Life is more expensive today than it was thirty years ago. Parents see their children struggling and want to support them personally and financially. Many offer generous down payments to help their adult children enter the housing market, while others will cosign personal loans or credit cards to help their kids get approved.
As a parent, you want the best for your child. But, before you help with a downpayment, co-sign a personal loan, or hand out money for their debt payments, make sure you understand your own financial situation.
When to Help Your Family With Debt
In the event of a plane crash, you’re told to put your oxygen mask on before assisting others. You can apply the same advice to your finances. Before you lend money to a loved one, determine if you can afford your own bills and necessities.
If a family member or friend asks for money, or you want to offer financial assistance, first ask yourself the following questions:
- Can you afford it? After reviewing your monthly budget and your financial goals, can you afford to lend money to your family members without impacting your day-to-day spending habits or future needs?
- Are you okay with not getting paid back? While everyone has the best intentions, it’s possible that the money you lend to family won’t be paid back. So ask yourself if you can afford to lose the money. Also, consider what it will do to your family relationships if you aren’t repaid.
- Have you cleared it with your partner? Before you lend a loved one money, make sure you speak to your spouse or partner, especially if you share finances. Keeping money secrets or clearing out your savings without asking, will only lead to relationship issues.
Answering yes to all of these questions means you may be in a good financial position to help a loved one in need.
When to Say No to Helping With Family Debt
When someone you care about needs money, it can feel really bad to say no. But there are certain circumstances where it’s not a good idea to lend the money. We’ve seen many generous parents come through our door up to their eyes in debt because they’ve loaned money to their children, at their own expense. You should say, ‘Sorry, I’m unable to help” when :
- You can’t afford it. If you’re hardly making ends meet, and lending to a loved one would mean your bills go unpaid or you go into debt, you might need to reconsider.
- They never pay you back. If you have a loved one who is constantly asking for money, and never pays you back or makes changes to their financial management, it might be time to have a serious conversation or cut them off.
- You’ll get stuck paying for their debt. It’s not uncommon for a parent to co-sign a personal loan for their child. However, when you co-sign a loan, you take on joint responsibility for the debt. If your loved one doesn’t make their payment, you’re stuck with the bill. Ask yourself if you can handle this financial responsibility.
How to Avoid Conflict
Money is emotional and complicated. There are things you can do to avoid conflict or the breakdown of an important relationship when it comes to family money management.
Communicate
Make it a habit to talk to your loved ones about money. Be honest with each other about where you stand financially. Talking about money can help to remove the shame around asking for help or dealing with debt. If you have young children, start teaching them about finances early so they learn the basics of money management.
Set boundaries
If you agree to lend a loved one money, set some boundaries. How much are you willing to give or loan? What are the conditions under which you’re open to lending money? Will you provide a one-time gift or ongoing financial support?
Create a written agreement
You can also create a paper loan agreement to outline the terms of your loan. For instance, will you expect monthly loan payments? When do you expect to be paid back in full? Getting everything on paper can help ensure everyone is aware of the plan.
Ask for collateral
If you want additional reassurance that you’ll get paid back, you can ask for collateral and hold onto it until you receive your money.
Offer help instead of money
If your adult children are struggling to make ends meet, and you want to help, but you can’t afford it, there are other ways to support them. For instance, you can offer to watch your grandkids to help with childcare costs. Or work with them to create a budget so they can manage their money. You can also share financial resources or assist them in reaching out for additional help.
Family Money Management – Talk to a Licensed Insolvency Trustee
Before lending money to a family member, consider your financial well-being. If you lend money to your kids when you can’t afford it, this puts you in a precarious position and can prevent you from helping anyone in the future.
On the other hand, if you need money and you’re thinking about asking for financial help from your parents, make sure you ask if they can afford it. If they can’t, take it upon yourself to look for other resources.
Parents will often do anything to help their children, even if it means jeopardizing their own financial security. This isn’t a good plan for anyone in the family.
If you or a family member are dealing with debt problems and need help, reach out to a Licensed Insolvency Trustee (LIT) at Allan Marshall today. A LIT can assess your financial situation and recommend debt solutions. You can find the help you need without risking your most cherished relationships. For a free, no obligation consultation call 1-888-371-8900 or complete our online consultation form.
