ABC Money Matters - Should you bail out your parents?

Well, we hear it all the time. Talk to your family about money, discuss money to build stronger relationships. But money is still one of the most taboo subjects for American families. So what about money between a parent and a child? Many parents offer to handle investments for their kids, and many don't mind handing money to their parents, trusting that they will make smart decisions for them. But is it a good idea? And what happens when parents are in severe debt? Should you help? Well, to talk about all of this and so much more, we're joined today by the master of money himself, Ramit Sethi, author of I will teach you to be rich. Welcome back, Ramit. Good to see you again.

How are you, Jackie?

Thank you, I'm doing great. And I'm dying to talk to you about this subject. Now, Ramit, if you're over the age of 18 and you're letting your parents manage your money, is that something to be ashamed of?

Well, you shouldn't do it. I mean, you wouldn't believe how many of my very smart friends think it's totally okay to let their parents manage their money. These are smart, educated people. And, you know, when you think about it, it's actually not that surprising. These are probably the same parents who coddled their kids, said, yeah, send your money over to our family financial advisor and then they feed their kids out of a bottle and change their diapers until they're 32. You don't want to be this person.

Okay, so it's time then for these people to really grow up. And you say even if you make mistakes early on, managing your own money, it's not necessarily a bad thing.

No, it's not. You know, I think parents, even though they're well intentioned, offering to manage money for your kids, especially as they're in their 20s, can be one of the worst things you can do. Because for people who are in their 20s, it's okay if we make a mistake. If we lose $100, even $1,000, we're getting the knowledge and learning what we need to do with our money so that when we have more money down the line, we'll know what to do with it. You don't want to take that learning experience away from your kids.

So what's the bottom line here? Why shouldn't you let your parents manage your money?

The first thing that happens if you let your parents manage your money is you basically take a totally hands off approach. You say, well, I don't need to worry about it. My parents are managing that. I swear, if I hear this Again, I'm going to jump up with an onion and beat someone. That way nobody will know why they're crying. The other thing is, you really don't know what's happening with your money. You're not accountable. So if the money goes up 30%, why did that happen? Was it a decision your parents made? Was it the market? You don't know. You want to be accountable for both the wins and the losses and, and your investments and all the results of them should be your own.

So tell us then, what could happen if you decide to send your money to your parents to be managed?

Well, like I said, you're going to get a hands off mentality. You're really not going to think about it. And instead of focusing on the important things, learning how to invest, learning about asset allocation, even managing a conscious spending plan so you're spending on things you love, you're just going to basically throw your hands up and say, oh, that's fine, my parents are taking care of it. I'll just spend whatever I need to do. So you really want to be able to remember that this, that money is one of the core things. We spend so much time watching tv, hanging out with our friends and all that is fine. But isn't it worth it to spend maybe one hour a week managing your own money, knowing that it's going to make you hundreds of thousands of dollars over your lifetime?

But what about the situation? If you were to give your money to your parents and they lost some of that money, doesn't that build a resentment?

Yeah, that's absolutely another thing. Like I said, you, you don't know what's happening with your money when you send it to your parents. And it's all fine and dandy when money is going up 10, 20% a year, but if it goes down, all of a sudden you're resentful and you're confused because you don't know why it happened. And the other thing is, you know, getting educated on your own, I mean, the fact that you're watching this, you're reading a good personal finance book, chances are you're probably going to know more than your parents about money anyway. So you don't want to turn that responsibility over to someone else. Right.

Are there some situations where in some families it's expected that you hand your money over to your parents?

Yeah, it's absolutely a cultural thing. In fact, in India, we know where my parents come from, all the money goes to the mother very often. And it's a very communal thing. And that's a cultural thing. So this is, again, specific to America, specific to our investment system. But you certainly want to understand how your cultural boundaries affect this as well.

But it's okay to take advice from your parents, right?

Yeah, absolutely. You can take advice from your parents, from your friends, look online. But ultimately, the decisions should be yours.

All right, let's talk now about the flip side of all this. What if your parents are in financial trouble? Should you take on the responsibility? It is a big responsibility.

Yeah. That can be one of the toughest things that you encounter because not only will your parents feel guilty about being in debt, but they'll feel even guiltier about talking to you about it, their son or daughter. So I think you want to approach it delicately. You know, if your parents are in debt, after decades of money management experience, maybe poor decisions or just bad luck, it's not like you're going to parachute in there and solve it with one big solution. What you want to do is focus on just changing a couple attitudes and behaviors and getting a couple of quick wins, Maybe something that shows them that there's light at the end of the tunnel when it comes to their finances.

How do you even go about finding out if your parents are in financial debt? I mean, oftentimes they may not even share that with you.

Yeah. You said it yourself that money is a taboo subject. Now, it would be perfectly fine to be taboo about it if we knew what we were doing. But we don't. Just look around you. Everybody is in debt and we don't understand how investing works over the long term. So the simple way to do it is just to bring it up gently, you know? And what I prefer to do, instead of being condescending with someone and saying, you're doing it wrong is say, ask him questions. Say, you know, I've been reading this book and he says that we should open online high interest savings accounts. What kind of bank accounts do you use? Get the conversation started, let them be the expert. And then over time, and it will take weeks, maybe months, uncover kind of what's going on with their finances and also make sure that you share what's going on with your finances as well. Right.

Are you finding that in this economic climate that more and more parents are in that situation where they are in debt and they don't want to share it with their children because they don't want to put that burden on their children?

I'm finding actually the opposite because there are a lot of people I know who are in their 20s and their parents have been maybe paying a little bit for helping them out with rent or paying for their vacation a little bit. And what I have found among my friends and some of my readers is that the parents are actually saying, you know what? Times are really tough. We just can't afford to do it this year. So it's becoming more and more acceptable to talk about it. Which means this is a great time to bring it up because everyone else is talking about it as well.

Good point. Now, in your book, I know you talk about the 85% solution, and this solution could really help people in this situation that we're talking about, right?

Yes. The 85% solution says that we think that we need to get 100% of everything in front of us before we even get started. We need to have all of our accounts laid out. We need to know exactly where all of our money is going, and of course, we end up doing nothing. The 85% solution says it's better to get 85% of the way there than to get 0% of the way there. So maybe you want to start by simply suggesting that your parents open an online high interest savings account or. Or they pay off one credit card. Just the first step. That's much more important than creating this large, huge strategy. The strategy will come, but you want to first get a small win right away.

All right, Ramit, as always, some great information. Thank you so much.