Make a one-time gift
If you can spare the cash, give your adult children a lump sum for them to budget rather than just paying their expenses or paying off their debt, and make it clear that’s all you are willing to give. Having a limited amount of money provides an incentive to stretch their funds by cutting nonessential expenses. You can give up to $13,000 per person, or you and your spouse can jointly give up to $26,000 in 2011 without having to file a federal gift-tax return or paying taxes on the gift.
Offer piecemeal assistance
If you can’t afford to fork over a chunk of cash, or prefer not to, you may want to help your kids pay a few critical bills, such as health insurance or car insurance premiums, so that you know they still have coverage.
Set home rules
If your kids can no longer afford to pay their rent (and you can’t either), discuss ground rules for moving back home, including how long they can stay and how they can contribute to the household in terms of rent and chores. Some parents let their kids stay at home for a given number of months, then charge rent after that, setting aside the money to build up an emergency fund or savings the kids can use for rent or other expenses when they do move out.
If your child is under age 26 and loses his job, it may be cheaper to add him back to your health insurance policy than to pay for continued coverage on his former employer’s plan through COBRA (the federal law that allows laid-off workers to buy insurance at group rates) or to buy a stand-alone health insurance policy. Raising the deductible on his car insurance policy could lower premiums, or adding him to your policy could produce even greater savings. And you may be able to consolidate your cell phone expenses into a single family plan.
Create a double-duty emergency fund
Matching your kids’ contributions to a Roth IRA as soon as they start working can have several benefits: The money not only grows tax-free for retirement, but your kids can also withdraw the contributions at any time tax- and penalty-free if they need the money before then, providing a backup emergency fund. And depending on their income, they may qualify for the retirement savers’ tax credit, which can lower their tax bill by up to $1,000 when they contribute to an IRA or employer retirement plan (as long as they are not your dependents or full-time students).