

If you borrow money from your parents, that means that they have less to put toward their retirement savings, at least until you pay them back.

While this may seem like a fairly general question, it's helpful because it allows you to gauge your parents' reaction. If they seem stressed when this question comes up, ask them politely to explain why it gives them anxiety or causes concern.

Then you can dig further into the specifics. As follow-up questions, you can pose inquiries like: "Would it help to ask your financial advisor before giving me a concrete answer?" and "Would my borrowing funds impact your tax liability?"

Seeking advice from a financial advisor could be a helpful step since it would allow your parents to speak to a professional about the state of their retirement savings before agreeing to lend you money, explains Ryan Marshall, a New Jersey-based certified financial planner.

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When asking about your parents' tax liability, you're essentially trying to decide whether your parents will be taxed higher if they loan you funds that could have been kept in their various retirement accounts.

"If they decided to make a withdrawal from their retirement savings account, it could result in the parent being pushed into the next tax bracket," Marshall says. "If they take out $50,000 from their IRA retirement account to help fund a loan for their child, it may cost them 20% to 30% in taxes ... or they could receive penalty fees if the account holder is less than 59½ years old," Marshall says.

3. "Would it make you feel better if we set specific loan terms?"

If you feel confident that you can pay your parents back, you can offer to set specific loan terms via a formal contract. This added level of security may help them feel more comfortable with your agreement.

When drafting up a contract or promissory note, you must identify all parties that are involved and write out the full names of the borrower and lender. You must also state the amount of money borrowed, the date it's due to be paid back (either in increments or in full) and any interest or penalties for not meeting the requirements.

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This contract can be short or long, but must include all of the loan terms you and your parents agree on — no matter how trivial they seem. If Dad wants you to bring him coffee every morning until the loan is paid in full, he's gotta list it. Or else, he's driving himself to Starbucks each day.

These kinds of agreements, even when drafted between family members, "should be in writing and notarized," Marshall says.

4. "Are you carrying a significant level of debt?"

Debt is a difficult burden for many to overcome. That's especially true for U.S. homeowners who, in 2019, had an average of $202,284 in mortgage loan debt, according to Experian.

When asking your parents, who may also be homeowners or carry another type of debt, to help you out financially, this is a valuable question to raise if both parties feel comfortable talking about it. Before accepting any help, you should first understand what kinds of financial challenges your parents may already face.

Of course, just because your parents have some sort of debt doesn't mean they absolutely cannot help you with a loan. If your parents are comfortable disclosing how much debt they have, that can be a good way of determining whether you should move forward or back off with your loan request.

I would say that if parents have their own debt, then they aren't in financial shape to help their kids. They need to help themselves.
Ryan Marshall
A New Jersey-based certified financial planner

Both you and your parents should consider their debt-to-income (DTI) ratio, which you can determine by dividing their total monthly bills by how much they earn each month. Most lenders say your DTI should be under 35% at all times. If your parents' debt is close to 35% (or more), it's likely not a good time for them to loan you money.

Whether or not to borrow money from your parents "depends on the type of debt and the amount relative to their savings," Malani says. "If they have a mortgage that they are on track to pay off and adequate retirement savings, that type of debt wouldn't be a red flag. But if they have exorbitant credit card debt or medical bills, it might be a different story."

Others have more strict takes on the matter. "I would say that if parents have their own debt, then they aren't in financial shape to help their kids. They need to help themselves," Marshall says.

5. "How will you handle unexpected expenses?"

When thinking through the possibility of a loan, you should also consider whether your parents have enough money set aside for unexpected expenses, such as medical bills.

"If your parents don't have a plan to cover the unexpected, such as future healthcare expenses, then realistically they may not be well situated to give you money," Keckler says. "Their priority should be securing their own financial future. Without being prepared for the unexpected, any money they give you could make it difficult for them to cover a sudden expense."

If your parents don't have a plan to cover the unexpected such as future healthcare expenses, then realistically they may not be well situated to give you money.
Marcy Keckler
Vice President of Financial Advice Strategy at Ameriprise Financial

If your parents don't have a cash reserve or emergency fund set aside, they aren't alone. In the U.S., 28% of U.S. adults have zero emergency savings, according to Bankrate. If they are trying to establish some type of emergency fund while also potentially paying down a mortgage and trying to save for retirement, you can imagine how difficult it might be to also grant you a loan.

"At some point, parents should put their own financial goals above their kids. If they decide to help, be deliberate with how much and for how long. Setting reasonable expectations is key," says Douglas Boneparth, president and founder of Bone Fide Wealth.

When to have the talk with your parents

The kind of questions to consider when approaching your parents to have this financial talk isn't the only thing to keep in mind. Timing is also important, Malani says. In order to avoid the conversation getting tense or too emotional, it's a good idea to talk to your parents before you'd even need to borrow money in order to see how they react.

"When you don't need the money is the best time to feel them out," Malani says. "There will be a lot less pressure, which means you'll get a better read on their situation and whether they would make a rational or irrational decision when and if you ask. This intel might prevent you from asking in the first place. You might pursue other avenues first and use them more as a last resort."

If you're in the process of setting your own long-term financial plan, that's a prime opportunity to talk to your parents about their finances. And if you've never discussed (or need to revisit) whether you will provide care or support for your parents in their late stages of life, it's a good time to bring this up as well.

At some point parents should put their own financial goals above their kids. If they decide to help, be deliberate with how much and for how long. Setting reasonable expectations is key,
Douglas Boneparth
President and founder of Bone Fide Wealth

Not only will it give you the chance to see if they're comfortable lending you money, but it also helps the conversation feel like more of a two-way street.

Malani suggests saying something along the lines of:

"I'm putting together a financial plan and one of the topics I'm addressing is whether or not I would need or want to provide support or care for my parents, including how much and for how long. I know we've never talked about this before, but given how much you've done for me, I'd love to be able to give back to you in some way. Even though I'm not in a spot to help now, I'd like to create a plan so that I can. Do you have any suggestions on what level of support might make sense?"

At the end of the day, Malani says you should always consider whether you'll be able to help your parents out at some point as a way of paying them back. "If you don't think you'll be able to take care of them, momentarily, in retirement to make up for the savings that they passed on to you, you need to think twice about asking in the first place," Malani says.

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