Helping a Family Member with their Finances (When to draw the line)

Helping someone with money can be a double-edged sword.

Assisting a loved one financially might temporarily get them out of a difficult position, yet if they believe they can always rely on someone else to get them out of a rough spot, it can deter them from having the drive to stand on their own two feet.

Then, there's the issue for the lender; unless money grows on trees for you, lending money to loved ones can and will hold you back financially.

When you don’t create boundaries and think of your financial well-being before someone else’s, the bank account that suffers is your own.

My Personal Story

Neither my parents nor all my years in school taught me a single thing about being financially independent and savvy.

But now, my partner is a financial advisor, and I’ve learned many financial lessons the hard way throughout my life.

I’m finally at a point where I prioritize my economic well being, and I’m hitting my financial goals.

And while I am in no way a millionaire, my savings account and good credit have become the go-to piggy bank for my family members when they need to borrow money.

This has put me in difficult positions. At times, it's held me back in my financial goals, caused problems between family members and myself, and negatively affected their financial independence.

I’ve never regretted helping a family member. Still, I regret how I went about it in the past—without rules and guidelines to create healthy boundaries and ensure that both parties benefit from the exchange. Below is what I’ve learned.

Guidelines for Helping Family Members Financially

Wanting to help family or even very close friends with a money need is admirable.

But it can quickly become stressful and detrimental for everyone if communication and precautions are rushed or even skipped.

Review this list of “rules” before agreeing to provide financial help to someone you love.

1. Know when to loan and when to gift.

When a family member asks for money, and you know they’re indeed struggling in all facets of their life, it can be tempting to tell them they don’t have to pay it back.

Still, gifting money can backfire in two ways.

• Without a solid financial cushion, you will have to find a way to work extra or be very frugal to cover that money or set your financial goals back, which, in this economy—can be detrimental.

• Gifting the money will not help your family member any more than if it was a loan. Receiving money without having worked for it can become a crutch that impedes financial independence – for both of you. And it can open the door to them expecting more from you in the future—an unwanted precedent.

When you know a person is struggling financially, cash or a visa gift card can be appropriate on special occasions instead of buying them a physical gift.

Otherwise, unless you truly do not need the money for your own financial security, providing a money loan to a family member can be a better option.

2. Loans should always have specific guidelines and parameters.

A loan should never be settled with just a few words, even if it’s a family member you trust with your life. Honest misunderstandings can happen and can be very difficult to patch up when money is involved.

To ensure the relationship goes undamaged and you get your money back when needed, put the terms surrounding the loan in writing.

If the person asking for money is disclosing why they need it, you can also inform them of your situation (“this is coming from my savings account, and I need it back by__ because I’m going on a trip”). That way, the other person knows they need to pay it back and can better understand your circumstances.

In a typed document, handwritten message, or an email that can stand as a reference, include the loan amount, the repayment date (dates if it will be paid back in parts), and your preferred method for how it gets paid back (cash, Venmo, PayPal, etc.).

You should also include what the money will be used for and obtain signatures from all parties involved.

3. Is charging interest ever ok?

Yes!

If lending the money puts you in a tight position, or if you want to gain something from providing the financing, you can definitely charge interest on the loan—after all, it’s your money, and you can do whatever you want with it.

I urge you to always charge some interest on a loan—this encourages financial discipline in the borrower and helps them take the loan repayment more seriously.

The interest must fall within the legal guidelines (most states have different usury laws), and both parties must consent to the interest rate (this is when having a written statement signed by both parties is necessary).

4. Don’t become someone’s piggy bank.

For reasons I already stated, frequently lending money to someone does more harm than good in the long run.

An excellent way to create healthy boundaries for the well-being of your money and your relationships is to give yourself a limit on:

• how much money you’re willing to lend within a year
• how many times you're willing to lend money to anyone

Make it a rule only to loan money to family members or trustworthy people to who you’re extremely close.

Stick to your limit and remember that saying no is more than ok. Unless it's your underage child, you are not financially responsible for anyone.

5. Take large loans seriously.

Currently, if a loan falls under $16,000, it’s considered a “gift exclusion” on your taxes. If the loan is more significant than that amount, you must report it to the IRS (Form 709).

Specific tax rules and regulations vary by state. So if you’re lending a big chunk of money, consider meeting with a financial professional to help you handle the transaction legally and maybe come up with other options when transferring large sums.

6. Share personal finance resources with them.

If others are looking to you for financial help, you're likely doing something right with your money.

Perhaps you can help them start tracking their spending and prepare a budget.

Maybe they could use some career advice or suggestions on classes to take to increase their skills and land a higher-paying job.

If they don't seem interested in hearing your advice, share your favorite money or business related books, blogs, or podcasts.

Providing educational resources to those you care about can be a great way to provide assistance without putting more of your money (or relationship) on the line.

Closing Thoughts

In the end, lending money to anyone is a risk, and you have to do it with the mindset that you might never get the money back.

If the amount you are lending is significant, and the money not getting back into your account poses a severe risk to your financial house and well-being in any way—don’t do it.

Before you can help anyone else, you must first ensure your own health and financial security.

Next: Love Thy Self: Practice Financial Self-Care

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By Paloma Quevedo, who's been writing about anything that excites and interests her since she first picked up a pencil. She’s a Texas State University graduate with a bachelor’s in English, and her most recent writings include articles for Bon Appetit Magazine, articles for the coaching platform CoCaptain, and everything finance for Find More Balances. She writes from her home office in Austin, Texas, where she lives with her partner, daughter, and orange cat.