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Tips From Counselors on How to Manage Financial Stress During a Crisis

More than 3 million Americans filed for unemployment during a single week in March External link  as the spread of the novel coronavirus (SARS-CoV-2, which causes the disease COVID-19) forced businesses to shutter and people to stay home. Job loss, reduced work hours and financial insecurity caused by the pandemic are exacerbating stress that already stems from money.

“Whether people have a lot of money or people have no money, money is a really stressful thing in our lives,” said Maureen Kelley, a Denver-based financial therapist and founder of MADRE (Money, Assets and Durable Relationships). External link  “This crisis we’re working [with], dealing with and living with now, it just accentuated it. And the fear and the panic around this is exponential.”

Effects of Financial Stress

Financial, physical, mental and emotional health are all intertwined.

“We can’t just assume that it’s only financial stress,” said Alex Melkumian, Psy.D., LMFT, founder of the Financial Psychology Center External link  in Los Angeles. “It’s also psychological stress, emotional stress [and] the stress that compounds our concern about our physical well-being.”

Fear and panic associated with stress can trigger the fight, flight or freeze response. Melkumian explained that we react to stress because our emotional brain, or limbic system, can take over and cloud our ability to make rational decisions.

Financial, physical, mental and emotional health are all intertwined.

“And that’s when you see the really negative response to the stress, which can be overthinking, a lot of anxiety, worry, sadness and despair,” he said.

Studies have shown that financial stress can lead to a range of physical and psychological complications. Depression, anxiety and poor work performance are among the possible psychological effects of financial stress (PDF, 254 KB). External link  The physical health complications of financial stress External link  can include cardiovascular disease, increased mortality, inflammation, hypertension, diabetes and digestion problems.

Long-term financial stress can also negatively affect immune response.

“When we’re stressed—chronically stressed—that stress response takes away from our immune system functioning,” Melkumian said. “We’re actually reducing our ability to cope with the virus.”

Tips for Managing Financial Stress in a Crisis

Kelley has seen an uptick in fear and panic among her clients. And although she believes the economy will bounce back, the lingering question for many people is when that will happen.

“There’s a lot of uncertainty with this,” she said. “People are losing their jobs, their hours are cut, retirement portfolios have been decimated. These fears are very real for us as a country.”

Rather than becoming paralyzed by fear and making irrational decisions, Kelly says that it’s important to learn how to manage fear, stress and anxiety.

“Look at the small things that are in your control right now around spending and know that this will pass,” she said.

OnlineCounselingPrograms.com asked a number of experts in the realm of financial counseling and coaching for tips on how to manage financial stress during crises.

1. Practice mindfulness

Become more aware of how you are feeling and identify the root of those feelings in order to move away from a panicked state.

Financial coach Jenn Steliga External link  explained that it’s important to get comfortable being uncomfortable.

“The more we push our feelings away or ignore them, research actually shows that they grow and get out of control,” she said. “Then, we’re in a position where our emotions are controlling us.”

Simple mindfulness practices can help ease anxiety. Steliga said that if you notice you are feeling anxious, stop and ask yourself something simple.

“Sounds very silly,” she said, “but if you can say, ‘Where are my feet?’ you bring focus to something.”

Melkumian also suggested making time for short, incremental meditation sessions for a few minutes throughout the day to alleviate the buildup of stress.

2. Talk about money

“Money is still the last taboo in our culture,” Kelley said. “Nobody likes to talk about it. It’s uncomfortable. People don’t know how to talk about it.”

Money can be difficult to discuss because it is often surrounded by feelings of shame, guilt and embarrassment. Those feelings can be heightened in a crisis. Kelley encouraged people to find a safe space to talk about money with a friend, family member, financial advisor or therapist.

“Often when you’re just able to verbalize it or share it with someone else, that in itself relieves a lot of stress,” Kelley said.

3. Make a financial plan

Free budgeting apps can help families create and track budgets

“A budget is not just tracking their expenses,” Steliga said. “It’s spending every dollar on paper on purpose, before they ever hand it out to anyone at all.”

For those facing true financial hardship, it’s best to prioritize spending on basic needs including housing, utilities, food and transportation. Kelley suggested cutting down on nonessential spending and “really looking at what are the things that I can control in my spending and what are the things that are not essential that I can cut out.”

When it comes to shopping, shop intentionally, Steliga added. Take stock of products you have in your house; then, make a shopping list and stick to it.

4. Don’t focus on getting out of debt during a crisis

After meeting your basic needs, including bills and legal obligations, make your minimum payments on loans and credit lines but don’t worry about paying off debt.

“A lot of people would say, ‘Hurry up and get out of debt,’ which is a really big misconception,” said Wendy Wright, LMFT, a financial therapist External link  based in Denver. She encourages clients to build savings while paying down debt.

It can be tempting to take on more debt when money is tight during a crisis, but try to minimize new debt. Don’t let short-term panic dictate long-term financial decisions.

5. Save money when you can

Wright suggested tracking how much money is required to meet basic obligations and then putting extra funds in a savings account for a set period of time. She encouraged using a timeline of three months and revisiting the situation after that time has passed. Having a set window to focus on saving can help reduce anxiety.

“Our brains like a beginning and an end,” Wright said.

Tips for Managing Financial Stress Combined With Other Anxiety

Financial stress from the coronavirus outbreak can compound general stress surrounding the pandemic. It can also exacerbate pre-existing mental health issues, such as anxiety or depression.

The following strategies can help mitigate financial stress when paired with other mental health concerns in a crisis.

Set a specific schedule

Creating and maintaining a schedule can provide structure for people who are home-schooling or caring for their children while dealing with struggles like job loss and financial insecurity. Schedules set boundaries and can help people avoid unhealthy coping mechanisms like binge-watching television, drinking too much or online shopping.

“Within that schedule, give yourself very specific time to job search and to get yourself on a budget,” Steliga said. “Be very specific.”

Rather than committing to looking for jobs without a real plan in place, Steliga suggested telling yourself, “I will job search for 30 minutes tomorrow morning at 9 a.m. at my kitchen table with my coffee while my kids are doing homework.”

Practice basic self-care

Eat well, exercise, and try to avoid round-the-clock binge-watching. Avoid heavy social media use and excessive news consumption.

“Do the things that bring you into a good place so that you can continue to make good choices,” Steliga said.

Treat yourself with compassion and practice gratitude

People are being asked to make important decisions while dealing with fatigue. Wright said that “pacing yourself, building a routine [and] sticking to your routine as much as possible” can help create a sense of steadiness during uncertain times. That can also include maintaining previously established mental health interventions.

She also said that it’s important to remember everybody is doing the best they can.

Recognize and address grief and worry

Crises can bring a heavy sense of loss. Identifying the stage of grief that you’re experiencing (denial, anger, bargaining, depression or acceptance) can help you build connections with others. People experience grief at different rates, so naming which stage you are in can allow you relate to people in different stages.

Melkumian also encouraged “scheduled worry sessions”—actually set aside 5 to 10 minutes during the day where you allow yourself to worry. The paradoxical intervention helps contain anxiety.

“You get your worries out for 10 minutes, but then the rest of the day you’re worry-free,” he said.

Although worrisome thoughts may still arise throughout the day, it’s up to you to guard your own mental well-being and protect yourself from those automatic thoughts, Melkumian said.

Lean on support systems

Staying connected in times of crisis is vital.

Seek financial advice from people who are grounded. Look for support from friends, family members and counselors who are financially stable. And if you are unable to see your regular counselor, look into telehealth options.

Additional Resources for Managing Stress Related to COVID-19

These resources can help alleviate financial and other stress-related to the coronavirus outbreak.

Financial Resources

Mental Health Resources

This article is for informational purposes only. Reach out to a financial professional before making any important financial decisions. If you are experiencing mental health issues related to financial concerns, consult a mental health professional.

Are you interested in supporting people through mental and emotional challenges? Learn more about how to become a counselor.

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Using Shopping as a Coping Mechanism for Stress

And how to survive buyer’s remorse.

In times of intense uncertainty most of us experience heightened emotions and deal with them as best we can. As we are navigating the uncertainty of the COVID-19 pandemic, many people are inundated with feelings of panic, extreme stress and anxiety about their health, finances and emotional stability. We all cope with the distress by engaging in behaviors with the underlying hope to feel “normal.”

Despite the tumultuous circumstances, some of us find shopping for nonessential items fills the need to feel like everything is “normal.” It takes us back to a simpler time and soothes us with a familiar, comforting behavior. Unconsciously, some do it to excess, in hopes of staying in the emotional comfort zone.

Then the reality of our overspending hits.

Prudence and budget were thrown out the window as we spend unconsciously to soothe our emotions. Then comes the feeling of overwhelming shame and buyer’s remorse.

On top of that, we may feel a moral dilemma around putting other people at risk of the COVID-19 virus as they package and deliver the nonessentials that we bought. Despite the very unlikely possibility of the newly arrived nonessential package infecting someone in the home, the complications of the emotions and morality create an unnerving reality.

How to deal with the moral and emotional dilemma of overspending.

  • Understand your habits. Physical, mental, and financial health are deeply intertwined.
  • Review your numbers. Create some fun money so you can spend comfortably to satisfy that need.
  • Be realistic about the virus. Follow the CDC-directed guidelines and remember this pandemic is still growing.
  • Focus on your and your family’s safety. There will be plenty of time for shopping later in the year.
  • Don’t expect to forgo non-essential shopping completely. In times of crisis and uncertainty people cope with their concerns through comforting behaviors, this is typical behavior and if done with restraint it will support your emotional needs rather than complicate your inner peace.

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Fight. Flight. Freeze. How are you Responding to the Coronavirus?

Quick Check-In on how your brain is processing the COVID-19 Pandemic

If you are like most Americans, you were already experiencing chronic stress around your finances according to the Stress in America survey done by the American Psychological Association. The current state of emergency due to the novel coronavirus pandemic has affected a tremendous amount of people raising the overall stress levels to unprecedented proportions.

Not all stress is bad. In simple terms it can be viewed as our response to a threat. It urges us to move away from danger and stay safe. However, our brains are interpretation machines and how they perceive the threat of the COVID-19 pandemic to our health and our financial stability will determine the level of our stress response.

A stress response is both psychological and physiological, it affects both our mind and body. Chronic and acute stress triggers our survival mode which activates the fight, flight or freeze response. The first two are appropriate responses during hard times. It’s a call-to-action by our brains. The freeze response is the most detrimental as it makes you “dead in the water” and unable to adapt and change to your new circumstances.

ACTION:

Take a moment to check in with yourself. Are you in fight, flight or freeze right now?

REACTION:

Fight. The fight response may provide you with a bit of an edge and get you into action. The Coronavirus pandemic has halted so much of our lives so it’s easy to feel powerless, but you are not helpless. Stay focused since too much edge / anger can quickly become detrimental You’re in it for the long haul. You know it’s going to take time. However, when channeled properly fight response can lead to (positive) confrontation and clarity of what’s next.

Flight. Stay present. Your brain is telling you that you are in danger of COVID-19 and financial doom. It wants to flee. While there may be some truth to the feeling of danger it is completely disproportionate to your reality. Use mindfulness and grounding to get clear on what is triggering your stress response. 1-minute meditations, deep breathing, mindful exercise can all bring you back into the moment. In the present you are likely healthy, with a roof over your head and food in the cupboard. The future is uncertain but accepting that sooner rather than later will help you enter fight mode so you can care for yourself, your family and your community.

Freeze. You must get unstuck. To do so you may need to engage in something completely counterintuitive. Action! Having too much time on our hands due to the pandemic can be retriggering the same freeze response over and over. Start a new workout routine, learn to play an instrument, even reading a book can help you thaw out. By using our bodies to get into action we get our brains to unfreeze

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Financial Stress in the Time of the Coronavirus

With the President announcing a nationwide state of emergency, there is no doubt that the novel coronavirus (COVID-19) is having a major impact on our country. Schools, events and businesses have closed across the country, impacting millions of people where they feel it the most, their wallets.

While more and more Americans are living in fear over catching or carrying the virus, millions also are adding financial stress as a leading anxiety as they are losing work, paid gigs, or require childcare. While health is, of course, the primary concern, it is also crucial that the additional financial stress is recognized and addressed.

The government is working on ways to alleviate the financial burden that will be experienced by millions of Americans due to the Corona Virus, however, there are key actions individuals do for themselves to help deal with their financial anxiety.

  1. Acceptance

Acknowledge what you are feeling and move on. The sooner you can get into acceptance, as difficult as it may seem, will make everything else easier. Accepting that we live in a new reality will help you start taking the steps to help yourself. It is a mental pivot that will disengage the emotional part of your brain, which is not helpful in moments like these. Your limbic brain, which is your emotional processing center, is sending out stress alarms to the rest of your mind and body most likely causing a fight, flight or freeze reaction. This is our primal caveman response to stress and keeps us stuck and suffering in anxiety. Acceptance helps you externalize the problem, which allows you to discover the relevant part of your fear. Once you accept the state of the world, you will be able to clearly see how it affects you and by focusing on those items, you will be able to make plans and decisions.

  1. Be Present

Our regrets live in the past, our fears and worries live in the future. In times of high stress staying present in the here and now is the antidote to the ruminating thoughts and negative emotions that are driving the fear. Use mindfulness to scan your body for stress and tension in the moments you are feeling it. This will help you to realize that you are physically safe, and it will help block out the outside chatter that is often amplifying fear, insecurity, and anxiety. Staying present will also provide the mental edge to help yourself and your loved ones when the opportunity presents itself.

  1. Spiritual Solution

When times are tough, turning to a spiritual answer can help provide context and give meaning to your struggle. The context of a higher purpose can right-size your current worries. Human beings make meaning of everything we encounter and this current situation with the Coronavirus is no different. This is a time of struggle for everyone. Struggle can often be unmotivating and depressing, but if you seek an uplifting spiritual solution you will find uplifting and even inspiring moments despite the seeming chaos of our current world.

“Worrying does not take away tomorrow’s troubles. It takes away today’s peace.” ― Randy Armstrong

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Are You an Emotional Spender?

Is your spending out of control? Identify if your retail therapy habit has gone too far.

Shopping is a form of instant gratification. Buying a new car or dress can provide a quick self-esteem boost. That’s because spending money is tied to our emotions.

While it makes us feel good to buy shiny new toys, we also adjust to new purchases quite rapidly, so it’s easy to feel the need to go back to the store or online to buy something else.

“Retail therapy is a band-aid,” says Megan McCoy, Ph.D., director for the personal financial planning master’s program at Kansas State University. It can also be an attempt to combat feelings of loneliness, insecurity, boredom, and fear. A Foundations and Trends in Marketing study also found emotional spending is often tied to relieving stress.

There’s nothing wrong with feeling a quick pick-me-up from a purchase if you’re having a bad day. However, McCoy says, “If you’re using it all the time, it’s not really going to lead you to a more sustainable happiness.”

If you’re constantly chasing the high of a shopping spree to avoid negative emotions, it may be time to take a look at your spending habits, especially if they are leading to negative financial consequences, such as credit card debt from overspending.

With that in mind, here are five steps to help you overcome harmful emotional spending.

Step No. 1: Identify the emotion behind your spending

“Most spending has an emotional component to it,” says Natasha Knox, a certified financial planner.

When you put that new item in your basket at the store or online shopping cart, take note of what you’re feeling by asking yourself the following questions:

  • What emotion are you currently feeling?
  • Why am I shopping in the first place?

“Every single decision you’re making is connected to a need, and some of these needs aren’t filled by spending, so increase the awareness of the emotion you’re feeling,” Knox says. “Was there a universal human need that you were trying to meet and how should you be meeting it moving forward?”

Pinpointing the exact emotional need you’re filling when you emotionally spend can make it easier to find cheap or free solutions that can lead to sustainable happiness, McCoy says.

Step No. 2: Understand your spending habits

“Even though our rational minds understand why we shouldn’t buy, there’s an even bigger desire to spend,” says Alex Melkumian, Psy.D, a licensed marriage and family therapist and founder of the Financial Psychology Center. “It’s a self-destructive behavior.”

And these behaviors can manifest in more than one way: by impulsive or compulsive buying.

Impulsive and compulsive buying are two types of emotional shopping motivated by making yourself feel better from negative emotions, says Grant Donnelly, Ph.D., an assistant professor of marketing at Ohio State University who studies judgement and decision-making.

Impulsive buying involves not fully processing purchases and buying things on a whim. Compulsive buying, on the other hand, is often triggered by mental health issues such as Obsessive-Compulsive Disorder, addiction, or anxiety. With compulsive buying, the act of buying does not necessarily focus on the object that has been purchased, but moreso on the act of spending.

“When you fall below your standards, you’re more inclined to overspend and make a compulsive or impulsive purchase as a way to regulate your emotions,” Donnelly says.

While it may be difficult to look at your bank account, reviewing your purchase history can help identify your spending patterns.

“If you’re spending impulsively, some people don’t want to look at that part of themselves and their behavior, so they’ll bury their heads in the sand,” Melkumian says.

It’s common for feelings of self-judgement, guilt, and shame to emerge going through this exercise. It may help to do this with a financial therapist who can provide financial and emotional guidance.

Step No. 3: Find your emotional triggers

Triggers for emotional spending will vary from person to person. Relational stress and work stress are two common triggers McCoy has seen with clients.

“When you feel like retail therapy, what were you doing and what or who were you interacting with?” McCoy asks. By pinpointing the exact emotional need you’re filling when you’re emotionally spending, it’ll be easier to find cheap or free solutions which can lead to sustainable happiness, she says.

Emotional spending can also become a reflex, even without a trigger. Being in specific environments may generate the urge to shop even if you don’t need anything.

Step No. 4: Develop sustainable strategies for dealing with stress

It can be easy to use retail therapy for a quick lift, but it can become problematic when it’s the only tool to help lift you out of a slump.

“Buying things more hedonic such as candy and designer goods can improve mood, but these aren’t lasting,” Donnelly says. “They are part of an effort to improve your life, but it’s not successful in improving circumstances, so you feel worse.”

Therapist Virginia Satir’s self-care mandala embraces eight universal human needs to fulfill, which McCoy says can be a starting point to find other sources of happiness:

  1. Intellectual
  2. Interactional
  3. Emotional
  4. Nutritional
  5. Sensual
  6. Spiritual
  7. Physical
  8. Contextual

The key point is this: Spending money shouldn’t be the only way to improve our lives. If you aren’t sure about whether or not you should splurge on a purchase, check out the below spending guide from OppU, which can help identify if you are showing signs of emotional spending.

Step No. 5: Introduce money management behaviors

Managing money is a core issue to master and it can be a slow process.

“There’s no magic pill to make you thin, and there’s no magic pill to master your finances, but persisting and addressing the numbers will eventually feel good,” Melkumian says.

When you don’t keep track of your finances, it leads to behaviors that go against your financial goals and well-being, Donnelly has found in his research. On the other hand, practicing basic money management habits, such as organizing receipts, creating a budget, and record-keeping, can actually make you feel better and more secure about your finances.

“Positive financial behavior leads to wealth accumulation, which leads to more positive money management,” Donnelly says. “You’ll be less likely to think that acquisition of new items will solve your problems.”

Article contributors

Grant Donnelly, Ph.D., is an assistant professor of marketing at Ohio State University’s Fisher College of Business. His research has been published in journals and media outlets across the country and focuses on how consumers can be encouraged to make decisions that improve their financial, physical, and social health. Additionally, his research has been published in “Psychological Science,” “Journal for the Association of Consumer Research,” and “Psychology Bulletin” among others, and has been featured in popular press, including Harvard Business Review and The Wall Street Journal.
Natasha Knox is a certified financial planner and the owner of Pax Planning, a fee-only financial planning practice on the west coast of Canada. She created Pax Planning with the mission of eradicating fear and guilt from her client’s personal finances by increasing their financial self-efficacy. Knox holds a graduate certificate in financial therapy from Kansas State University. She believes in giving back to her profession and serves on the board of directors of the Financial Therapy Association.
Alex Melkumian, Psy.D, is a licensed marriage and family therapist and founder of the Financial Psychology Center in Los Angeles. He is devoted to helping clients improve their financial and mental health by uncovering patterns in their relationship with money that keep them stuck and suffering. Specifically, he has worked with athletes to improve their financial wellness and overall performance. As athletes train with a singularity of focus to excel in their field, they often experience stress in other areas of their lives, such as finances. Helping clients understand how those factors interplay revitalizes client’s emotional and financial health.
Megan McCoy, Ph.D., a licensed marriage and family therapist and a Level-1 certified financial therapist, is the director for the Personal Financial Planning master’s program at Kansas State University where she teaches courses for the financial therapy certificate program. She is also the secretary for the board of financial therapy and the associate editor of profiles and book reviews for the “Journal of Financial Therapy.”

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Helping your children buy a home

What to consider and ways you can assist children in buying their first home.

Having somewhere to live is a basic necessity but the price of Australian property is making it increasingly difficult for young people to purchase a home.

Housing prices in Sydney are recovering fast from the downturn of the past 18 months. The median house price exceeded $1.14 million in December quarter 2019, the Domain House Price Report found.

At current growth rates, Sydney prices will hit new highs in 2020. The story is similar around the country. In Melbourne, house prices are back on track to reach a new peak, while units are already at record highs, Domain’s report shows.

ANZ Private senior financial advisor Jacki Tulloch says parents want their children to save for a home, but realise it now takes much longer to accumulate a 20 per cent deposit – the amount needed to avoid having to pay thousands of dollars for lenders’ mortgage insurance.

“There is a lot of concern that the more [the property market] goes up the bigger the house deposit has to be,” Tulloch says.

Parents with property experience can play a useful role in guiding their children toward home ownership and determining what is affordable.

Those who have the financial means often find satisfaction in transferring wealth to their children during their own lifetime, and helping their kids to buy in an area where they want to live.

“One fear parents have is that their children won’t be able to buy in an area close to them if they don’t help. They’re going to have to buy so much further away but they want to be close to family,” Tulloch says.

Before you help

Even with financial assistance, most young people buying a home need to take out a mortgage. And this can be a beneficial experience.

“Owning your own place and being responsible for your power bills, living expenses, and having to make monthly repayments on a mortgage is a huge financial discipline for people to learn,” Tulloch says.

The first step for the younger generation should be to speak to a lender to assess their borrowing capacity.

At this stage parents will want to rush in and help but what they should first do is consider their own financial needs. A good starting point is to see a financial advisor to determine how much capital to provide their children.

Before providing assistance, most wealthy parents achieve their own financial goals such as:

  • paying off their mortgage
  • becoming financially independent
  • owning a holiday home outright.

At a minimum, parents should generally make sure they have enough rainy day money and are financially comfortable before helping children, Tulloch suggests.

She adds that cash rates and dividends have fallen over the past few years and parents need to determine how the weaker outlook for investment income will affect their plans.

“Are they going to have to use a bit more capital or assets themselves to have enough to retire on?” she asks.

Protect the family dynamic

Parents with more than one child may need to consider whether they will be able to provide similar assistance to each of their children.

Tulloch recommends discussing with kids the fact that “the bank of mum and dad” is not limitless and what is a fair gift for each of the children.

One approach might be to keep a ledger of money given to each child which can be used to adjust what inheritance they get when the parents pass away, she suggests.

Parents need to strike a fine balance between supporting their children, and giving them too much, Dr Melkumian, a financial therapist and founder of US-based Financial Psychology Centre, says.

“I’ve worked with trust fund kids where they were completely taken care of from the get-go and unfortunately it hindered them greatly in their adulthood, in their professional lives, because everything was taken care of. They’re not used to having a work ethic,” he says.

Where that balance lies will be different for each family, but whatever the level of assistance, parents should consider documenting their reasons for giving, Dr Melkumian says.

The contents of such a document would vary from family to family: “Overarching themes could be discussed such as: ‘Are we buying this as a way to show our love for our child? Or is it also a practical step for our family and a legacy?’.”

Writing down each parent’s emotional goals in providing financial assistance allows parents to share their expectations with each other and with their children. This can help prevent feelings of resentment, guilt and shame, and protect the family dynamics if something goes wrong, he says.

Practical strategies to help

The next step is to decide how to provide the funds. Financial, legal and tax advisors can help determine the best approach, addressing questions such as:

  • What will the tax implications be?
  • What if the child’s marriage or relationship breaks down?
  • What if the child becomes ill or loses their job?
  • What if the child’s business fails?

A simple gift

The simplest option, says Tulloch, is often to gift money.

There are generally few tax consequences for either parent or child with a gifted sum and there may be no legal structures to establish. (Parents should seek professional advice to confirm the implications of a simple gift.)

The biggest drawback is that parents have no right to reclaim the money at a later date. This may lead to regrets if the child’s marriage or relationship breaks down, as the child’s partner may be entitled to half of the assets, including the gifted sum.

Similarly, if the child has a business that fails, creditors may be entitled to those funds.

Loans

Lending to children can achieve a similar outcome to gifting but with greater protection, says Brennan Solicitors’ Paul Brennan.

By structuring financial assistance as a loan – even if the parents do not intend to ask the child to repay the debt – the parents have the option to recall the money.

Reclaiming the money would allow the parents to return it to their child later on, after the reason for recalling it has been resolved. A loan can be forgiven on the parents’ death.

Establishing a loan is more costly than gifting money as it’s essential that the loan is correctly documented.

“You’ve got to see a lawyer,” Brennan says. “You can take a chance on all sorts of things but not this. You’ve got to have a lawyer do this because if you don’t it will just bite you on the backside later on.”

Having the loan secured by an asset – such as the property – can help to ensure funds can be made available to repay the loan if required, Brennan says.

Going guarantor

Another way parents can help is to guarantee the child’s mortgage. This allows parents to provide assistance without giving cash up front by using their own income or the equity in their property to secure the child’s loan.

A guarantee may allow the child to borrow more than they otherwise could.

However, Tulloch says parents are rightly cautious of this approach as they are faced with repaying the loan if the child defaults.

“You would want your child to have shown they can save and be quite responsible for their money before you put your house up as security,” she says.

Parents may need to pay for costly independent legal advice before entering such an arrangement.

Another risk is that if the child buys the property in joint names with their partner and the relationship fails, the child could lose half the house but the parent would remain guarantor for the full value of the loan.

Parents should also be aware that acting as guarantor affects the amount they can borrow for other purposes as lenders consider guarantees as borrowings when determining how much to lend.

Buying together

Some parents buy in partnership with their child with the intention that the child could buy them out at a later date to take full ownership of the property. The property may be owned directly or through a trust.

This may suit some families but Tulloch says it’s generally not popular as it prevents the child accessing first-home-owner grants and the parents may be required to pay capital gains tax when the property is sold.

Family protections

Whichever method parents are considering, Tulloch suggests they should encourage their child to put in place an estate plan and take out adequate insurance cover, with income protection and trauma insurance being the most important to consider.

“If you have loaned them the money you have certain rights in making sure they’ve got their finances in order,” she says.