Young adults' pursestrings still tied to parents

updated 3:27 p.m. ET Aug. 23, 2005

Nishank Khanna, CEO of his own online-coupon Web site, knows how to make money. But the 23-year-old doesn’t know how to manage it yet.

That’s where his dad comes in. He controls “pretty much everything, from personal finances to business finances,” Khanna said.

Running Undertag.com and living in his own apartment in Queens, N.Y., Khanna is more independent than many people his age. Still, he knows he has a lot to learn before he can take over the reins from his dad, who emigrated from India in 1973 with few assets and became a mutual fund manager.

“Let’s say tomorrow he just stops doing it. I wouldn’t know how to file my taxes or anything. I don’t even know where some of my money is,” said Khanna, who plans to hire an accountant in a few years to replace his dad.

It’s only natural for parents to want to protect their kids’ money, but when should they stop? It’s a tough decision — the transition to financial independence is difficult these days, as surging home prices, education costs, credit card debt and job competition leave many young adults in a lurch.

“What is new is the increasing number of young adults unable to succeed financially on their own,” said John Gallo, an estate-planning attorney in Los Angeles who co-authored “The Financially Intelligent Parent” and “Silver Spoon Kids” with his wife Eileen Gallo. “Parents have not been responding to those increased social factors by teaching their kids how to manage money.”

It’s tempting for parents, especially first-generation wealth creators, to control their grown children’s money, said Tom Rogerson, senior director at Mellon Private Wealth Management.

“The type of people who make wealth like to make decisions themselves, and want to make decisions for their kids,” Rogerson said. “They may make better decisions for the money, but they leave their kids less capable and confident to make decisions themselves.”

How to teach independence
So how do parents let go? When children enter the working world, parents don’t need to suddenly sever all financial ties. Becoming fiscally independent often takes a series of steps, depending on the child’s maturity level — not to mention assets, income and debt.

“If parents can think of it in terms of a process, not a cutoff, it can help,” said Eileen Gallo, a licensed psychotherapist.

One step is establishing boundaries. If a young adult needs money to pay off credit card debt or make a down payment on a house, it’s OK to ask a parent for a loan — as long as the parent can afford to, and as long as the terms of the loan are clear.

If parents want to loan their children money, a good way to do it is by setting up a matching system, where the parent pays only as much money as the child contributes, John Gallo said. This way, a parent can help their child become debt-free more quickly, but the child is ultimately responsible.

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