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?