Monday, July 15, 2024

Should You Charge Your Adult Kid Rent? A Financial Unpacks This Tricky Convo

Should You Charge Your Adult Kid Rent? A Financial Unpacks This Tricky Convo

Whether your adult kid hasn’t yet flown the coop or they’re moving back in with you, having a grown-ass kid at home can get expensive. Even though they’ll always be your baby, you might want to be sure they’re working on becoming financially responsible. With that mission in mind, should you charge them rent?

From the jump, it’s worth noting that there’s no clear-cut answer, as every family’s circumstances are different. It’s one thing to care for an adult child with chronic illness and/or disability, or to offer your kid a safe landing zone if they find themselves in dire straits for any reason. Intergenerational households are also very common in many cultures, and what works for one family might not for another.

So, how can you figure out if your kid might benefit from a monthly rent payment? Jennifer Seitz, CFEI and Director of Education at Greenlight, is here to help you navigate what could be a tricky situation.

Pros and Cons

Before making your decision, Seitz offers up some things to consider. “Charging your adult children rent can instill a sense of financial responsibility, teaching them the importance of budgeting and managing their income efficiently,” she says. “It also prepares them for the real-world expenses they will face once they live independently. It’s never too early (or late!) to help them practice balancing their own life checkbook and develop healthy financial habits.”

Having your adult child pay rent can actually usher them toward more independence, notes Seitz. “[It] can motivate them to save money and work toward their financial goals, especially if the monthly amount is less than what it would cost to live alone or with roommates,” she says. “They could save for a down payment or deposit on their own home or build an emergency fund. It encourages them to prioritize their financial future.”

There are certainly some scenarios in which you might not want to charge them rent, as Seitz points out. “Drawbacks could vary depending on the unique financial situation of the adult child… or their parent,” she says. “Generally, if they are struggling to find a job right out of school or have a low income, spending a high proportion on rent could make it more difficult for them to move in a positive financial direction — which is usually the ultimate goal. Additional financial strain would impact their ability to focus on long-term goals, whether it’s further education to earn higher income or to build a retirement fund.”

If your kid is moving back in because they have a low-paying job or internship and are struggling to make ends meet, it’s not a bad idea to give them some time to get on their feet financially (if it’s at all feasible for you as a caregiver).

The Contribution Conversation

Legally, you’ve got an adult on your hands now, which means you’re gonna have to have open and honest conversations. In fact, Seitz recommends starting there before making any decisions.

“Explain your reasoning behind it — for example, that it helps teach them financial responsibility while also covering their share of expenses as an adult,” she says. “You should clearly connect how taking on this responsibility now helps lead to independent living in the future, by learning how to budget and prioritize spending.”

Then, you can determine a fair amount and/or pay schedule and any other factors, such as giving them a few months rent-free or at a lower rate that increases as time goes on. “Parents may choose to determine the rent amount in advance or come to an agreed amount together, based on an overall review of finances and factors like rent-to-income ratio.”

It might feel foreign or far too formal to tackle these topics, but it’s important to prevent resentment or misunderstanding on both sides, short- and long-term. “Set clear expectations by thinking through the terms of the rental arrangement and communicating them, including the amount of rent, due date, household responsibilities, and any other terms you may have, such as the length of time of the agreement,” Seitz adds. “Encourage questions to make sure you are explaining the rationale and avoiding any misunderstandings.”

Money Matters

Not sure how much to charge so you won’t place your children under further financial duress? “Involve your adult children in researching the rental market in your area to get an idea of the typical rent prices for similar accommodations,” suggests Seitz. “Strike a balance between charging a reasonable amount that reflects their fair share of expenses without creating an undue financial burden. They can benefit from understanding the economy and learning how to do financial research in the process.”

If you choose not to charge your adult child rent, Seitz offers up a different idea: collecting some amount but saving it for their future housing expenses. “Deposit the agreed-upon amount in an income-earning account — either a high-yield savings or investment account,” she recommends. “If they pay ‘rent’ now, they can grow accustomed to paying bills and making payments on time. Once they’re ready to move out, they can use the money for a down payment or deposit on their own place. This will help them learn how to prepare for the future under your guidance.”

You could either collect the money and deposit it into a savings account yourself or, to get them into the habit of making saving part of their budget, require them to set the money aside on their own.

Perhaps you don’t want to or don’t need to charge your child rent. That’s 100% OK! “There also are other ways they can contribute to the household,” says Seitz. “They could help with specific household tasks, assist with groceries, or contribute to other shared expenses — i.e., groceries, utility bills, internet, subscriptions, or gas. You could even have them take over the utility or internet account to teach them about recurring bills. By having them contribute toward household expenses, you can still instill financial responsibility while allowing them to stay focused on their financial futures.”

Each child and each family setup is unique, so you will know what’s best to set your adult kid up for success, whether it be a modest monthly rent payment or helping them set aside some money in savings for their future. Your love, support, and guidance will pay off in spades, no matter what.

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