Personal finance pro Dave Ramsey had a tough-love message for a recent caller.
“When you’re trying to bless somebody and you do it wrong, you don’t bless them — you curse them.”
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Rachel called in to The Ramsey Show from California to ask Ramsey and co-host Rachel Cruze about her plan to pay off a car she financed for her daughter. [1]
“I made a big mistake,” Rachel admitted. “I’ve made many, but this is huge.”
A year ago, Rachel got the car for her daughter, a single mom who needs it to drive her three kids around. Rachel hoped it would give her daughter a year to focus on improving her credit score. Then she’d put the car in her daughter’s name.
“It was contingent upon her getting herself together, her FICO high, all that good stuff,” Rachel said. “It’s almost a year. She hasn’t done that.”
Now, Rachel is considering borrowing $27,000 against her house in a home equity line of credit (HELOC) so she can pay off the car, and give it to her daughter outright.
Doing more harm than good
Ramsey was blunt, saying Rachel’s daughter had demonstrated irresponsibility.
He recommended Rachel tell her daughter she loves her, but that financing the car was clearly a curse, saying something like: “It has really messed up your life. And I’m so sorry. Hey, we’re going to fix it. We’re going to sell that car.”
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Although Rachel tried to rationalize things, worried about how her daughter will transport her three kids, Ramsey and Cruze did not hesitate in their assessment.
“She can get a $5,000 car. Single parents do it all the time,” Ramsey said. “You’re putting those kids’ mom in a trap. She can’t swim. She’s drowning because of you!”
Cruze told Rachel, who still owes $27,000 on the car, that she will likely take a loss on the car when she sells it. She advised looking up the value of the car, selling it and then taking out a loan at a credit union to pay off the difference.
Are you enabling a financially irresponsible family member?
Rachel is in a common situation, feeling responsible to help a family member in need — even if it might hurt one’s own finances in the process.
For example, a family member might ask for a one-time loan to get out of a tough spot. No damage is done if you both set clear parameters — what the loan is for, when it will be repaid and at what rate of interest — and your family member repays you.
But sometimes good intentions can hurt, as with Rachel and her daughter, who either can’t afford to pay for the car, or doesn’t know how to manage her money or both.
Rachel’s helping hand to her daughter was actually just enabling her. If a one-time emergency loan turns instead into someone regularly expecting, or demanding, help, and you comply — you are financially enabling them. [2]
Financial enabling hurts the people you’re trying to help because it encourages them to continue living in a “false economy” and discourages them from learning financial responsibility, and how to live within their means.
Another way to tell if you’re enabling someone financially is to see what happens if you offer help other than cash, like giving them a ride or helping them build a budget. If they demand cash instead, that should be a big red flag.
How to turn off the tap with a family member
A blank check will not change, or help, financially irresponsible family members. It is also never a good idea to lend someone money if doing so will put you in a financially precarious situation.
As Ramsey points out, if you’ve realized you’re enabling someone financially, you need to initiate a conversation with them, as hard as that can feel.
Review the exact amount of money you have already lent them. Don’t let the conversation delve into other family members you may have helped, or how much money you yourself have relative to your loved one.
If your loved one does not have a budget, or a plan to repay their debt (to you or others), helping them build a budget and debt repayment plan, or helping them access services that can help them do so, will go further than any loan you could give.
When you stop enabling them, they will be forced to learn to stand on their own, and they will be better off for it.
If you do decide to loan money to a loved one, draw up an agreement that includes what the money is for, when it will be repaid, and the interest rate you will charge.
Speak to a tax professional about whether you will need to claim interest paid on the loan. You also have a right to ask to see your family member’s plan to pay you back, in writing.
Even if you set out with the best intentions, the fact remains that it is very common for friends and family members not to pay back loans.
If you do decide to lend someone you love money, remember the adage that you should not loan any amount of money that you would not be comfortable losing. If it is not an amount you could give them as a gift, it is not an amount you should lend.
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[1]. The Ramsey Show “I made a big mistake”
[2]. In Charge Debt Solutions “How to stop enabling financially irresponsible family members”
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