Real-life case – When our children have financial problems
Shortly before the holidays, Jean-Pierre lent $2,000 to his 26-year-old son, William, for the second time in 6 months. A few weeks ago, the young man asked him for a loan of $1,000 again.
His father is concerned that his son and his partner’s recent purchase of a residence may cause them financial trouble. How can he help them?
As parents, our first instinct when our adult child asks us for financial help is often to accept, if we can afford it. But lending a few hundred or a few thousand dollars occasionally will not solve anything if the person is heavily in debt. Ideally, we should address the root of the problem, because otherwise, the same difficulties will inevitably resurface a few months or weeks later.
Too many debts to repay
Jean-Pierre tried to discuss the issue with his son, but he refused to talk about it, not welcoming his father meddling in his affairs. He insisted and proposed to William and his partner to consult a financial restructuring professional, which they agreed to.
The trustee noted that they earn respective salaries of $62,000 and $68,000 per year. Therefore, the couple has a good income and they bought a house for $325,000 with a monthly mortgage payment of $1,625. The transfer fees (welcome tax) represent an additional amount of $300 per month, and taxes and heating amount to $514. «It’s not the purchase of their residence that puts them in a bad position since the costs associated with it represent 20% of the couple’s gross salary, while the Canada Mortgage and Housing Corporation considers the maximum to be 35%. The cause of the difficulties is rather the accumulation of debt created by the home furnishings and commuting expenses related to work. Moreover, the $300 per month in arrears for the welcome tax doesn’t help,» explains Pierre Fortin, authorized insolvency trustee, president of Jean Fortin et Associés.
Indeed, settling into their house has been costly (purchase of curtains, furniture, landscaping, etc.) and most of these expenses were paid with their credit cards, which now total $14,500. William’s work schedule also requires him to commute 40 kilometers by car every morning and evening, which is expensive in terms of fuel and maintenance.
Budget with a deficit
In addition to that, William has a $24,000 student loan (monthly repayment of $250) and two car loans ($875 per month). In the end, the family budget has a deficit of about $450 per month, so it’s not surprising that the couple is struggling to make ends meet.
«However, their debt-to-income ratio is relatively reasonable – 32% compared to the 40% limit tolerated by financial institutions. We suggested they apply for a line of credit of $18,000 to immediately pay off the credit card balance and the welcome tax. With a rate of 9%, they will save over $4,500 in interest fees over 5 years, and their monthly payments over 5 years will be reduced from $875 to $375, which respects their budgetary capacity,» emphasizes Pierre Fortin.
If your adult child often asks you for money, try to convince them to assess their financial situation to find the source of the problem.
If they refuse to do this exercise with you, they might consider meeting with a neutral person or a financial restructuring advisor.
The best help is not always financial. Instead, help them establish a budget, develop an action plan to repay their debts, and support them throughout this process.
Financial assistance itself should be limited to essential needs (food, urgent expenses) rather than making minimum payments on debts.
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