4 steps to help a loved one in money trouble

woman going over a budget with an older man

If you suspect a parent, adult child or good friend is having money problems, you're probably troubled about what to do.

Mounting debt, dwindling savings or a lack of money to simply cover the bills can lead to financial ruin. The biggest problem is that most people fall deeper into their holes because they're too proud or ashamed to ask for help.

It's great if you can afford to lend a hand, but don't pull out your checkbook until you know exactly what's going on — and why.

These four simple steps can help your loved one address their money problems head on.

Step 1. Ask them to come clean.

Many people hide their financial problems because they're embarrassed.

No one wants to admit they've racked up $30,000 in credit card debt, are down to their last $1,000 or can't afford to cover the rent next month.

They see it as failure. But however they got there, and whether or not it's their fault, having them recognize the problem is the first step in solving it.

Kimberly Foss, president of Empyrion Wealth Management in Roseville, California, says money problems often show themselves in mood or spending behaviors.

The best thing to do is come out and ask.

"Just have a casual conversation at dinner and ask if everything is OK," Foss says. "You might suspect something is going on, but you won't know unless you approach them."

Chart showing results of poll asking adults who they would rather discuss financial issues with.

The sooner they come clean, the more you can help them. At this stage, Foss recommends you avoid any mention of financial help, no matter how small.

If you offer assistance before seeing the entire picture, you could get yourself in trouble and even make their problems worse.

You might be throwing money into the hole or making promises you can't live up to.

"Because of fear or love, we may end up saying things before we can commit," Foss says.

Step 2. Open the books.

When the person admits they've got a problem, you should try to get a full view of their finances.

Your help should be contingent upon knowing all the facts. You deserve to see a full disclosure of assets and liabilities, meaning account balances, credit card balances and outstanding debts.

It may seem like a lot to ask, so tread carefully when asking for the information and stress that you need to learn more about the problem in order to help them.

Demanding all this information could potentially put the person in a defensive mode.

"Make it so that it's a positive thing for everyone," Foss says. "Frame it in the right context so you can work together as a team instead of appearing like you're trying to take over."

Foss says putting together a balance sheet can be eye-opening for the person.

She also recommends that you have them pull a credit report to review. It will give you a full accounting of debt and prevents the person from omitting something — accidentally or otherwise.

They could have a case of identity fraud marring their credit. Many people don't realize that debt and poor money management can wreck their credit score.

Your aging parents could have old debts they don't even know about.

"You can't help them unless you know what all the problems are. It's like someone seeing a doctor and hiding some of the symptoms," she says.

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Step 3. Keep oversight.

Once you've discovered the problems, you'll want to work to maintain a level of transparency.

The best way is to track expenditures and income in a monthly cash-flow statement.

If it's an aging parent, Foss recommends you obtain log-in and password information for their accounts so you can view them yourself.

You may also ask to add your name on their spending account as a joint account holder.

Keep an eye on things, and you might be able to spot some trends after a couple of months.

Young people could be spending too much on entertainment. Older people may have a large portion of their income going to prescription medications. Perhaps there's a big recurring monthly charge on a credit card that they haven't noticed for a couple of years.

It can help to have an extra set of eyes glance over their finances, and you might be able to see something they're missing.

Don't criticize. You want to partner up with the person. Keep it positive, congratulate them on success and tread carefully when pointing out room for improvement.

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Step 4. Create a budget.

Creating a budget won't always fix a problem, but it can help identify problems and potential solutions to resolve them.

If the person already has a budget, help them go over it.

You may be able to find things they've missed or identify some areas where they could cut back on spending.

"A budget is often seen as a negative thing," Foss says. "Then call it a spending plan. You just want to get them thinking about the money coming in and the money going out."

Our Home Budget Calculator can make this a pretty painless task.

After you've established the budget, you should hold regular meetings to review it and track progress.

"There is no right answer on how to do it," Foss says. "It's different with every relationship, but the one thing you have to do is help them get their financial goals in order."

Once you've gone through all these steps and it's clear your loved one will need more help, then you can think about offering money.

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