3 Ways To Set Better Financial Boundaries
As a member of Generation X, sandwiched between aging parents and adult children, there’s a good chance that you’ve considered loaning or gifting money to a family member.
But “loan” takes on a whole new meaning when the family gets involved. It can turn from a nice gesture to an awkward, irritating, or downright annoying encounter in a hurry.
Loan/gift, tomato/tomahto—that’s what it’s like giving money to family or friends. How can you financially support your family while also protecting your financial wellbeing?
Let’s explore ways to strategically give money to loved ones without going overboard (on your money or your expectations).
YOUR GUIDE BOOK FOR LENDING MONEY YOU WON’T REGRET
In financial planning, there is no one “right way” of doing something. This sentiment is especially true when family and money are in the mix. However, there are some best practices that you can consider. Let’s review some tried and true strategies for lending money to family members.
1. GATHER ALL THE FACTS
If you are going to provide financial assistance to your family, it is critical to have a plan.
- How much money do they need?
- Do you have a limit on how much you’re willing or able to give?
- Is the payment one-time or ongoing?
- Will you need a payment schedule?
- Are you legally required to charge interest on the loan or file gift tax returns?
Generally speaking, people can’t get a loan on their own because they have credit or other financial issues. If you lend money once, who’s to say that will be the last time? If it’s a recurring financial struggle or ongoing payment, they could end up buying something they can’t afford long-term or have trouble maintaining it.
They may come to you with ongoing requests for cash. You don’t want lending to turn into routine giving. Put a cap on the money you are willing to lend and stick to it. This has two benefits, it gives them boundaries and teaches them how to manage their own finances.
2. DON’T SACRIFICE YOUR LONG-TERM FINANCIAL WELL BEING
As much as you don’t want to see your family members struggle, you can’t sacrifice your own financial security. It’s not good for anyone involved if you jeopardize your financial future at the expense of a loved one. Do your best to be hyper-aware of your current and future financial circumstances before offering a helping hand.
3. CONSIDER ALTERNATIVE FUNDING STRATEGIES
Instead of simply giving cash to your family member, consider other alternatives. A riskier alternative to gifting or loaning money would be to cosign a loan. This would allow your family member to take out a loan from a 3rd party lender (even if they have poor credit).
But remember, if they fail to pay the loan, you would be on the hook for the payments. Co-signing a loan also increases your debt to income ratio, which could prove difficult if you’re looking to get pre-approved for a new loan like a mortgage or car. Also bear in mind, the credit ding you’ll receive from missed or late payments that could follow you around for years to come.
Only consider this strategy if you know that your loved one has a reliable source of income and can pay the bills each month.
4. SET REALISTIC EXPECTATIONS
It’s important to distinguish between a loan and a gift. They are not the same and shouldn’t be treated as such.
If you see a family member genuinely struggling, consider gifting them some money outright. This may remove some tension in the relationship long term. If you decide to loan money, set specific parameters for how and when they will repay you. Either way, make your expectations clear both to yourself and the family member.
TIPS TO SET BETTER FINANCIAL BOUNDARIES
Money and family are both personal.
To avoid being taken advantage of, it’s critical to set clear financial boundaries with yourself and others to keep you on the right track. Let’s take a closer look at some of the ways you can create more intentional boundaries that work.
KNOW YOUR “WHY”
Before you start thinking about the specifics of a family loan or gift, ask yourself, “why?”.
- Why are you willing to lend money to your family?
- What are you trying to accomplish?
- Are you really helping them, or could you be harming them in the long run?
- Should you be thinking about how this will impact other parties (i.e., your spouse, siblings, other family members, etc.)?
If you feel comfortable with the answers to these questions, it just might be a good idea to move forward. Given how emotional this situation can be, it’s easy to overlook the impact this decision can have on you and your family as a whole. If needed, ask for guidance from an unbiased 3rd party (like a long-time friend or your advisor). They may be able to help you see the forest through the trees.
THINK LONG TERM
Ultimately, you need to be thinking about the long term impact of lending money to a family member:
- If this is a loan, what are the loan terms? Clearly establish the loan amount, repayment period/frequency, interest rate (if applicable), and “consequences” if the loan terms are not met.
- What percentage of your overall net worth or assets does the loan or gift make up? Maybe you are willing to lend or gift 1% of your assets. This will set a cap that is tailored to you and limit the potential damage to your financial future.
- Are you incentivizing the right behavior long term? Are these unique circumstances, or does this person have a track record of irresponsible behavior? As they say, fool me once, shame on you. Fool me twice, shame on me.
- What happens if things go south? Are you prepared for the possibility of losing all this money?
COMMUNICATE YOUR LIMITS AND STAY ACCOUNTABLE
It’s great that you have considered your “why,” thought about the long-term impact, and set some limits for yourself. All of that effort could go to waste if you do not communicate your boundaries.
- Communicate With Yourself: As we have already established, be honest with yourself and set clear expectations and boundaries.
- Communicate With The Family Member: Make sure that the family member you are loaning/gifting money to is crystal clear on your limits. Write them down and ask them to sign it for future reference.
- Communicate With A 3rd Party: Do yourself a favor and factor in your emotional biases. After all, this is your family we are talking about. Pull in an unbiased 3rd party who can help you think clearly when you cannot do so yourself.
NAVIGATE FAMILY AND MONEY LIKE A PRO
It can be complicated to lend or gift money to family members without damaging relationships and putting your personal financial future at risk.