Help a Reader: How to Teach Parents to Budget

Here's an email I recently received from a reader:

My question relates to my parents.  They've seen what my wife and I have done to turn our financial situation around (in relatively short order), and they have now enlisted me to teach them how to budget.

This is what I've gathered thus far about their finances:

My mother's "fixed" income (she's salaried at her job, so it's a de facto fixed income) is about $1,950 a month - she works part time, something I will certainly tell her to change to a full-time nursing job.  She's 52 and in great health, so she shouldn't be working part-time as it is.

My father owns a one-truck long-haul trucking company, and as such his income is not fixed.  Because it's variable, he thinks budgeting is impossible, and as such generally refuses to consider it.

Their loan and credit card payments per month equal about $3,000.  So 50% higher than their current fixed income.  It's split between a house payment (not a casualty of the housing bust; the house has simply been used as a way to pay off credit card bills four times), a Lexus car payment, a mortgage on my dad's shop for his truck, and credit cards.

Your readers have done a pretty good job of getting suggestions out there for people, and I'm hoping I can get a boost so I'm even better armed when going into discussing with them how to solve their financial woes. Other pertinent information: my mom contributes $50/pay (every other week) to a 401(k); this is their only retirement contributions.  Their savings is currently negligible.

What would you tell him to do?

Comments

[J in FL]

One thing I might say is to think thoroughly about the way you approach your parents with this discussion... from what I've tried with my parents, that's what I've learned. I haven't always had the greatest results, and I've realized that it's usually because of my approach. My parents have very small savings as well (for their age), and so I try to drop hints and bring it up in conversations with them whenever appropriate. Now that my sister recently landed a job with one of the big mutual fund companies, my parents seem a lot more receptive to what she has to say.

[Mixer]

Wow. There is a lot they can do in general: downgrade the Lexus if possible, see if you can either lower the HELOC (I assume it was a HELOC) interest rate or extend the payback period to lower monthly payments and see if you can combine credit 'cards' into a single 'card' with a lower minimum payment. But, you asked about budgeting.

Okay - first off, take your father's 2007 income receipts and average his income over a 12 month period and make a note of what his lowest month was. Then figure out what total monthly obligations are (not just debts) and determine if there is a positive difference - they are making more then they are spending. If so, then take 50% of the remainder and start a savings plan. Take 3/4 of the remaining funds and use it for extra debt payments, etc, and the rest for discretional spending. The savings plan should do double duty as an emergency fund and a pool to draw from during the slow months. If there is a negative difference, then they need to drop expenses until it is in the positive - try to get them to drop until they have approximately 15% of their monthly income as liquid.

If they can maintain this for a while.. say a year or so, then they can start to seriously pay down debt and start planning for long term retirement. If they can't, then they won't dig themselves too much deeper a hole, and they need to go see a financial planner who will follow up with them on progress; it's sometimes hard for a child to scold a parent, where it's easy for someone to do if you are paying them to :)

- Mixer

[Mixer]

Oops - forgot to add: any month where they bring in money that is over budget, the excess goes directly to savings.

[Anonymous]

1. Sell the Lexus. There is no such thing as a utility Lexus. Even the SUVs are status cars. Hit Edmund's and Consumer Reports and find a car of similar space/performance/size/function as the Lexus (and preferably one with better gas mileage)

Sell the Lexus, pay down as much as that loan as possible, and buy a much less expensive USED car. I'm hoping they bought the Lexus used, otherwise the math on this is still going to be ugly. Bottom line: getting that car payment down significantly will help a good deal.

2. Set up an automatic savings plan from their existing checking account to ING Direct or something similar. Even if it is only $10/week, automate some regular savings into this account. They need to build up an emergency fund.

[Captain Obvious]

They should probably try to win the lottery

[Miranda]

They definitely need to budget.

But first, they need to change their spending mindset. If they've paid off four credit cards with home equity, there's a pattern here. First thing they need to do is realize that they need to stop buying unnecessary and expensive (especially the Lexus) stuff.

Nothing will change in their financial situation until your parents wake up and realize that they have some poor habits. They have to WANT to change.

[Bill]

This one hit home after being presented with 6 figure credit card debt by 2 members of my family (one my mother) the day before Christmas.

It strikes me that your mother has committed, but father has not. I suspect you know the discipline required to deal with personal financial situations from your own efforts. Recognizing that budgeting is going to be a difficult "sell", try increasing revenue as an approach.

First, see if your mother can find another income source through part-time work

Second, send your father to a local Small Business Development Center and see if there is any way he can increase the revenue coming from his business.

Third, get them to commit this extra income will go entirely to (a) paying down the credit card debt and the house's line of credit to the initial mortgage requirement, and (b) paying down the truck loan. Once accomplished, have them (c) save a bit for short vacation (my experience is a little fun helps). Then plow the (d) additional money into a stock index fund using the various tax deferral vehicles available with the hope they can work for another ten years. I am hoping the real estate value in the "shop" and a number of years of stock market investing will increase their net worth substantially enough to give them a small nest egg at retirement, a paid-off home, and social security checks.

I started this with another sister two years ago (interesting, she was 52 at the time)using a retirement calculator that showed how dismal her income was going to be at 65. She was "seeking" help, offered no excuses, and has remained committed. She won't be rich at retirement unless the stock market produces an extended period of 20% returns, but with a small amount of part-time work, it will turn out considerably better than it looked two years ago.

Of course, if your successful, you may be referred to other members of your family with more difficult problems.

Good luck.

[anon]

Well, aside from ditching the Lexus (what WERE they thinking?), it'd be the same as anyone aside from treading VERY gently. Go only as fast as they can handle! I tried to partner with a friend so we could give each other inspiration to budget. It fell apart quickly when he became offended over my challenging his spending habits. I can only imagine how much more sensitive a parent would be. Best bet is to first show them how YOU did it, step by step (write it out as a checklist), and then wait for questions.

[Jim]

1) Agreement that both will stick to a budget
2) Mother gets full time job
3) Sell Lexus
4) Sell anything else of value that is not essential and use to pay off debt
5) Get credit card interest reduced (if possible)
6) Can Dad get part time job on the side (delivering pizza, etc.)?

[Miriam]

Since your father's income is variable, I would highly recommend having them live on the previous month's income. Check out YouNeedaBudget.com. I've found that it's a very useful system, and I have a lot less stress about paying bills now that I don't have to worry about the timing of paychecks. I think it might be a good partial solution for your parents.

[Ryan]

Back when we had dollar bills in Canada we used to save our 1 dollar bills every time we got change back. They sure added up. They also made you think about what you spent money on - coffee, newspapers etc. - and sometimes stopped you from spending too much money. Money ran out much faster before the next paycheck came.

[Josh Stein]

Thanks for all the help here. My parents in the past week were able to reconsolidate their mortgages (dad also owns a shop property for his business) to add some of the C/C debt and lower overall payments.

I got them started with the YNAB program, and so far so good. Though of course, ideally getting rid of that *darn* Lexus would be ideal, I know my mother and that's just not something she's willing to do. It's "safer to drive in the winter," though yes...it's a status symbol and it always has been. I believe the blue book value is around $25K on the car, so...it would knock out quite a bit of debt (and they already have a VW jetta as a replacement vehicle, dad has a separate pickup truck).

So, since "making mom mad" isn't a really good way to get them to work on their budget, I'm having to work around it. But we do drop hints every all the time that it should go away.

As for the checklist; that is how I've gone about it. We also used the YNAB (I got a good-paying job last December and somehow we didn't have any more money saved up despite it...so we just knocked it down and figured out what the heck we're doing wrong...good idea with a baby on the way...after a month we're sitting on an extra $2,500 saved up that's going to be going towards various retirement/college plans here in the next few months as it builds up further).

Thanks again for all the help.