Should you give money to family members?
Borrowing money can be a touchy subject and has the potential to destroy relationships.
Consider saying 'no'
Related links
Should You Give Money to Family Members?
By Kimberly Palmer
– 24 Jan, 2012
Borrowing money is never simple; when you borrow from friends or family members, it also has the potential to destroy relationships.
[50 Ways to Improve Your Finances in 2012]
Tarah, a working mom in the Midwest, in her early 30s, struggled with whether or not to help her parents buy a new car, while she and her husband were trying to pay off their own debts.
She ended up deciding not to help.
"I don't want to think about dealing with that, while I'm trying to stay focused on getting out of debt," says Tarah, who asked only her first name be used.
She says her decision created family tensions.
As more families come under financial pressure, Tarah's dilemma--to help or not to help--has become increasingly common.
According to Fidelity, 10 percent of generation X-ers provide financial support to their parents or in-laws; the average amount is about $3,500 a year.
Experts offer these strategies for cross-generational lending:
First, decide if you can afford to give help
An Ameriprise Financial survey found many baby boomers didn't realize how much the help they were providing cut into their own retirement savings.
About 30 percent of baby boomers said the money they gave their adult children negatively affected their own retirement savings; most were unaware of the impact.
Consider saying "No"--firmly
Declining a request for help, while painful, is sometimes the best decision a person can make, especially since MANY LOANS NEVER GET PAID BACK!
The top priority needs to be staying solvent oneself, says Ted Beck, president of the National Endowment for Financial Education.
[See Borrowing From the Family Bank.]
If a relative asks for money unexpectedly, you should stall, suggest Jeanne Fleming and Leonard Schwarz, authors of Isn't It Their Turn to Pick Up the Check?
"What you blurt out may not be the best answer," Schwarz says.
Then, be sympathetic but firm.
"You want to be unequivocal.
Don't say, 'This is a bad time', or they'll ask you again, next week," Fleming adds.
Look for nonmonetary alternatives
Tina Kimball, a 30-something administrative assistant in Dayton, Ohio, loaned her parents her car, when an accident left theirs unusable.
If the situation worsened, she says, she would invite them to live with her family.
Kimball says she wishes she could give them money, but with her own family finances under pressure, she's doing the most she can.
Put all loans and gifts in writing
Relatives lending more than $1,000 should draw up a simple document describing the terms of the loan, including the interest rate, and schedule for repayment, recommends Jennifer Streaks, a financial services attorney in Washington, D.C.
In addition to preventing misunderstandings, the paperwork can be important for legal reasons.
This year, amounts over $12,000 are subject to gift taxes, and unless a certain interest rate, set by the Treasury Department, is charged--currently 1.63 percent, or higher--loans could also be considered gifts.
Consider what might be expected in return
Donald Cox, professor of economics at Boston College, says people who give or lend money to relatives are usually motivated by altruism; sometimes something is expected, in return.
For example, if parents give money to their child for a down payment for a house or college tuition, they may expect assistance later.
"Many adult children, providing care for needy, elderly parents, say they are doing this out of a sense of reciprocity," he says.
[How to Handle Awkward Money Situations]
Learn from mistakes
Tales of family borrowing gone awry abound.
Consider these examples from Alpha Consumer readers:
-- Andrew lent his sister $10,000 in 2005, to help her pay off her bills and get out of debt.
He expected her to pay it back, but she only repaid a small portion of it.
He writes, "I rarely talk to her, and when I do, I don't want to pester her about the money.
"She recently purchased a house; she has a family with three step-kids and one child of her own, only a year old."
He isn't sure what to do, and worries about tension around holiday gatherings.
The lesson
Family loans often don't get paid back, which can badly strain relationships.
-- When Jay's mother had a stroke, at age 50, he struggled over whether to lend her money.
He was just 26, but with his job, could afford to give her some money.
He decided not to.
He writes, "I know my mom.
"I know her history with money and jobs.
"I know what would have happened if I enabled her behavior."
He did pay her rent, until she recovered.
She ended up relocating to a less-expensive area and is making ends meet.
The lesson
Know your limits.
Jay says, while his decision was difficult, he knows it was probably the best move.
"Throughout my experience with my mom, she kept saying, 'I'll pay you back.'
"I knew better."
[See 12 Money Mistakes Everyone Makes.]
-- Julie had just turned 17, when her dad quit his job and opened a hardware store.
He asked her to lend him some of the cash she had stored up from part-time jobs--money earmarked for school costs.
She decided to lend him the money.
"My parents had already provided for us, and spent money year after year, on our sporting activities.
"I determined, if I could help, I would be glad to, as a way of saying 'thank you.'
"By lending the money, I would guarantee I wouldn't spend it, and I didn't need it for three years," she says.
She ended up drawing up a contract for the loan, which specified her dad would pay her back, with interest.
She got her money back, right when she needed it.
"Things worked out, in the end, and I am happy I was able to give my dad a gift, to help him out when it was needed."
The lesson
Sometimes giving a loan works out well, for both parties.
Written agreements can help.
Bottom line
Borrowing or lending money to family members can cause problems that go well beyond money.
As for Tarah, she says the best thing she can do for her family is to avoid repeating her parents' financial mistakes.
That way, she says, she can avoid becoming a similar burden to her own children, one day.
More From US News & World Report
4 comments:
With family, it's very true -- only lend money if you can afford not to get it back. If you do get it back, it's a bonus. More likely, you'll never see it again.
indeed, deb...
despite promises of repayment, i'm out a VERY substantial amount...
i'll likely NEVER see it...
that was the major reason for my moving out of halifax...
on top of all else, it TOTALLY ruined my credit! :(
When I lent a large sum to a relative, I made sure I could live without it. I've not seen it since, and she never mentions it. But it has not ruined our relationship.
But I see a potential storm brewing in my future. This same relative refuses to get health insurance, and if she gets very sick, I know who she will turn to. How can I refuse at that point? Argh.
force her to get health insurance, bella... or tell her up front, you can`t afford another financial hit... from anyone :(
Post a Comment