How I Lost My Daughter’s College Fund (and the Lessons Learned)

This is a guest post from Kate Phillips of Total Wealth.  Kate helps us write and edit this blog.

 How a Whopper of a Financial Mistake Became a Blessing in Disguise

Last week, we published a post from Dan Sullivan of Strategic Coach, “What You Can Learn from Failure.” As I read it, it started me thinking about all that I have learned from failure, and particularly my financial failures.

We often think of money as a game that we win by earning, saving and investing successfully. So what happens when we lose it all?

Money is a great teacher, and we can gain lasting value from ALL of our experiences with money. I’ve had a lot of financial wins in my life, but it’s my losses that have brought the deepest learning. This is a story about just one such event.

It was one of the biggest failures of my life, certainly of my financial life. In just two short years, I had lost my daughter’s entire college fund that had been worth well over $50,000 at before she left middle school.

In a few short years, I had grown an initial investment of $11,000 windfall into a sum several times that amount with a savvy investment into a one-bedroom rental condo in a fast-appreciating district of Seattle. A realtor at the time, I knew I would have instant equity by simply buying it, with a high chance of healthy appreciation.

It had negative cash flow from day one, but it was a screaming deal. I took the risk and was proven right. (My timing was good.)

I sold the condo three years later for a nice profit, did a 1031 tax exchange, and rolled the money into a big down payment on an almost-cash-flowing three-bedroom home in Boise, ID in 2007. (Yes, I should have known better.)

The market had already depreciated some, and I thought I was getting in at a great time, with several years for the home to appreciate more before I’d need to either liquidate it or take an second mortgage to pay for college.

This time, my timing was terrible. Over the next 24 months, the housing market crashed to its lowest point. The house lost almost 45% of its value in The Great Recession/ Subprime meltdown. My 25% down payment was gone, the home equity was gone, rents had decreased in the depressed market, and the property now needed new carpet, cleaning and repairs.

I was literally “underwater,” owing tens of thousands more on the property than it was worth, and I didn’t the cash flow to fix it up and hold out until things got better. When my tenant left, I stopped paying the mortgage and put it up for sale. After an unsuccessful short sale offer, I ended up giving the house back to the lender and chalked it up as a very tough learning experience.

I remember the reality of it sinking in. The college fund was gone. Nada. Null and void.

I had a good cry. I felt foolish and ashamed, but I knew that somehow, we would make the best of things.

Lessons learned:

1. Don’t buy real estate for appreciation, buy it for cash flow. Otherwise you’re just speculating and it’s not a sustainable, profitable investment without the cooperation of the market.
2. As a real estate investor, you’ve got to keep adequate cash reserves to buy and hold properties through repairs, tenant changes, and unpredictable times.
3. Don’t put your child’s college fund into an investment that is potentially risky. Granted I didn’t feel it was risky at the time. (I had been riding a climbing market and felt invincible.) You’ve got to consider the “worst case scenario.”

So what happened? My daughter Maddie started studying at a community college. We applied for financial aid which ended up covering her tuition and books, at least to start. Her grandparents pitched in to help get her a car, her dad got her a laptop, and she paid for her own car insurance, gas, and “fun money” by working.

She took a job as a hostess at a Red Robin restaurant, and worked her way up to waiting tables, which paid $20+/hour including tips. When she moved out and transferred to a University, she took a small loan to cover what financial aid, our support, and her part-time job didn’t cover. When she was in-between jobs, I hired her myself and she willingly did the work I would have paid a housekeeper to do.

This year, she’s on a break from school, trying to decide on her major. She’s 21, working at a better restaurant, self-supporting (almost all of the time), and is making payments on the little student loan. She has a Best Buy credit card that she used to replace a laptop that failed, and no other consumer debt.

Next year, Maddie will go back to school and wait tables part-time again. Her grandparents and I will increase our support, and hopefully she’ll still qualify for some financial aid.

She’s taking the slow route through college; her “four-year degree” may take her 6 years. But she’ll graduate with minimal  student loan debt (which I can help her pay off), and a whole lot of satisfaction and confidence from all that she has accomplished.

She has an amazing “can do” attitude and is consistently grateful for the help she does receive. I’m proud of her and her hard work, both in college and at her jobs. I’m glad that she has learned to pay for her own rent, utilities, groceries, and car insurance, and I am grateful that I can help pay for her cell phone, medical and dental bills.

As a mom, I wanted to give her “the best” and didn’t want to require that she work to help support herself while she was in college. But would that really have been the best thing for her?

I found a surprising statistic in Thomas J. Stanley’s book, Millionaire Women Next Door that gave a major clue as to exactly how the millionaires interviewed for the book came to be self-sufficient and successful. Fully HALF of the women had paid for ALL of their college expenses! It is no surprise they can succeed in business when they have already learned to work hard, budget, and save.

Stanley’s extensive research spanning several books confirms that continuous gifts of money equal financial dependence, not financial independence. Well-meaning parents often prevent their child from developing the financial confidence they need to succeed on their own.

My daughter and I had a heart-to-heart talk recently. Interestingly, Maddie does not feel that she would be “better off” if I could have just paid her way through school and if she did not have to wait tables. She acknowledges that her own confidence in earning, budgeting and saving has soared (with a few mistakes and a couple of panicked “I don’t have enough for rent!” phone calls to Mom).

She loves making her own decisions about housing, clothing, food and entertainment. She enjoys being able to save for things she wants, such as a music festival and a new bicycle, and she is learning from her mistakes.

Maddie has also learned a lot in her jobs. I waited tables all through college as well, and it provided me with invaluable people skills, as it has my daughter. She has had a chance to observe many different management styles and has quite a bit to say about how providing an empowering atmosphere for employees can make a huge difference in a business, from lowering turnover rates to increasing happy attitudes that help employees create happy customers.

As much as it would have given me deep satisfaction to have had the ability to fully support my daughter through her college years, there was one thing I could never have bought for her: the financial self-confidence that comes only through earning and managing her own money.

Lessons Learned:

1. We can learn to think and be prosperous in any situation. A lack of money should not stop us – it should help us think more creatively and collaboratively.
2. Where there is a will there is a way. Our children are capable, and they benefit from having “skin in the game” when it comes to college, cars, and other purchases.
3. Even when we are able, we might be wise not to offer too much financial support to our children. Financial confidence must be earned, not gifted.

And perhaps the biggest lesson is this: Money is never everything. It is important and it touches nearly every area of our lives, but we cannot allow financial setbacks and failures to stop us or determine our self-worth. If we make a huge, whopping financial mistake, we can forgive ourselves and move forward. Chances are, if we look, we may even discover the silver lining.

Have you made big financial mistakes too?

Financial shame and stress are epidemics that are rarely addressed in this “don’t talk about money” society. In addition to helping us with our blog and our marketing, Kate Phillips also helps clients transform their financial thoughts, feelings, and behavior around money. (Sometimes called “financial therapy,” Kate prefers “Prosperity Therapy.”) Contact her at kate@TotalWealthCoaching.com or learn more at Total Wealth Coaching.  (That’s Kate, pictured with her daughter.)