I’m worried about what will happen when my daughter turns 18 in a few months.
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Question: After a car accident, my daughter was awarded a sum of money, which was invested and has grown to $150K. But I’m worried about what will happen when my daughter turns 18 in a few months. She plans on going to college (thankfully in-state), travel Europe, and buy a car. All great things, but I see how quickly she spends her part-time income on entertainment and dining out. I know how much easier it is to spend it than save it. I’ve tried to teach fiscal responsibility over the years, but unfortunately she has more of her mother’s free spirit than my frugalness. I’m looking for any last-minute ways to convey the gravity of this money, or any suggestions on how to make it a little less accessible in the short term. Can I hire a financial adviser for my daughter? (Looking for a financial adviser too? This tool can help match you with an adviser who might meet your needs.)
Answer: It’s completely understandable that you’re worried about your daughter blowing her money. “I, too, have an 18-year old and while they’re technically adults, they’re also very much children,” says certified financial planner Mark Struthers at Sona Wealth Advisors. The good news? There are ways to prepare her for preserving this money smartly. Here are suggestions from a few financial pros.
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Education is key.
First of all, the best way to avoid having your daughter waste her insurance settlement is to educate her on how to properly manage the funds for long-term needs. That could come from a financial adviser (sometimes kids are more willing to listen to someone who isn’t their parent), or you could do it yourself. Some things she’ll need to understand are budgeting and the long-term benefits of investing.
“The example of harvesting some apples each year from her growing financial tree and not cutting off major branches or worst case cutting down the entire tree at once for short-term personal gratification, might assist you with your conversation,” says certified financial planner Robert Riedl at Endowment Wealth Management.
Additionally, “Have you talked to her about how much of the money will be devoted towards college vs. Europe vs. the car? College is an investment, so she should be able to determine what the financial benefit of going to college will be after she graduates. At 18 it’s tough to convey how much your older self wants you to make better decisions as your younger self, but I think giving her some resources that help with her perspective might be helpful,” says certified financial planner Terrance Hutchins at Logos Financial Group.
What Struthers says he’s found works best in seminars is to hand people an oversized fake dollar bill and scissors and walk through a budget. “We cut 30% off for housing, 20% off for taxes and when they see how much is left for fun stuff and planning for the future, there’s often a come to Jesus moment,” says Struthers.
It might even be helpful to gift her some personal finance books. “‘Rich Dad, Poor Dad,’ ‘The Richest Man in Babylon’ or ‘Who Stole My Cheese’ are simple reads that might get her to think beyond the current moment,” says Hutchins.
If you go the adviser route, find an adviser she can relate to.
It’s possible you can educate her on this on your own, but sometimes kids have an easier time hearing about all of this from someone who isn’t their parent. If she’s open to speaking with an adviser, maybe finding a younger adviser who works with young people could be a good introduction for her and get her some additional financial literacy, says Hutchins. (Looking for a financial adviser too? This tool can help match you with an adviser who might meet your needs.)
Frame the hiring of an adviser like this.
For his part, certified financial planner Brian Waldner at Deeper Roots Financial Planning says if you take the adviser route, frame it as an opportunity to explore the possibilities and receive expert advice on managing the inheritance wisely. “This approach allows your daughter to be involved and empowered in making financial decisions. By taking a collaborative and positive approach, you can strengthen your relationship with your daughter and guide her towards making informed financial choices,” says Waldner.
Consider this three-pronged approach.
“Consider the three-pronged approach of a financial coach, budgeting software and a real estate investment,” says certified financial planner Blaine Thiederman at Progress Wealth Management.
A financial coach, akin to a personal trainer for finances, can shape your daughter’s monetary habits by instilling discipline and knowledge to navigate her newfound wealth responsibly. “Budgeting software like Monarch Money can be a godsend. These tools provide tangible, visual representation of spending habits, thereby helping your daughter understand where her money goes and the value of saving,” says Thiederman.
Considering a property investment, such as co-signing a mortgage on a condo using her funds as a down payment, can have far-reaching benefits — but it also comes with risks you, and she, just might not be ready for. “This tangible asset underscores the gravity of her financial power, while also providing a potential source of passive income,” says Thiederman. Of course, if you co-sign a loan with her and she doesn’t make payments, you’re on the hook for the money. Perhaps instead of buying a permanent property, convince her to hold money back for a purchase once she’s finished college.
Should you make the money less accessible to her?
With regards to your question about accessibility, once she turns 18, she’ll no longer be a minor so UGMA accounts won’t work and she’ll have immediate access to all her funds. “You could invest the funds when she is a minor in some illiquid investments or annuities to slow down her access to the funds, but I don’t believe that’s a good long term solution,” says Riedl. By tying money up now, you risk not outpacing inflation and potentially missing out on better interest rates that could allow the money to grow. “Her education, learning personal responsibility and appreciation of what she had to endure from the accident is the key solution to her long-term financial success,” says Riedl.
Another solution is to have a joint account where both owners have to sign off on spending over a certain level and you could get alerts or a credit card with a limit and where it’s easy for you to monitor. “Where the adviser could be of value is a third outside expert party that your daughter may listen to. Asking an adviser to sign off on and to monitor all spending will most likely not work at your current asset level because it would be too expensive and require too many person-hours,” says Struthers.
Have an issue with your financial adviser or looking for a new one? Email questions or issues to picks@marketwatch.com.
Questions edited for brevity and clarity.
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