What to do if your kid's emergency fund is ... you

Financial fallout from the pandemic is hitting millennials hard — and many will soon turn to their parents for help, if they have not already.

Before parents ride to the rescue, financial planners urge them to map out a strategy that doesn't just plug a short-term need but also makes sense in the long run.

"Often the heartstrings will get pulled — 'I really have to help them!' — but it can be detrimental to the parent," said certified financial planner Jeffrey L. Corliss of Westport, Conn.

(Of course, financial aid can flow the other way, as many millennials help support their parents. I'm addressing parents here, but most of the advice applies to kids helping their folks as well.)

Even before the pandemic, millennials had lower median incomes, far more debt and a much smaller slice of the nation's wealth than boomers had at the same age. Millennials — usually defined as those ages 24 to 39 — are more likely than older generations to have lost jobs or household income because of the pandemic, surveys show.

"I've already seen clients coming in, worried about their kids," said CFP Deborah Badillo of Miami. " 'They're going to lose the house! What can I do to help them?' "

Encourage your kids to take full advantage of available financial help before extending yours, Badillo said. Unemployment benefits have been dramatically expanded because of the pandemic. Weekly payments are higher and are available to people who normally wouldn't qualify, including gig workers, the self-employed and people whose hours have been reduced.

Another option is a corona­virus hardship withdrawal, which allows people to tap their IRAs and 401(k)s without penalty if they were physically or financially affected by COVID-19. The withdrawals are taxable, but if the money is paid back within three years those taxes are refundable. Raiding retirement funds isn't ideal, of course, but your kids have many more years to replenish their retirement savings than you do.

While your kids are filing for unemployment and calling their lenders, take a moment to assess your own finances. Where will the cash for your kids come from? It's one thing to give away money you have been saving for a vacation, since you're unlikely to travel soon anyway. It's quite another to undermine your own ability to retire or handle a layoff or other setback.

Some parents make a conscious decision to operate with a smaller cushion, or to delay their retirements, to help their children, said CFP Lazetta Rainey Braxton in New York. Just keep in mind that you may not get to decide when you retire. Many workers retire earlier than expected, often because of a health problem or job loss. Helping your children now could mean you have to lean on them later, Braxton says. If you are not sure what effect this financial aid will have on your future finances, a consultation with a fee-only financial adviser could bring you some clarity.

Financial planners typically recommend deciding how much to give, and then setting clear boundaries about when the financial help will end. That's tricky now, of course, because no one knows how long the current economic crisis will last.

But parents can still set expectations in other ways, financial planners said. If the child didn't have an emergency fund, for example, parents can discuss the importance of saving money out of every future paycheck, so the child won't have to rely on family help again, Braxton said.