How do you deal with a family member who time after time finds himself in a financial sinkhole?
How do you best help? Is it as simple as writing a check?
It’s a bit more complicated than that and you can take a few important steps to help your family and safeguard your finances at the same time.
Giving Financial Assistance to Family Members
Here are a few steps I recommend:
1. Don’t Put Your Head in the Sand
People don’t wake up stupid and they usually don’t wake up broke. You can see the signs of bad financial behavior years (and sometimes decades) before a crisis. Don’t wait until this person comes to you for money.
When you see someone you care about making dumb financial moves, understand that you may be the one left holding the bag. Don’t think the problem is going to disappear all by itself. If this person is on the road to self-destruction, it might be just a matter of time before that trouble lands on your doorstep.
This happened to a client of mine, Pam. Her son had great ideas – but somehow he was never able to get it together. Time and time again, Ron came to his mother to “invest” in his doomed projects. I showed Pam that she simply could not afford to continue doing that – regardless of what that meant to her son. That leads us to the next step.
2. Know Your Limitations
Even before anyone asks you for money, be realistic when you see trouble on the horizon. Get ready.
Don’t fool yourself into thinking that you’re going to get back whatever money you loan this person. He or she has already demonstrated financial irresponsibility and it would be silly to expect that somehow this person is going to magically get it together. Personal debt collection is ugly – especially if it’s your brother-in-law you’re trying to collect from.
If you do provide support, remember that this personal loan is a one-way gift. It’s money you’re NOT going to see again. Regardless of the promises you’ll get (and you will get plenty) don’t kid yourself. This money isn’t coming back to you. The obvious conclusion is to only give money that you can live without ever seeing again.
3. Set Boundaries Quickly, Gently but Clearly
If you are the designated “Mr. or Mrs. Moneybags” in the family, you’re this person’s ace in the hole. Their meal ticket.
Time to cancel dinner.
Again, you don’t have to wait for this person to come to you with their hands out. The sooner you communicate the better.
Let them know what you see and how you feel. Don’t judge. But let them know what you are willing to do to help and what you are unwilling to do. That support should include talking things out in addition to any financial support. You might give this person the gift of personal responsibility by saying no which is invaluable but……
4. Don’t Expect Gratitude
If anything, you might get indignation. You are doing this person a huge favor by setting boundaries and by forcing them to start accepting responsibility for their financial behaviors. But they may not see it that way.
5. Know That Your “NO” Isn’t Going To Be The End Of The World
You cutting someone else off financially probably isn’t going to end with them being homeless. They may see it as the end of the world but it ain’t. Don’t fall into the guilt trip they will try to send you on.
Let’s use a worst-case scenario and say this person is forced into bankruptcy. It’s bad…but it’s not cancer. And you didn’t do it to them…they did. And did you know that you can declare bankruptcy and still hold on to your home? Don’t tell yourself you’re forcing them out on the street because you aren’t.
How to Lend Money to Family and Friends without Going Broke
The advice above was centered on not giving loans. But read these tips if you decide you want to give a family member a loan. Lending money to family and friends is always tricky since nothing can destroy a good relationship like a fight over money. If you feel like you want to help by lending your family member or friend money, here are some tips that could keep your relationship intact:
1. Consider Calling it a Gift
The #1 tip for lending money to family and friends is not to do it. Working out the terms of a loan can be messy, and it requires discussion about sensitive money topics. Consider making the money a gift, rather than a loan. Get yourself in that mindset, and don’t expect anything back. Make sure you examine yourself to ensure that you aren’t going to have bitter feelings over your gift down the road and make sure you can make it a true gift, without expecting anything in return.
You can also consider alternatives to giving money. Offer to babysit children while your friend or family member looks for a job. Buy groceries on an occasion, or provide a gift card to the local grocery store. Be available to help with transportation, let your friend or family member stay with you for a couple of weeks, or look for other ways to fulfill needs in a non-monetary way. If you aren’t comfortable handing over cash, find other ways that can help alleviate the stress related to a money crunch.
2. Be Clear About the Terms
If you decide that lending money is the way you are going help, you need to be clear and up front. This means you have to power through your discomfort of talking openly to others about money, and just lay it out there. Find out what the money is needed for, and create a repayment plan. Make sure you are clear in your expectations for payment. It can help to create an installment plan, starting in a few months, so that your borrower does not feel the pressure to pay it all back at once.
You can also discuss interest. Many people prefer not to charge family and friends interest. However, if you want to, you can arrange for a low rate of interest. Just remember that if you receive earnings from the interest, you will have to report it on your taxes.
3. Create a Contract
After you have hammered out the details of the loan, it is time to create a contract. Contracts entered in via email or text message are binding, so that can be helpful if you are arranging a loan over a distance. Make sure that everything about your loan is included in the contract. Spell out the terms, and make sure that the borrower explicitly agrees to the terms. You can even get a template for such contracts, although a simple email with bullet points works as well. A witness might even be helpful in sealing the deal and making it official. Try to make it clear that the loan is a business/professional relationship and not a personal one.
Use a 3rd party to enforce the contract. One way to formalize the loan is to use a 3rd party service, such as Lending Club or Prosper. The family member can list their loan on either of these services and you can agree to fund all or a portion of the loan. An added benefit to you is having a strong legal basis for the loan, and potentially other lenders to take some of the risk, and the borrower benefits by having their loan funded and the loan counting toward their credit rating. You can learn more about these companies at their official sites: Lending Club, and Prosper.
4. Show Consistency
Finally, make sure you are consistent in your policy of lending money to family and friends. This is important, especially if you have other family and friends who may need help. Offer the same terms to others, unless someone else shows a higher risk. Develop your own “credit scoring” method that can help you explain why someone might be “approved” for more money, or a lower interest rate (assuming you charge interest).
Have you ever been in a situation like this? How did you handle it? What was the outcome? Are you still on this person’s Christmas list?
KCLau says
It is really a pain to ask money back from family members.
Setting a limit is a good start. I think it is best to have the borrower to sign a commitment letter.
Money Reasons says
I’ve been lucky with my family, but I have friends that have gone through some rough times with the siblings…
Nice article Neal!
[email protected] says
Thanks……
I gave money to a relative once….never again. I don’t care if they call me “Pilgrim Scrooge” It’s a badge of honor!
K.C. says
It depends on the situation, of course. We fronted $5000 to my daughter and son-in-law when a credit union stopped payment on an official check that was proceeds of a car sale. They paid it back several years later after winning the lawsuit. But they resented having to pay it back.
I have helped my son out a couple of times. I let him know after the second time that there would be no more money forthcoming. He hit bottom, filed for bankruptcy, then got his act together. He still has a way to go, but he is a hard worker and will get there.
In the end, they need to figure it out. That is usually a painful process which is often prolonged when well-meaning friends and relatives try to help out.
MP says
Yes, just last week, a relative asked me for a few thousand dollars to pay off a credit card balance. Over the past few months, I have been sending her links to PF blog post, trying to help her get her act together. I told her that she needs to create a budget. So when she asked me for a loan, I asked for the budget she supposedly created, and a copy of the credit card bill. When she told me that she needed payment now, and would produce the documents later, I said no.
Ryan says
MP, I’m sure that was a difficult situation to be in, but it was probably for the best.
Robert says
This is a very touchy subject for sure. In most cases, your family may be coming to you because they already have bad credit and know their options are running out.
While there is no magic bullet, this article does make some good suggestions in dealing with the issue. Obviously the message is don’t do it, but there are different situations and you need to be your own judge. At a minimum I would make sure you are okay with with the fact that you probably will not see this money again. If you can come to terms with that than so be it.
Jenna says
I can not afford my family. For the past 28 years they have swindled me out of all of my retirement and even some of the income I needed to feed and cloth myself.
My new rule is simple. The answer is NO.
If they truly need anything they can take up my offer to sleep on my flour or sofa.
Kevin Khachatryan says
I always lend money to people knowing that I might not get it back; always lend whatever you can afford to lose. remember, its a big gamble.
wiser now says
I don’t sweat an occasional $20 that is paid back, but for anything over that, for repeat requests, or for someone who hasn’t repaid a small amount, I look over the transactions more carefully. I learned long ago that if you loan large amounts to friends or family, you should treat them as official loans with paperwork or as gifts. What happens more often, though, is that I offer to employ the person or purchase something that they have to sell that I need. (Caveat on the last part – I only purchase something if I truly NEED it.)
I have one friend who, when borrowing small amounts, fastidiously pays them back. However, when that person borrows a large amount, the payments start off on time and in full and then start lagging and then stop altogether. It does not bother this person to see and talk to the loaner in the course of daily life, and it doesn’t bother them to not pay the loaner off completely. After watching this friend (who has good qualities – financial management is just not one of them), I learned to only offer employment as a means of getting money. Fortunately, I was never one of their loaners 🙂
Joe Plemon says
My wife and I have a policy that we don’t loan money to anyone. We might GIVE them money if we think they are doing their best and the need is real. A loan, especially when you don’t expect to get it repaid, only sets up an awkward relationship. The one who makes the loan starts to scrutinize why the borrower bought that new outfit, or took that trip, or etc, etc.
We would rather simply give the money and keep the relationship clean. So far that has worked for us.
Rita says
If I cannot give them the money I just say I can’t. To ask them to give it back in better times just does not work. There is always a need or a want. The money will not be returned and then there will be hard feelings. So I give the money as a gift or I do not give it at all. I’m firm about this and have never lost a friend because they did not pay me back. Also, even gifts are touchy. I’ve given a gift of money when a friend told me she was in dire need. It saved her at the time but embarrassed her to have to ask and we’ve not been friends since even though I have put forth extra effort.
Money Obedience says
I’d imagine that this is a touchy subject for many people. It is for me since I lent one of my brothers a hefty sum of money years ago. He has not repaid the amount after he took it under false pretext. I don’t think there is any way to guard against something like that except for not lending money in the first place. The good news is that I did learn my lesson and that I got to know him a little better. Had I never lent him money I would probably still think much higher of him than I do now. There is nothing wrong with adding a little reality to our perception of our family members.
Robert says
I think the best opinion is #1, although it can sometimes be the hardest. Also, I think you have to look at the circumstance and each one is different. If you have a family member who has repeated behavor of some type of self destruction (ie, quitting jobs, laziness, etc) and they know they will always get bailed out you probably should not lend to them. However, if this person has been with a company for 10 years and is suddenly laid off and is really looking hard for a job without success, I may consider loaning them money or helping out.
Fed Up in AZ says
I have friends who pay back when they can and usually if I have a chore or errand I can’t run, we’ll make a deal. Unfortunately, I have a mooch of a brother I have loaned over $5k to aid his family and keep him out of jail. I am a complete naive. No more. I know I won’t see my nephew and nieces ever again unless they want to see me.
He’s promised repeatedly to pay back, even the small amount I set up each month. Not happening. Now he has to file for bankruptcy and can’t afford the fee and CALLED for help. Screw it. Let his dead beat, lazy, “wife” help him. I will buy medicine, school supplies, winter clothing and food. No direct money is going to them anymore.
K.C. says
My experience has been that those who want me to “loan” or otherwise give them money simply aren’t willing to say “no” to themselves or to take the hard action necessary to resolve their financial problems. They assume I have money to spare because I don’t have financial problems, but the reason I don’t have financial problems is because I don’t have money to spare. All of my money is directed to some purpose, current or future. I have no “extra money” to lend or give, other than money designated for charitable giving. It is arrogant of someone to assume that because I have financial assets, they are somehow entitled to them. When I say “no” to them, I give them the opportunity to solve their own problems and learn from the experience. Bailouts, be they personal or corporate, only encourage the bad behavior that led to the problem in the first place.
Nick @ till debt do us part says
I think you could look at it another way. Instead of learning to say ‘No’ you could learn to say ‘Yes’ in the exact same situation. So in the case of spending too much instead of saying No to spending too much say Yes to financial freedom – free from the stress and worry that overspending brings.
Instead of saying No to a loan to a friend say that ‘Yes’ you agree with the old phrase – ‘Never a borrower or lender be’ – Ah if only I listened to this myself 😉
Just say ‘Yes’ but only to the positive empowering aspects in any situation – saying No can get you into a limiting bad habit.