When to give money to your parents (and when not to)

Should you give money to your parents?

As your parents get older and you get more established, they may turn to you for financial support. And now may be the time older people need help.

Older people have been hit from both sides by the Covid-19 pandemic and the recession. Retirees have watched their nest eggs wobble with the volatile stock market. Parents in their seventies and eighties could run out of retirement savings with today's low rates of return. If your parents are still working, they may be at greater risk of contracting Covid-19, which is much deadlier in older people. And for the first time in fifty years, workers ages 55 and older are experiencing higher unemployment than mid-career workers.

While you may feel a moral obligation to help your parents financially, you first need to run through a basic checklist.

First, you need to know your own financial situation. For that, you need a personal budget. Any decision about your generosity hinges on whether you actually have the money.
Giving money to your parents only makes sense if it affects your current lifestyle. It's not a good idea if it would reduce your future lifestyle. Reducing your retirement contributions will cost you much more than getting takeout less frequently, since a dollar

in a retirement account grows tax-free. Lowering your current consumption doesn't harm your financial future. And taking away from your own retirement security could have you asking for money from your own children.

Borrowing isn't a good answer. If you borrow to pay your parents, you'll put yourself at a financial disadvantage. It will reduce your credit score and give you less cushion for your own future money needs. Going into debt or dipping into your own emergency fund carry similar risks. (The rule of thumb is to have six months of living expenses because most emergency surprises are predictable.) With today's low interest rates, it would be cleaner for your parents to borrow the money themselves.

Second, consider the reason your parents need financial help right now. Giving money to people is easier and more effective if the financial need is not caused by chronic mismanagement of funds. One-off situations like essential car repairs or temporary assistance after a sudden job loss are both sensible times to give money. If your parents' financial need is chronic, it is reasonable to help your parents find a financial planner and help them with a budget.

If your parents have a gambling addiction (up to 10% of the elderly population) or a compulsive shopping habit (up to 5% of American adults) then giving them money is a form of codependency and will hurt them. Saying no in those circumstances should be easy. They need professional help, and the only effective help you can give is pointing them toward professional counseling. Credit counselors are often subsidized.

If, based on the above criteria, you decide that giving money to your parents isn't an option, you can still help them in other ways. You can give your time and care. You can give in-kind help — dropping off food and medicine or doing repair work. You can help them figure out other sources of income, like food stamps.

But you can't help them if you don't have your own budget and manage your own finances. So, the answer to whether you should give your parents money comes full circle. It depends on whether you have a budget and know what you can afford. If you don't budget yourself, then you can't help your parents financially. 

Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She's the co-author of "Rescuing Retirement" and a member of the board of directors of the Economic Policy Institute.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.