Loan to Daughter

[mitchjav]

Hi... I'm 61 years old, FIRE'd since November 2018. DW is 62 - 2 daughters - a 24 year old and a 21 year old (w/ some special needs).The 24 year old is a teacher at a local high school and moved out to her own apartment in May. We helped her plan for this move, setting her up with all the $'s she needed to make it through the summer (with no teaching income) and worked with her extensively on a budget that would work for her. We gifted her a return of all the rent money she paid to us while living with us since college - including help with buying a new car.

3 months in to her new apartment life - she's in financial trouble. Not enough money to pay September's rent and about $3K on her credit card. After a long, tear-filled phone call yesterday - offered her a 3 year, 1% interest $5,200 loan to give her a clean slate. She needs to work her loan payments into the budget and refrain from all the extra spending that got her in trouble. She went hog-wild on clothing and furnishing the apartment as well as miscellaneous other things she wanted. Despite years of working with her, she has no control over her spending - shopping addiction - warned her multiple times that if she came back to us not being able to pay the rent, it would be a painful conversation - it was (for all of us). Told her that if she gets in trouble again, our only help is pack up the apartment and move back in with us (which none of us wants).

She does have about $26K stowed away in a brokerage account. It's her money, in her name, but, at her request - we manage it and don't give her access to it. Advised her not to draw on that for this situation and to take the loan instead - take the pain to learn the lesson - we hope.

Should mention that we're in the process of selling and building/buying a new home - so our finances are a bit in flux - not crying poverty, but cash flow is important right now - so, lousy timing.

She's working with a therapist on a number of issues right now (including this "shopping issue"). I also advised her to give me her credit card until she gets control of the issue.

So, any other advice? How do we get this girl on the right track?

Thanks

 

[FLSUnFIRE]

I'd look into financial coaching. There are volunteer programs. Of course, she needs to want to change but the coach should be able to help her figure out her goals and find internal motivation within herself to change and will also act as an accountability impartial accountability partner.


I'd be careful about enabling irresponsible financial behavior with repeated bailouts.... easy to say for me but some lessons have to be hard learned and better to hit bottom in early 20s than much later when there is no more safety net to catch her and less time to fix the damage.

 

[spncity]

Include a requirement to take the Dave Ramsey course?

During one "thin income" time in her mid- or late twenties, DD delivered pizzas to pick up some extra money. They allowed a very flexible schedule in that she could sign up to work the days she had available that week or weekend. Weekends were busiest. These days it may be plenty busy during the week. Can't remember where I heard one pizza place owner say that during COVID business was up 80%.

 

[wrigley]

The first thing that caught my eye was "We helped her plan for this move, setting her up with all the $'s she needed to make it through the summer (with no teaching income)"


My son is an elementary school teacher and gets paid all year round. He has a summer job that he starts the day after teachers are finished for the school year, so he actually "double dips" for about 2 1/2 months.


Mike

 

[Car-Guy]

Am I reading this right? She is a 24 year old about to start a new teaching job, has 26k in a brokerage account that is her money and needs 5.2k to pay off her current bills?

When I was 24 I had more than 26k but that was in debt or negative value. Sure she needs to be disciplined in spending unless/until her boat comes in but she sounds like she's doing okay to me. Unless there's a lot more to this story.

 

[Aerides]

I don't believe in loans to family (I had one at about her age, and it just made me find more ways to borrow peter to pay paul, and lie to my parents about it). You don't say exactly how much cash she blew thru, and moving into an apartment for the first time in May of 2020 was not the greatest of ideas.

In your shoes I would either:

A) Offer to her to move her home now, and pay off her lease-break penalty. (she won't go for that so....)

B) Have her come over with her credit card bills in hand. And the cards. Pay them all and cut them up, leaving her with a debit card only, maybe one CC she keeps. Hand her a rent check for September and a bag of groceries. Tell her good luck and if that doesn't work, offer A stays on the table.

Most likely, whatever you do here, A is going to happen sooner or later. She's not ready.

 

[Golden sunsets]

We had this experience with our daughter. You indicate that you worked with her at the point that she moved out. Did you help her to establish a detailed budget? And has she been encouraged to pay off her credit card every month?

Assuming the answer to those questions is yes, then the other thing you could do is encourage her to automatically set aside money from her checks into a separate account, for known expenses and automate payment of those expenses monthly or whenever they are due. For example, each time DD was paid, an automatic withdrawal came out of her main checking account equal to a proportionate amount(25% if paid weekly, or 50% if paid biweekly, etc.) of rent, car payments, utilities, cell phone, cable, etc. That would mean that when those payments are due the money is there to pay the Bill's and autopays took care of paying the bills. So the money left in her checking account had to cover the rest of her expenses, like food, entertainment, credit card bills, etc. and left very little room for overspending.

If this basic format works, the next step would be to auto transfer to yet a different account each payday, a sum that will be her emergency account, starting with affordable amounts and hoping that the account builds over time to represent 3-6 months of living expenses.

If still successful, a third step would be to fund another account with affordable amounts that would be for items she desires or needs, like clothing, furniture, travel, etc.

This process worked for our daughter, who became increasingly confident in her ability to manage her own funds and practice self discipline. She maintained a spreadsheet, which she keeps to this day.

 

[bigcmagor]

Been there, done that. Four years ago, we agreed to help our freshly minted RN DD get into a condo. Signed the purchase agreement and immediately totaled her car. Car payments were not factored into her expected cash flow needs. Then the furnishing began. Ended with a similar sized credit card hole and the tearful phone call.

We agreed she should dig out of the hole herself so that a recurrence was less likely. DW helped develop a budget and was added to her accounts so she could monitor DD's progress. The good news is that DD seems to have found her financial footing and has squirreled away $40k between retirement and brokerage accounts in the meantime. Not bad for a 27 year old considering the 23 year old person she was. Now if we can just keep her from piling up her car....

 

[pb4uski]

Sorry to be harsh, but WADR, you're enabling her. Other than a difficult conversation and night of tears she hasn't learned anything.

What does she have for income?

Time for her to put her big girl pants on and learn that actions have consequences. She needs to have that difficult conversation with her landlord that she can't pay her September rent and negotiate a payment plan with him/her. She needs to pay that outrageous credit card interest... it will incentivize her to get it paid off. If she needs to dip into her brokerage account, so be it... the payments that she would have made to you she can make to rebuild her brokerage account.

It is fine for you and DW to help her plan and guide her and all, but she needs to do it on her own. She should probably put her credit cards aside for a while.

 

[aaronc879]

I know teacher pay varies greatly all over the country but around here there is a pretty good increase from 1st year to 3rd year and tenured teachers with Master's are making $70K+ with Summers off which is good money. Pay raises in the first few years may take care of the problem. Even as an entry level teacher she should be making enough to live on unless she lives in a place with very high rent/housing costs in which case she should look into getting a roommate. I don't think bailing her out is the answer. She has to learn from her mistakes and have a reason to cut back the spending. Teachers have pretty full schedules during the school year but I would suggest she get a Summer job if she is not going back to school for a Masters. If she is going to school for a Masters then that is the one thing I would pay for in your position if the school doesn't pay for it. I would not pay off her CC or rent.

 

[pacergal]

What I interpret from your writing is that she has always been a "shopper" and you have "worked with her for years".
Looking back, perhaps giving her back a large sum of money from saved up previously paid rent was not in her best interest--she suddenly had a fistful of cash and an empty apartment?
Our daughter, too, was a spender. She too, ended up back home from her first apartment, after losing a job and not having any savings. That was the eye opener for her--losing her independence. After that, she focused on learning more about budgeting, finances, etc. And is doing terrific now.
You have provided her with financial help and emotional support. By not giving her access to the brokerage account, and giving her a loan, she is still not learning how to manage her money and make better decisions/choices. Perhaps, like with any "addiction", she needs to hit bottom and end up moving home again sometime in the future. You and your wife will need to discuss your financial assistance bottom line and stick with it.
Glad she is working with a therapist.
It is not easy parenting. It doesn't suddenly end when they are 18!
Best of luck to you.

 

[sengsational]

Sorry to hear of this troubling situation. I've got two daughters of similar ages and my heart goes out to you. It's hard to know what's best for them. I'd be the "bad cop" and DW the "good cop" if a problem like yours ever came about here. And although I'm "all things financial" in the household, this kind of thing would put me in second chair. But my approach would be much like a financial councilor... if I loaned money, that would justify some rather intrusive monitoring. I'd make it a condition of the bail-out. Not every transaction, but statements for income, monthly bank and CC balances. The monthly review could be viewed as an opportunity to share how to track expenses and how to prioritize. But it depends on the disposition of the daughter. If the loan had the monthly reviews as a condition, and she was fine with that, then it's an opportunity for her to learn and for you two to have a bit of "quality time" (as long as everyone keeps their head). BTW, I think clamping spend is way smarter than opening the investment account coffers!

 

[jollystomper]

Hi Mitch,

I just wanted to point out that your daughter does have plenty of savings to pay her CC debt & the rent coming up.

You state she has $26,000 in a brokerage account. IMO you need to relinquish control of that account to your daughter. She's an adult and that's her money. You can certainly advise her, but then it's up to her as to what she does with the money.

+1000. She has the money... it may be painful to withdraw, but maybe that is the pain needed to teach her to not do it again.

She does have about $26K stowed away in a brokerage account. It's her money, in her name, but, at her request - we manage it and don't give her access to it. Advised her not to draw on that for this situation and to take the loan instead - take the pain to learn the lesson - we hope.

The loan is not giving her any pain. The loan is just opening another line of credit to her. Only you can judge the following questions: giving how badly she has handled loans via credit cards, what do you see that will make her handle this loan from you any better? How much is the possibility that she will not stick to the repayment schedule, since see may see it as just another "gift" again from parents?

Then you mention your our monetary concerns. I always remember this adage: "You can borrow for a lot of things, but not your retirement". Conversely, I would not be lending money that would make your retirement life any less comfortable.

Our rule with our kids: it is one thing if something happens that is not your fault, we can be flexible. But if you dig yourself into a hole, we will help you figure how to get out, but it will not be with our money.

 

[brett]

I believe that you are enabling her.

She may indeed need professional help. And some independent financial advice.

I believe that you are making her situation worse by not forcing her to come to terms with her problem.

Cut her loose. Give her access to her 26K brokerage account. Let her sink or swim. Unless of course you a prepared to do this over and over again in the future.

Besides...I suspect that you will be throwing good money after bad.

Why on earth should she give YOU her credit card? She is , after all, a 24 year old. Sounds like you have a control issue. A good financial advisor would probably tell her to cut up the credit cards and go on a cash basis.

This in an inflection point for you and for your daughter.

 

[Car-Guy]

+1000. She has the money...

Our rule with our kids: it is one thing if something happens that is not your fault, we can be flexible. But if you dig yourself into a hole, we will help you figure how to get out, but it will not be with our money.

+1

 

[VFK57]

If your daughter failed her independent life and came back home, you should not let her live with you for free. The rent money, she pays you, from now on is not repayable back. She must pay her share of food as well and if she does not like it, the cost of utilities could be shared too. She must learn her lessons the hard way, in order to avoid the addiction to spent what she did not earn yet. We all love very much our kids. Yet the more we spoil them, the harder it would be to set them on a responsible financial behavior.

 

[O2Bfree]

Giving her the loan would just strengthen her sense of having you as a financial safety net. If she were ready to learn her lesson about finances and realized she needed a little help just this one time, she'd have come to you with a level-headed plan or two rather than engaging you in a tearful conversation about what to do. She's not looking around to see how she can help herself, but looking to you to rescue her by both doing that thinking for her and providing a plan and resources. She needs to be coming up with her own plans that use her own resources.

Perhaps you should tell her you've changed your mind and have the loan taken out of her retirement account instead, to be repaid according to the terms you discussed. It's not the whole amount after all. That'd probably have a bigger impact on her than having to pay you back, which could also lead to non-payments and requests for more loans, causing resentments. I would keep managing that retirement account for her though, until she gets control over her shopping issue.

 

[iloveyoga]

We learned the hard way not to "loan" money to adult kids. If we help, we just give the money. And it has never been anything over $1000, which still seems like a lot of money to me. Also learned the hard way....is an adult child is living somewhere they can't comfortably afford, for whatever reason, the money issue never really goes away.

One other thought, from experience, it does not really help in the long run to give money. Sorry you are going through this, I can certainly relate.

 

[brett]

A very good friend of ours went down this road ten years ago.

Nothing changed...except the amounts of the bailouts, loans, gifts, etc. increased over time.

She has now put her financial retirement well being in jeopardy.

Eight years ago we told her that her son would continue down this path of appealing to a mother's love until such time as she had no more money to give him.

That day has just about arrived. She was the one who learned the lesson. Alas...she was/is a slow learner and she is the one who continues to pay the price.

 

[Sunset]

I believe that you are enabling her.

She may indeed need professional help. And some independent financial advice.

I believe that you are making her situation worse by not forcing her to come to terms with her problem.

Cut her loose. Give her access to her 26K brokerage account. Let her sink or swim. Unless of course you a prepared to do this over and over again in the future.

Besides...I suspect that you will be throwing good money after bad.

Why on earth should she give YOU her credit card? She is , after all, a 24 year old. Sounds like you have a control issue. A good financial advisor would probably tell her to cut up the credit cards and go on a cash basis.

This in an inflection point for you and for your daughter.

+1

I'll add that OP's daughter is the perfect age to learn, or end up bankrupt and declare bankruptcy.... much better for her to do it now, then to hobble along with Daddy loans until parents are dead and then blow her inheritance as well.

I've seen this with my Sister... penniless at over age 60, blew a few inheritances.

 

[sengsational]

It is fine for you and DW to help her plan and guide her and all, but she needs to do it on her own. She should probably put her credit cards aside for a while.

I wonder how many here have raised children and encountered this kind of problem. I look at it as an opportunity for training...a teachable moment. The method I would choose would change, depending on how long the child had been out on their own. We do often throw them in the deep end without swimming lessons. If I'm convinced that I've done all I can to impart the life skills required to stay out of trouble, then it would turn into a sink or swim situation. But for someone I desperately want to succeed and who is encountering life on their own for the first time, I want to train them. But I'm a believer in "you can't tell 'em anything", so certainly let them work through each activity themselves. But with some patient guidance from someone (maybe a practitioner or a parent). If the behavior doesn't change, then letting them crash is an option. And they should know that going in. They have to know it's not another line of credit, it's a one time effort to get them on track. If it doesn't work, the discussion will be different next time. As to the brokerage account, I presume it was gifted and I'm such a strong believer in the benefits of compounding, that I'd choose to protect it, at least in "round 1". I'd look to emerge from round 1 with the brokerage account intact, and a daughter who learned from her experience. If round 1 ends badly, she would know that next time, she would be on her own to assemble a solution.

 

[badatmath]

When I was a small child I asked for an advance on my allowance - like $1 or something. My parents told me to learn to budget - I never asked again. Don't enable her.

 

[willing2try]

I agree with those who say you are enabling her. The only thing she's learned is that if she's willing to have a tearful phone call, you'll bail her out.

 

[pb4uski]

OP, is her $26k brokerage account accessible without penalty.... ie, a taxable account? If so, then I like the idea of her "borrowing" and paying back her brokerage account rather than you... make it all more real for her.

If it is a Roth then she could withdraw contributions... again, more real.

If it is a tIRA then the 10% penalty comes into play... it still might be worth her having to pay penalty and tax... a valuable lesson to her not to get herself in a jamb like this again.

I recall when I was in my late 20s I ran up $3k in credit card debt and it took me a long time to pay it off... a very valuable lesson that was never repeated.

P.S. We have a similar arrangement with DS... even though he is financially independent and doing well (a saver only because he isn't a spender) he still relies on me to manage is investments for him... though we talk about any significant moves. While he knows that money is there and is "his" since in his case it is "for retirement" he doesn't consider it in his day-to-day finances.

 

[OldShooter]

Sorry to be harsh, but WADR, you're enabling her. ...

This.