Helping babysitter manage large insurance payout?

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cogito
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Helping babysitter manage large insurance payout?

Post by cogito » Tue Jan 14, 2020 3:22 pm

We are close with our babysitter that we met through our church. She is 22ish, does not have a lot of stability in her home/rental situation, is trying on and off to take classes while balancing multiple minimum wage jobs, but has a good head on her shoulders and a responsible outlook on life. Her somewhat estranged father was recently killed in a drunk driving accident, and from what I can gather, she is getting nearly 100k from the liable parties insurance (as are multiple others in her family). Prior to this she has been living paycheck-to-paycheck, although I don't believe she has any consumer debt or student loan debt. I'll have to check, however. To her this is an unbelievable amount of money, and it is, but I'm well aware of how quickly it could disappear.

She asked my wife if she could talk to both of us about what she should do with all of this money, or how to invest it. I don't think she has any good role models for financial responsibility in her life, and she has observed our family and our modest lifestyle, and the boglehead success we've had in life. Since she is close to our family I would like to try and give her some very simple help and advice to help her feel confident that she can educate herself and decide how she wants to use the money. Here is what I was planning on suggesting:

1. Take the Dave Ramsey approach and do absolutely nothing for 3-6 months. She has just undergone an emotionally traumatic experience, and is in no condition to make life-changing financial decisions.

2. Work on writing down her life goals for the immediate future, and what she want to do in her life, whether that is school, pursuing a career, spending time with family, etc. I think we would encourage her to pursue full-time college at this moment.

3. Put down on paper a basic budget/expenses, so she understands how much she is spending every year, or will be once she is in school. Once she has done this and has a better picture of her financial situation, she can:

4. Pay off any debt she may have, if she has any.

5. Put six months of expenses in a high yield savings account as an emergency fund, not to be touched. I'm guessing this will be about 15-20k or so.

6. Decide if she wants to use any of the money for immediate purchases, to buy a car, move into a new place, or help family members, etc. She comes from a lower-class immigrant family, but I have no expectation that she would be impulsively irresponsible wasteful. Perhaps just a little. She mentioned wanting to gift us with someone big like a family vacation, to show gratitude for ways we've helped her (in the past we've paid for train tickets to see family and little things like that) and I totally objected and insisted that this money was for her and her future, and small gifts only would be accepted.

7. Put everything else that won't be used in the next 5 years into a target date retirement fund at Vanguard, and pretend it doesn't exist. I'm a little hesitant to get any more complicated on this point, I think its a little wiser to focus on personal finance education and not get into the weeds on investing. I'm wary of starting to talk about anything like Roth IRAs, or deductions, or Stocks vs Bonds, etc etc. Perhaps that could come later. But I'm worried that if I don't keep things very basic, it will confuse rather than help her.

Is there anything that I'm missing here? Am I misguided in thinking this would be a good rundown that we could deliver over an afternoon coffee? I genuinely would like to help and provide some basic financial education that will result in easy action steps that helps her feel like she is managing what she has been given wisely.

averagelonghorn
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Re: Helping babysitter manage large insurance payout?

Post by averagelonghorn » Tue Jan 14, 2020 7:13 pm

I think all your points are good, but I DO think it might be a bit too much to cover all at once; I would concentrate on the following:

1) As much as humanly possible, drive home the "Do Nothing" for a while point. What "a while" is could be various time periods, but I think 6 months is a good minimum. Only exception MIGHT be if she has any high interest debt, like carrying a balance on a credit card. Otherwise help her to open a high yield savings account and/or a short-term or no penalty CD or something like that and really try to impress on her the idea of "Don't touch this" until whatever date.

2) If the reason she didn't go to college was largely due to finances, for sure using this windfall towards an education could be a very good use of the money. But there could be many other reasons she didn't go to college or some other sort of career prep after high school, so don't rush into this. (I mainly mean do plant the seed; but no rushing to enroll in the closest institution of higher learning at the next opportunity.... she's been working for a while gauge the value she sees in pursuing further education.

3) Try to impress on her to TELL NO ONE. (Obviously she has already told you, and other family know, but to the greatest extent possible, she should not be letting anyone know that she has/will be coming into this much money. Everyone that finds out will have some fabulous use for it, somewhere 99% to 100% of those ideas will be horrible uses of the money that will at best be a lesson and at worst will leave her with nothing.)

4) This conflicts with the above; but in most cases, I think it would be useful from a behavorial standpoint to pick some fairly small amount of 1% of the windfall and suggest she take that, put it a checking account, and just blow it on some kind of treat to herself. That could be a weekend away, a new phone, a new TV, a new outfit including shoes.... pick one of the above or something else; but just that one treat to herself. One single treat, the rest for the longer term. It might help resist the urge to blow more. (I'm sure many would disagree with this, but consider it.)

I think I'd use your "first meeting" to address those points, then give her the homework of thinking about life goals. Education might be the thing, or maybe it isn't. Since you're stepping up and taking on the role of advising her, the first step is to listen to what she wants to do.... take some time to absorb what that is. Since you have an ongoing relationship with her, you can continue to discuss, but YOU should remember the idea of DO NOTHING major as well.... doesn't mean you don't think about it, and maybe plant seeds, but you don't need a fully fleshed out plan immediately, that's what that DO NOTHING period is for!

averagelonghorn
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Re: Helping babysitter manage large insurance payout?

Post by averagelonghorn » Tue Jan 14, 2020 7:18 pm

Oh and at end of first meeting, schedule the next... agree to meet several times during the DO NOTHING period to plan the transition to the next period. (Maybe that's once per month, 6 weeks, whatever.) If she still babysits for you, or you see her at church once per week or whatever; I'd say do not make every time you see her a check in on financial goals.

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ResearchMed
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Re: Helping babysitter manage large insurance payout?

Post by ResearchMed » Tue Jan 14, 2020 7:22 pm

This worried me: She wanted/wants to gift you a "big family vacation".

That REALLY shows she doesn't understand how very fast money can just fly, fly away. And on something that isn't critical.
I suspect this is just a clue to her current mindset, so do be aware of a more serious attitude/misunderstanding about money.

Good luck.

RM
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averagelonghorn
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Re: Helping babysitter manage large insurance payout?

Post by averagelonghorn » Tue Jan 14, 2020 7:27 pm

Oh and one last thing: When you take on the role of giving advice, recognize the fact that the person you are advising will very likely not necessarily follow your advice 100%. If that's a problem to you, reconsider if you want to be the advice giver. Realizing that in advance will save you some worry later. Take that advice to the extent you want to :D

GAAP
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Re: Helping babysitter manage large insurance payout?

Post by GAAP » Tue Jan 14, 2020 7:35 pm

Maybe some education/suggestions on general finance concepts? Books to read, perhaps? Teach a person to fish...
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

3-20Characters
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Re: Helping babysitter manage large insurance payout?

Post by 3-20Characters » Tue Jan 14, 2020 7:35 pm

I would impress on her what a trivial amount of money this is given a lifetime of earning and spending. Additionally, I would impress on her with some arithmetic projections what it could mean for her future if she invested the bulk in an index fund(s) and never touched it for another 40 years. Not sure how to best to convey these ideas to her but I’m afraid unless she can wrap her head around the concept of the power of money invested over time, this will be a squandered opportunity at her age no matter how grounded she is. Telling a young person to do nothing for 6 months or more may not be good idea. A significant chuck of money may disappear in unaccountable ways.

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Bernard
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Re: Helping babysitter manage large insurance payout?

Post by Bernard » Tue Jan 14, 2020 8:48 pm

A 22-year-old very unlikely thinks about money long term. Thus, I would show her a compound interest calculator and tell her if she were to put $100,000 into a low-fee index fund, and does not add a single dime to it for the rest of her natural life, this $100K would grow to about $1,5 MILLION dollars by the time she's 62.

http://www.moneychimp.com/calculator/co ... ulator.htm

Katietsu
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Re: Helping babysitter manage large insurance payout?

Post by Katietsu » Tue Jan 14, 2020 9:12 pm

Bernard wrote:
Tue Jan 14, 2020 8:48 pm
A 22-year-old very unlikely thinks about money long term. Thus, I would show her a compound interest calculator and tell her if she were to put $100,000 into a low-fee index fund, and does not add a single dime to it for the rest of her natural life, this $100K would grow to about $1,5 MILLION dollars by the time she's 62.

http://www.moneychimp.com/calculator/co ... ulator.htm
I disagree with this. Maybe illustrate the point of compounding with some fraction of the money. But this person who does not have a stable living situation and probably knows what it is like to fear a that a flat tire means a loss of transportation. She has immediate needs for a chunk of this.

I too am concerned about the offer of a family vacation. I think this amount just seems so big compared to $8/hr.

I like the suggestion of scheduling a few lunches and not bringing it up otherwise.

Otherwise, I agree with the points made by average longhorn.

NEDriller
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Re: Helping babysitter manage large insurance payout?

Post by NEDriller » Tue Jan 14, 2020 10:39 pm

Try to impress upon her how little money this actually is in the grand scheme of things. After setting up and emergency fund and stabilizing her life (whether it be housing or vehicle problems) there probably won't be much left for investing, but like I tell every one of my employees when I offer them our simple plan, Start Now, it may not seem like much now but by the time you retire you will thank me.

Like someone said before, don't tell anyone that doesn't already know, it's nobody else's business.

I had a family member receive a settlement in the mid 6 figures a little over a decade ago and has lost all of it, even after most of our immediate family had tried and tried to give them financial advice. Multiple expensive vacations a year, bought in to a nice timeshare (you know because that's a great deal). Bought a motorcycle and a boat, traded cars every 9 - 14 months. Built a new house instead of living in the one she had paid off initially. And boom 10 years later they are broke, divorced, sold the house, boat, and motorcycle, and have no idea what happened to their "Riches".

junior
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Re: Helping babysitter manage large insurance payout?

Post by junior » Wed Jan 15, 2020 8:46 am

Bernard wrote:
Tue Jan 14, 2020 8:48 pm
A 22-year-old very unlikely thinks about money long term. Thus, I would show her a compound interest calculator and tell her if she were to put $100,000 into a low-fee index fund, and does not add a single dime to it for the rest of her natural life, this $100K would grow to about $1,5 MILLION dollars by the time she's 62.

http://www.moneychimp.com/calculator/co ... ulator.htm
That growth prediction isn't a "fact" but something you got by making the assumption 21st century stocks will have similar growth to 20th century stocks.

getthatmarshmallow
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Re: Helping babysitter manage large insurance payout?

Post by getthatmarshmallow » Wed Jan 15, 2020 12:13 pm

Keep in mind that #6 is likely to be a hurdle for her in a way that it wouldn't be for an established middle class person. She's likely going to have people in her life with genuine need, and it takes a heart of stone for her to prioritize herself. She needs to - but she might need to hear that it's OK to put aside money for college or retirement even if her nephew needs new shoes or a winter coat.

It's also okay if she doesn't invest most of it. If she spends most of it on getting out of debt, funding a good career through college, and having an emergency fund she'll be fine. I'd almost be inclined to say that the percentage invested should be around 15-20%. Establishing the savings habit is more important than socking it all away and working minimum wage jobs until 60.

The advice to wait (unless she has a ton of debt or an environment that is unsafe) is smart. Try to get her to think of it as a safety net that gives her options.

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