Advising family on finances? First, ask three questions

Last week I had THE question that comes up over and over and over. It’s a question I find myself pondering from time to time. While the specifics change, it is a version of:

How can THEY afford THAT?

Here is a more specific example: “How can I drive this car with no payments, 200,000 miles on it and be saving enough for retirement and my kid’s college education and have 6 months of cash in an emergency fund and kind of feel, well — broke. Then here’s this family member or close friend who just drove up in a brand-new car.”

Heavily financed for 6 years, the car is obviously a really bad decision.

How do they know it’s a bad decision? Well, maybe this is the person who is always cash strapped and borrowing money or accepting family or friends treating them to meals but not really reciprocating.

As a person who is responsible with money, maybe you feel it is your duty to tell them this is obviously a really bad idea that they bought this car.

After writing for a year and a half encouraging open conversations about money, you might be surprised at my response. In this case, I believe you don’t tell them anything. A poorly timed or phrased confrontation can both fail to get to a desired outcome and drive a wedge between you and this loved one.

One thing I have learned as a financial planner is that while I can play out financial scenarios, I don’t actually know the future. I have seen people with strings of less-than-ideal financial decisions get lucky and turn their situations around pretty quickly. One such luck is inheritance. A large infusion of cash can make up for a lot of financial mistakes, especially

if the inheritance is deployed responsibly.

Also, people can change. Families notoriously freeze out loved ones in time, casting all our adult actions back to that time when we were 8 years old and sneaked a piece of gum from the candy aisle. But the truth is that people do change.

I met with a young man who had a spotty history with money and loads of credit card debt. His $8,000 in credit card debt a couple years ago was described as “Oh, by the way, I have a little debt.”

At the time, we had a really productive conversation thinking more expansively beyond the debt to a life building up wealth. He seemed intrigued but noncommittal.

Flash forward to a recent meeting. He still had debt but a lot less. Interestingly, here is how he described it. “I have a crushing amount of credit card debt, but I am determined to get the credit card to zero. Here is a ‘no spend’ period that I have been in and will continue to be in until it gets repaid. From there I want to prioritize my retirement account and start building wealth like we talked about.”

This young person who previously identified as “bad with money” his whole life is changing his identity and may end up better off than most people who were responsible with money their whole lives. How? If he sticks with this new plan and diverts a heavy fraction of those credit card payments into retirement and other savings then his savings rate will be well over 10%.

We are not predestined to money mismanagement. I am a living breathing example of that! It’s a subtle but powerful reminder as you consider how to approach someone you care about with money. We can and do change. Not only that — it can be a positive and joyful experience.

I have learned a process from the Rev. Susan Sims Smith who has modeled that ability to have hard conversations that can result in positive decisions and deeper relationships. She taught me three questions to ask before confronting someone. They are: Is it true? Is it kind? Is it useful?

When I asked her where these questions come from, she said variations can be found in many faith traditions.

Let’s apply these questions to a possible confrontation for our family member who bought the new car. While we can maybe answer yes honestly to the first two, we would fail with the third question. It’s just not useful to challenge someone for purchasing a car after the fact.

As hard as it can be, probably we need to celebrate the car, but find opportunities in the future to positively nudge this family member or friend toward future smart financial decisions.

For example, maybe a few months down the road while sitting over dinner there is a natural opening to bring up money in a positive way. You can challenge your whole family to a no-spend month and in a positive way encourage that one family member to pay down her car note faster or bump up retirement savings. Look how beautifully the answers to Sims Smith’s questions flow.

Is it true? Yes, this family member deserves some honest advice on money. If not family, who would be willing to give such advice?

Is it kind? Yes, this is about the future, not the past, so it avoids much of the shame that can come from analyzing past decisions.

Is it useful? In this case, absolutely. If paired with a no spend challenge, then this family member who might be otherwise cash strapped could have the motivation from this being a collective effort and the resulting financial means from a no-spend month to take action.

Family can often be the only source of honesty around money that people get in life. But if done wrong, such honesty can drive division. Don’t avoid these tough conversations; rather consider the timing. Then from a place of humility and positive thinking, ask yourself those three simple questions before you launch. Is it true? Is it kind? Is it useful?

Sarah Catherine Gutierrez is founder, partner and CEO of Aptus Financial in Little Rock. She is also author of the book “But First, Save 10: The One Simple Money Move That Will Change Your Life,” published by Et Alia Press. Contact her at sc@aptusfinancial.com.