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Helping Your Kids Recover after a Major
Money Mistake
The average college graduate is $20,000 in debt, and today's
young adults are clearly exposed to more opportunities for
self-directed financial disaster than any group in history.
Despite the current credit crunch, credit cards are still a
common way most young people afford their new adult lifestyle,
and rising costs on everything from rent to gasoline presents
deeper challenges.
So it happens. Your kid gets in trouble with those credit
cards, loses a job, or can't find a job to pay the sum total of
the rising debt he or she has. What can you do? Make sure you
can afford to help. It's tough to say no to a financial bailout
for your kid, but depending on the level of trouble he or she is
in and your own financial responsibilities, you may need to.
Here are some ideas:
Both sides should come clean. Remember that this
situation is as much about the relationship as about money. The
decision to help a family member with money problems requires
understanding — lecturing tends to not work so well. But it's
right to encourage your kid to take a frank look at their
financial situation and if they are in debt trouble of any kind,
they should get help. It's also important that you show
confidence that they will make it through this.
Consider a joint talk with a financial planner. A
financial planner, such as a CERTIFIED FINANCIAL PLANNER™
professional, can look at their financial situation and your own
and give you both a road map on how to work through your child's
money problems and set up better money management techniques for
after the crisis.
Should help be considered a gift? Actually, this is a
good first question in any scenario where you offer help to a
friend or family member. What happens if you don't get the money
back? For the sake of the relationship involved, it might make
sense to think through that possibility. Would the potential
loss of money injure you, and worse, will it injure the
relationship? This is why it might be a very good idea to
present this solution as a one-time gift — and then stick to
it.
Should help be considered a loan? If so, you need to
structure it professionally with clear consequences if it goes
unpaid. Handled correctly, such a solution can offer benefits
for the borrower and lender alike. Terms should be at arm's
length to meet IRS rules but it can still be more attractive
than the child could obtain in the current marketplace. But
there's the potential for incredible downside. Unclear
agreements can lead to missed payments or default. If the
borrower dies suddenly, the lender's investment may be lost if
the agreement isn't structured correctly. A properly executed
promissory note is still an obligation of the estate, and may
continue to be paid to an heir or other person or entity based
on the terms as agreed. It is advisable that the loan agreement
be in writing and properly executed to meet IRS rules.
Work with them on budgeting. It's not going to be
enough to solve the immediate problem. Even if you don't use a
financial planner to help you both work through the situation,
it's important to set a clear financial course for your child
going forward. They obviously have to have a stake in the
planning, but you're going to have to provide guidance.
Encourage them to start an emergency fund. Even if
your child only has a few cents in their pocket after settling
their troubles, encourage them to start an emergency fund.
Optimally, they'll need to stash away three to six months' worth
of living expenses, and even if it's just a small start, it's
part of the recovery effort.
December 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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