In his early 20s, Chris Chen’s nephew dreamed of becoming a professional photographer, but to pursue that dream, he needed equipment that cost over $5,000. His nephew worked hard to save $1,500, then his maternal grandmother provided an additional $750. Chen, a certified financial planner in Newton, Massachusetts, covered the rest.
“It helped him understand the value of money,” Chen says of his nephew, who now earns his living as a photographer.
Grandparents—and other family members — often have the best intentions when it comes to helping their grandchildren financially, but experts say they don’t always know how best to do so and can accidentally hurt their own finances along the way.
Financial advisers recommend following these steps whenever you’re giving grandchildren a financial gift, whether big or small.
Also read: Can kindness be taught to children?
“The first question is, ‘Can you afford to help your grandchildren, and how much?’” says Lorraine Ell, CEO and co-founder at Better Money Decisions, a wealth management firm. Checking your own retirement funds and overall financial security can help ensure that you’re in a position to give, she says.
Grandparents, Ell says, are often pulled to “overgive” out of love, but doing so in moderation instead can ensure your generosity is affordable.
Katie Lindquist, a CFP in Madison, Wisconsin, and owner of Lindenwood Financial, cautions against co-signing loans for grandchildren, which can put your own credit on the line. “There are other ways to help, such as giving part of a down payment, that can help them without actually co-signing on the loan,” she says.
Before giving a financial gift to a grandchild, Lindquist recommends discussing the idea with their parents. “Make sure everyone is clear on the plan. You can figure out what accounts they already have and what their needs are,” she says. If you’re giving cash, she adds, you might want to ask the parents to help the child keep it safe or direct the money to a specific savings account or purchase.
Also read: 3 ways to inculcate generosity in children
Still, Lindquist adds, it’s worth recognising that once you give the gift, “you can’t control what they spend it on.”
Trent Porter, a CFP and CEO at Priority Financial Partners in Durango, Colorado, says in some cases, parents might not want their children receiving money. “Grandparents can become a piggy bank,” he says, where they end up enabling overspending. It’s also essential to treat grandchildren fairly, he adds, even if unique needs require differing forms of financial help, such as contributing to a wedding for one and a travel abroad opportunity for another.
At the same time, it’s worth setting clear expectations with your grandchildren, too, Porter says. “Be as specific as you can reasonably be: ‘We will give you x number of dollars for tuition,’ instead of, ‘If you need help, here is a blank check,’” he says.
When you’re giving money, it’s also a good time to talk about financial topics such as budgeting and saving, Porter says. “Communicating about those things gives them a huge advantage because most kids leave high school and have no idea,” he says.
Susan Greenhalgh, a financial coach in the Providence, Rhode Island, area and president of Mind Your Money, which provides financial coaching and workshops, says grandchildren are watching and observing your behavior closely, and modeling healthy financial behavior can be beneficial to them. “Every conversation you have about money in their presence will become their money mindset, so you want to be careful about how you’re showing up for them,” she says.
Also read: Play together to stay together
Giving to charity can also be part of that conversation, she says. “One grandparent I know wrote a note to his grandchildren every year at the holidays saying he would make a donation in their name to a favorite charity. It’s a beautiful thing to pass on,” Greenhalgh says.
That kind of life lesson is a financial gift, too.
This column was provided to The Associated Press by the personal finance website NerdWallet.