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financial psychology

October 30, 2020 By Anna Bahney

Thanks to Covid-19, some folks are broke and some are flush. Here’s how to talk about it

(CNN) – As the pandemic rages on, millions of Americans are suffering financially while millions of others are doing just fine — some even better than ever. But how do you talk about money with friends or your own family, without feeling ashamed or offending anyone?

America was already economically divided and a “don’t-talk-about-it” money culture, said Alex Melkumian, a licensed marriage and family therapist and founder of the Financial Psychology Center in Los Angeles. Now, with people finding newly exposed sensitivities and dividing lines, gaps are widening and conversations have become even more difficult.

We’re already in a period of financial trauma for people, said Melkumian. Conversations, which leave people feeling judged or insulted, don’t help. Here’s how to talk about money while being sensitive to those around you.

Listen more, spout advice less

Jake Morris was starting a financial advisory business and his wife Whitney was a verbatim hearing recorder for the Social Security Administration in New York’s Hudson Valley when the pandemic struck. Very quickly, Whitney’s work dried up as hearings were put on hold then went to a telephone format and the launch of Jake’s business was delayed.

Then he got a text from someone in his inner circle: “Do you both still have jobs?”

Morris said it was so insensitive that he had to laugh.

“To me, that was so stark. It was almost funny,” Morris said. “But so harsh.”

With their job situations turned upside down in a matter of days, they still weren’t over the shock. They have each found work in their own ways, but it is not at the level it was before.

“Anyone who has had a job loss or gone into retirement knows there is a loss of identity,” he said. “We need a little sensitivity training, I think. It isn’t helpful to say, ‘How does it feel to have your whole life torn out from under you?'”

Jake Morris found listening to be the most helpful way to hear about other people’s financial situations.

Based on his experience, he now asks people he meets, “How has this impacted you?”

“I let them talk about it the way they want to,” he said.

If you’re the person who has remained employed and is financially unscathed, do more listening, Melkumian advised.

“The most important thing we can do is listen and resist the urge to jump in and fix it, because much of this can’t be easily changed.”

Suggesting that someone ‘pivot and do something else,’ for example, can be good advice, Melkumian said. But your friend or loved one needs to be ready to hear it.

“You may have connections to offer them, but it is your connection with them that is most important,” he said.

Pick up the phone

These serious conversations are best had in person. If social distancing is preventing that, a phone call works best.

Nothing on the topic of personal livelihood and well-being is better conveyed by a text, said Ashlee deSteiger, a certified financial planner with Gunder Wealth Management in Michigan.

“With friends and family, I don’t want a text,” she said. “There is just too much tone to be lost in a text.”

She suggests setting boundaries like not texting in frustration or sharing things in which tone can be misinterpreted.

“Those conversations need to happen over the phone or face-to-face,” she said.

If you’re the one receiving the insensitive texts or messages, avoid getting defensive and try to consider where the other person is coming from.

“I suggest reframing the situation to, ‘I know my friend or family member is doing the best that they can for themselves and their family.'”

That, she said, may help you see beyond the posts and conversations that you think lack empathy.

Be direct

If you are having financial difficulties, now is the time to speak up about it, Melkumian says, because you’re not alone.

“If you are really struggling and feel you can’t say to your friend, ‘I don’t know where my next rent payment is coming from’ — then when can you say that?”

When Ed Hart was able to reopen his hair salon in Hermosa Beach, California, he noticed many of his clients experienced the shutdown much differently than he had.

While Hart was struggling after a major loss of income, his customers were working from home, earning the same income, some even more than before.

“People that I know who retired well are fine,” he said. “Younger people I know that work for large companies are working out of their homes, they are okay. But the people who are consistently struggling and having trouble are business owners, entrepreneurs.”

So he decided to address this awkward disparity directly.

“I made a sign and put it by my station,” he said. “It says that there is no secret that we are going through a financial hardship. I understand that they may be going through a hardship, too, so we won’t raise prices. However, if you are financially strong, pay more if you can.”

And they have. After one client received a $200 treatment, he said, she included a tip and left.

“It was a $1,000 tip,” he said. “I called her right away to thank her. I didn’t know what to say. It was overwhelming. ‘Don’t worry,’ she told me.”

Don’t be tone deaf

Some people who have celebrated things like buying a house, taking a trip or getting a new job, have been met with anger by hurt friends and family who say it smacks of being tone-deaf to the moment. Just look at the public reaction to Kim Kardashian’s post about her 40th birthday celebrations on a private island earlier this month.

The response was largely not enthusiastic.

“Congrats on this nomination for most tone deaf tweet of the year,” Twitter user @beyondbrighton replied to Kardashian. “You want normal? Try people unemployed, at food banks, teaching kids at home, or worse in the hospital by the tens of THOUSANDS! Oh the plight of the wealthy & their struggle to an escape to a private island.”

The context matters when sharing good news, said Melkumian.

“If you post your celebration in a way that says, ‘I’ve been struggling and in order to overcome something and I did this, this and this,’ documenting and chronicling your fight, it isn’t out of context,” he said.

But in this moment, there are other things to keep in mind, he said.

“There are political factors, sounding tone deaf, other people being broke,” he said. “How do you tell your truth without coming off as insensitive?”

It may be that there isn’t a way to do that, he said, and it is better right now to keep it to yourself and just to listen.

Filed Under: media, Uncategorized Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

October 14, 2020 By Louis DeNicola

Will COVID Change Our Habits Permanently?

(Money Management) – The coronavirus pandemic has upended everyone’s life and led to some significant habit changes. The old (and ironically somewhat tired) personal finance advice of skipping a morning latte may be forced upon you if you no longer have a morning commute.

Such an impactful event also brings up questions of how people are coping and which new habits will stick when we no longer have to worry about the coronavirus. We talked to some experts to find out how COVID has changed us and what changes may be still to come.

FIGHT, FLIGHT, OR FREEZE

Looking back at how people initially responded to the coronavirus outbreak offers some insight into how a crisis can impact us.

“First and foremost, COVID is affecting our mental health by creating an initial stress response: fight, flight, and freeze,” says Dr. Alex Melkumian, founder of the Financial Psychology Center in Los Angeles.

Perhaps you’ve seen or experienced some of these responses. People “fighting” by updating their LinkedIn profile and jumping into a job hunt. Flight and freeze might look like avoiding the situation and putting off everything until the last minute. Although, a similar lack of response can come from optimism bias—the belief that everything will work out okay.

Of course, there’s more at play than an initial response, and people react differently depending on the situation. For example, after a layoff some people may avoid filing for unemployment due to shame or pride rather than a flight or freeze response.

Crisis responses have also played out in different ways on a large scale. If you think back to the early days of the pandemic (a lifetime ago), you’ll remember how panic-buying led to toilet paper shortages.

SOME FINANCIAL HABITS ARE ALREADY CHANGING

Over half-a-year in, people have had time to adjust, develop new routines, and implement changes. Some of these might not be habits, per se, but they can still have a long-term impact.

“A lot of what holds people back is that they think there’s all the time in the world to get it done,” says financial therapist Lindsay Bryan-Podvin. “When the reality hits… the fire burns to get things going.” Many of her clients are finally crossing things off their financial to-do list, such as getting life insurance or writing up a will.

A McKinsey & Co. survey from October 7, 2020, offers more insight into what types of financial habits may be changing:

  • Most people are cutting back on discretionary spending.
  • About 23% to 25% of people recently started using food or grocery delivery services for the first time, or are using them more often. Of those, over half plan to continue using these services after the coronavirus subsides.
  • A small group (12% to 13%) is trying curbside store and restaurant pickup for the first time, and about half of that group plans to continue using curbside pickup.
  • More than two-thirds of people are trying new shopping methods, brands, or stores. Many are “trading down” to find cheaper brands and retailers.
  • Since the pandemic, people are increasingly aware of how companies care for their employees’ safety (23%) and a company’s purpose or values (17%).
  • The increased use of social media, wellness apps, online streaming, and online fitness programs may continue post-pandemic. Topping the list of changes that may continue is an offline activity—regularly cooking.

Katherine Milkman, a professor at the University of Pennsylvania’s Wharton School, also recently shared some insights on what habits can be “sticky” in an interview on the Slate Gist podcast and article by Joe Pinsker in The Atlantic.

For example, it’s not hard to imagine someone developing a preference for a lower-cost brand or more convenient services. But washing your hands for 20 seconds might not stick when there’s no fear of a virus.

TRAUMAS MAY STAY WITH US

Specific habits aside, there could be a lasting impact on people’s relationship with their work and finances.

Even before the pandemic, the American Psychological Association’s annual Stress in America survey from 2019 found that most people listed work and money as one of their most significant sources of stress. The pandemic and resulting layoffs has only exacerbated those stressors.

“This is our Great Depression,” says Melkumian. “The level of anxiety and concern and worry could be exponential to where we were before. From a mental health standpoint, we’ll see an increase in financial trauma.”

There’s no single answer to how this plays out. The pandemic is affecting households in drastically different ways, and even those who are impacted in similar ways may have different responses.

“How much we’re going to be ruled by fear, caution, worry, anticipation, and doomsday scenarios is going to be part of our overall psychology and how we approach finance,” says Melkumian. “There may not be answers until we get there, but we need to beware of our psychology.”

He also draws the connection between financial stressors and the resulting impacts on how you may interact with your spouse or kids, and your overall wellbeing. “In turn, how does that affect your physical health? What happens to your family and identity as a provider and contributor?” Melkumian asks.

BUT THIS IS ALSO AN OPPORTUNITY FOR CHANGE

While the pandemic can cast a foreboding shadow over everything, if you can get out of crisis mode, it can also be a significant opportunity to rethink your life and the habits you want to change.

As Bryan-Podvin shared, some of her clients have done this by checking off some of their financial to-dos. She’s also observed a growing interest in making more drastic lifestyle changes. “They’re starting to consider what life would be like if they downsized housing and could retire earlier, or spend more money elsewhere,” she says. What might have been a daydream before has become a more realistic option.

“Obviously there’s a lot of uncertainty. We’re in a limbo pattern of not knowing when we can resume normal life,” says Melkumian. “But I’d love COVID to be the call to action to improve and increase our financial consciousness, awareness, and literacy.”

If you’re ready to start making some lasting financial changes, a free one-on-one counseling session is a great place to start. Our debt and budget experts are available 24/7 to help you discover resources, learn valuable skills, and begin realizing your goals.

Filed Under: media, Money Management Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

October 14, 2020 By Alex Melkumian

How Financial Therapy Can Help You

Blog 3 of 3 in the Introduction to Financial Therapy blog series.

Introduction to Financial Psychology blog series

This brief blog series will illustrate how the growing field of Financial Psychology can revolutionize people’s turbulent relationships with money. Through understanding the roots and influence of their personal financial psychology, individuals find themselves able to discard the inherited programming that drives their financial decisions, and that no longer serves them.

The complete list of blogs in this series are at the bottom of this article.

How Financial Therapy Can Help You

Modern American culture projects a faulty reality of wellbeing and status largely based on large amounts of consumer debt and fueled by immediate reward. This external view is far from the truth. People in high-earning jobs often feel pressured to maintain the status quo or keep up with friends of a similar income level. They may indulge in overspending based on expected continued high-income, estimated bonuses, and anticipated promotions. Those unable to keep up with associates’ financial successes may be distressed by jealousy, shame, and low self-worth. The truth is that all of these related negative emotions have led to a taboo around personal conversations about money. While experiencing financial anxiety, depression, or stress—or even excitement over a big raise and promotion—any disclosure of such feelings may feel unsafe, exacerbating the discomfort.  So, instead, as a society we tend to bottle up any confessions about personal finances, and carry on with our silent struggle to mitigate our stress.

There is a Financial Solution

As highlighted in the previous blog, Why the world is turning to Financial Therapy, it has become more and more obvious that the solution to personal finances doesn’t merely require education and information regarding the basics of financial management. Although certainly helpful, knowing what to do does not always lead to effective decisions and execution. It is imperative that individuals with financially dysfunctional behaviors work toward a comprehensive alteration of their thoughts, feelings, and habits with money. These habits and feelings typically arise in childhood and early adulthood when initial financial blueprints are established by experiences and role models.

As adults, we find we may have unconsciously adopted problematic financial habits, creating roadblocks to our own personal success. For example, your parents may have managed money perfectly, but may not have shared the details with you—leaving you both ill-equipped to deal with adult life and resentful of their inattention to this crucial skill. On the other hand, they may have had intense arguments about money, leaving you uncertain about how to manage finances and fearful of a topic that appeared to create friction. Every money story is unique, made of individual experiences that require awareness and discernment in order to right-size and balance one’s relationship with money.

This is where the financial therapist comes in. A trained and experienced professional can provide a safe haven, with proven tools to help clients navigate the maze of their own money stories. Through careful work with an empathetic specialist, a financially stressed individual is empowered to identify and overcome economic roadblocks. Relief from constant pressure around money opens up new possibilities for individuals to expand their life experiences, create and maintain better personal relationships with their partners, and rid themselves of the shame and guilt too often associated with finances.

For a free consultation about your best course to financial stability and health, call 818.600.2264

****
Introduction to Financial Psychology blog series

This brief blog series will illustrate how the growing field of Financial Psychology can revolutionize people’s turbulent relationships with money. Through understanding the roots and influence of their personal financial psychology, individuals find themselves able to discard the inherited programming that drives their financial decisions, and that no longer serves them.

Blog 1 – What is Financial Psychology
Blog 2 – Why the World is Turning to Financial Therapy for Help
Blog 3 – How Financial Therapy can Help You

Filed Under: blog, financial stress Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

October 7, 2020 By Alex Melkumian

Why the World is Turning to Financial Therapy for Help

Blog 2 of 3 in the Introduction to Financial Therapy blog series.

Introduction to Financial Psychology blog series

This brief blog series will illustrate how the growing field of Financial Psychology can revolutionize people’s turbulent relationships with money. Through understanding the roots and influence of their personal financial psychology, individuals find themselves able to discard the inherited programming that drives their financial decisions, and that no longer serves them.

The complete list of blogs in this series are at the bottom of this article.

Why the World is Turning to Financial Therapy for Help

How low-income, middle-class, and wealthy individuals alike are all beginning to realize that financial wellness begins in the mind.

There is no mystery to managing personal finance. In spite of money management being woefully absent from school curricula, most people manage to understand the basics: earn more than you spend, save as much as you can, invest in a future day. However, an entire industry is built on educating people on the finer points of financial management. Books, articles, television programs, and radio shows all devote countless words over countless hours to provide insight into the details of handling personal finance. Yet millions of Americans find themselves grossly in debt, having saved little or nothing for retirement, and unable to enact the simplest changes to their financial lives. The impact of the COVID pandemic has greatly exacerbated the already alarming state of personal finance and sent our society into a K shaped recovery.

The financial industry suggests that if you are more educated about money management, retirement plans, and investment programs you should be able to grow your wealth. Likewise, the education industry aligns with the narrative that a more advanced degree would enable you to obtain a higher-paying job—your financial stress evaporating because of the increased income. When both strategies show minimal results, many people blame themselves and internalize the narrative as being defective or irresponsible. But for a large number of individuals who are trapped in living beyond their means, underearning, neglecting savings, or compulsively spending high incomes, there is good news.

The financial industry does provide significant benefit in certain areas of personal finance. However, most financial advisors’ ideas about personal decision making are based in rational choice theory, which states that human beings are rational and will make optimal decisions, resulting in outcomes aligned with their own best interests. But humans are not always rational in all areas of their lives—including their behavior with money. Thus, financial therapists in corporate elements from the field of clinical psychology to examine how emotions, beliefs, and personal narratives impact both short-term and long-term financial behavior.

A new awareness of how behaviors with money are influenced by childhood history has created a driving force to uncover, understand, and discard the money stories that don’t serve us in our current, day-to-day lives. Such stories underlie financial disorders that manifest in a variety of patterns such as underearning, over-working, or see-sawing as a high-stress, feast-or-famine intermittentincome earner. All of these behaviors result in shame, leaving the sufferer feeling incompetent or paralyzed and unworthy.

A Solution to Financial Stress and Emotions

Awareness is the first element of the solution. This is where Financial Therapy comes in, as more and more people are coming to recognize as the solution to their self-sabotaging financial habits and accompanying financial stress. Working with a financial therapist, individuals find a safe place to examine the money beliefs that drive their flawed financial habits. This allows them to identify and interpret the money stories rooted in their personal history, and to acknowledge economic mistakes with grace and self-compassion. This awareness leads to financial transformation and feelings of empowerment.

For a free consultation about your best course to financial stability and health, call 818.600.2264

****
Introduction to Financial Psychology blog series
This brief blog series will illustrate how the growing field of Financial Psychology can revolutionize people’s turbulent relationships with money. Through understanding the roots and influence of their personal financial psychology, individuals find themselves able to discard the inherited programming that drives their financial decisions, and that no longer serves them.
Blog 1 – What is Financial Psychology
Blog 2 – Why the World is Turning to Financial Therapy for Help
Blog 3 – How Financial Therapy can Help You

Filed Under: blog, financial stress Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

September 21, 2020 By Alex Melkumian

Conquering COVID: Financial Trauma and Recovery

Since the outbreak of COVID 19, the lives of people all around the world have shifted drastically. From social distancing to endless quarantine, numerous sudden changes in our lifestyle have greatly impacted both our macroeconomy and our management of our personal finances. The unprecedented societal disruptions have left many people financially traumatized, and irrevocably affected our ideas around money. It is important to fully realize that such changes may be permanent, and recovery may require a learning curve for many of us.

Although daily life appeared to come to a screeching halt during the past five months, the shift in people’s attitudes toward money and finance accelerated. Fear, confusion, and uncertainty thrust whole populations into survival mode, with citizens frantically purchasing and hoarding common household items, leaving supermarket shelves empty. BBC news journalist Bryan Lufkin explained the reasoning behind such blind panic reactions as “fear of the unknown, and [the belief] that a dramatic event warrants a dramatic response—even though, in this case, the best response is something as mundane as washing your hands.”

Looking back, we may categorize such extreme emotional activity as irrational and unreasonable. However, David Savage, an associate professor of behavior and microeconomics, wrote, “But emotions are not irrational: they help us decide how to focus our attention” (The Conversation, 2020). As humans, our emotions play a large and important part in decision making, both in response to possibly life-threatening external factors—such as the pandemic—and considerations as mundane as personal finance. In “normal” times, certain reactions might seem unhinged and fanatical; however acknowledging, examining, and valuing our emotions can help us decipher what our feelings may be trying to convey.

Five months into the global crisis, mask-wearing is the norm and the term “social distancing” is part of our daily vocabulary. At the same time, we have weathered losses not seen since the Great Depression, both in employment and in overall personal wealth, radically altering our usual patterns of spending. Baker and colleagues (2020) recently studied household expenditures in the United States, finding a sudden, steep increase in spending between February 26th and March 10th, followed by a 50% downward spike, then another sharp drop. Behavior being a clear reflection of emotions, the upward surge was easily attributable to the “fight-or-flight” survival response, as large segments of the public hurried to stockpile certain grocery items. The subsequent precipitous decrease clearly illuminated the struggle of many families to pay their bills. Different populations have adapted to this new state of adversity by fundamentally modifying former habits and priorities. It is evident that, for many, “getting and spending” currently take a back seat to saving up for an uncertain future and maintaining as much control as possible over family finances.

Conversely, others found themselves turning to compulsive online shopping— “retail therapy”—in an attempt to “medicate” their distress. Instead of relief, this behavior only served to exacerbate their anxiety as their reckless spending increased their financial problems. Along with mounting dread over deepening debt came feelings of deep shame and self-recrimination over the increased danger of unrestrained shopping spreading infection to delivery personnel and others.

As consequences of the pandemic continue to mount, new behaviors—rooted in adverse experiences and emotions during this time—will certainly materialize. CNBC reporter Chloe Taylor (2020) wrote that “a generation of risk-averse supersavers could emerge from the fallout of the coronavirus crisis and potentially reshape the economy.” The widespread economic misfortune this pandemic has inflicted may affect the ways we manage our money far into the future. Many individuals may become much more cautious about extending themselves for financial gain. An increase in precautionary savings in the U.S. is similarly likely.

On the other hand, other sources argue that this is a temporary and a relatively small financial setback in a much bigger world. Daniel Crosby, a well-known psychologist and a behavioural finance expert writes, “It’s human nature to assume that all we see is all that will ever be, but markets operate on a more forward-looking basis and realize that ‘this too shall pass.’ ”. He emphasizes the importance of believing in a better and brighter future in order to be the best investors we can be. As mentioned above, it is a small bump in a larger scheme of things – the market does not radically change overnight and it might be in our best interest to recognize the importance of consistency by not changing our behaviour as much.

While a lot of us would choose to be proactive in terms of managing our finances, many who have been deeply wounded and traumatized worry that a successful economic adjustment may take months or years to achieve. It is helpful to acknowledge that, throughout this pandemic, workable adaptations were made quickly and reasonably. This is proof of the power of our emotions and thoughts over unconscious behavior.

Many of us previously approached our lives without a moment of doubt over the apparent permanence of our social structures. That notion crumbled before our eyes, serving as a much-needed wakeup call. The resulting rapid shift of a whole generation’s former capricious financial behavior to a “tighten-your-belt” mentality clearly proved that harnessing our emotions can change our money habits in positive, if unpredictable, ways.

Our human capacity for adaptation over a very short period of time does not mean, however, that we can expect to coast back to “normal” at the same velocity. The unexpected crisis exposed an already precarious economic situation for many people, revealing the missing elements of thought and planning in their approach to money management. It has been a series of chaotic months for a lot of us financially. Moving forward, while we might assume that from all we have endured, our actions will reflect our experience and will be nothing like what we expected before; however, the intricate financial world does not change easily. In order to achieve a similar state as pre-covid, it may be in our best interest to keep the bigger and brighter picture in mind and seek for continuity and stability. Although it is tempting to believe that our lives will eventually return to their 2019 standard, the indelible lesson is that we must learn how to respect and understand our own emotional reactions if we are to effectively guide our financial affairs with intention and forethought. The alternative is to continue to find ourselves at the mercy of circumstance.

For a free consultation about your best course to financial stability and health, call 818.600.2264

References:

Savage, D. A., & Torgler, B. (2020, April 24). Stocking up to prepare for a crisis isn’t “panic buying.” It’s actually a pretty rational choice. Retrieved August 13, 2020, from https://theconversation.com/stocking-up-to-prepare-for-a-crisis-isnt-panic-buying-its-actu ally-a-pretty-rational-choice-132437.

Lufkin, B. (2020, March 4). Coronavirus: The psychology of panic buying. Retrieved August 13, 2020, from  https://www.bbc.com/worklife/artic le/20200304-coronavirus-covid-19-update-why-people-are-stockpiling.

Taylor, C. (2020, April 03). Coronavirus could create “a generation of supersavers” and reshape the economy. Retrieved August 13, 2020, from https://www.cnbc.com/2020/04/03/coronavirus-m ay-create-a-generation-of-supersavers-who-reshape-economy.html.

Baker, S., Farrokhnia, R., Meyer, S., Pagel, M., & Yannelis, C. (2020). How Does Household Spending Respond to an Epidemic? Consumption During the 2020 COVID-19 Pandemic. doi:10.3386/w26949.

Daniel Crosby, D. (2020, August 11). The Strange Psychology of COVID-19 and Investor Behavior. Retrieved August 24, 2020, from https://www.kiplinger.com/investing/601211/the-strange-psychology-of-covid-19-and-investor-behavior.

Filed Under: blog, financial stress Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

August 31, 2020 By Steve Calechman

Lending Money to Family Is Complicated. Here’s How to Do it Right

(Fatherly.com) – When a family member falls on hard times and needs a hand, stepping up is the sensible thing to do. The immediate reaction should be: What do you need and how can I help? But when the ensuing request is for financial help, the decision becomes a bit more difficult. Dealing with family is rarely drama-free. But lending money to family is riddled with conflict. It immediately creates a situation that dredges up resentment, anger, and worry. How, then, do you go through with a family loan without it being such a nightmare?

Even in the most straightforward agreement, money creates an imbalance. It involves power and control. You have it. They don’t, and, if the deal goes bad, the nature of your relationship, and the family dynamic, can be changed for good. It can be, in a word, “messy”, says Jennifer Calder, financial therapist in Montpelier, Vermont.

Still, you’re not turning away from a relative, and a family loan does not automatically mean disaster. But, to make lending money work, you need to balance your head and heart. It takes self-examination about what you’re getting into and it involves having open conversations. This isn’t a fun exercise. But the process can head off the anxiety, reduce surprises, and end up making a deal that works for both sides.

Responding to a Family Loan Request: What to Think About

Your brother asks you for money. You want to respond, “Of course,” but the answer can’t be impulsive. You need time. There are complications, both obvious and unforeseen, to explore. So how do you begin?

Calder says to start with two essential, fair questions: “How much?” and “What’s it for?” Once you have the basics, it’s perfectly reasonable to then say, “Let me think about this for a couple of says,” because there is even more to take into account.

On the practical level, the main concern is Can I afford to give him this money? Over-extending yourself merely causes stress that can bubble up into resentment. If the amount of money he’s requesting is doable, then you have to talk it over with your spouse, particularly if its a joint account. Not mentioning it, Calder notes, is breeding ground for financial infidelity. Lying to your spouse about money is never a good move.

But the considerations you need to make before lending money to family are not all practical. The most essential is a basic rule of lending: You may never see the money again. But you will see this person again. You have to ask yourself: How will I feel if it’s not repaid?, notes Alex Melkumian, financial therapist and founder of Financial Psychology Center in Los Angeles.

This is an important question. And if you’re comfortable with the prospect, it becomes a smoother process. Calder and Melkumian both say that making it a gift — tax implications, aside – makes it even smoother. (More on that in a bit.) But before you go ahead, it’s necessary to think: Is this request part of a troubling pattern or a sign of atypical hard times?

With all these considerations laid out, you come to three options:

  1. Yes.
  2. No, I can’t.
  3. No, I don’t want to.

Regardless of your answer, the conversation continues, and ways to help are still possible.

Lending Money to Family: If Your Answer Is No.

If a family member asks you to lend them money and your answer is “No,” the way in which you deliver your answer is crucial. Is the reason because of your financial situation? Say “I love you, but I can’t afford it right now.” Is the reason because you don’t feel comfortable giving the money, say something like, “I love you too much and I’m worried that this will damage our relationship.” It’s not a desired answer, obviously. But you can follow either with, “I still want to help,” and then you two can brainstorm.

Depending on the underlying issue – bad job, outdated skills, poor money management – you could offer to pay for a counselor or adviser. You could look for ways to free up your brother’s time in order to job hunt or take a class. The point is, as Melkumian notes, “money is not the only resource.”

Lending Money to Family: If Your Answer Is Yes

If your answer is yes, then you need to talk with the requestor frankly. Again, it’s simpler to gift it, and you can put it on yourself with, “Do this for me. I don’t want to jeopardize us. Pay me back if you can, but you don’t have to.” It doesn’t take away all the guilt, but some weight is lifted, notes Melkumian. Plus, the option still exists to repay, which doesn’t conflict with the asker’s pride.

But if you are going to make it a family loan, you have to figure out the details of interest and repayment, and go through as many scenarios as possible. Calder calls these the “What-ifs?”, the most important being if repayment can’t happen.

One thing that helps is to set a re-payment schedule that includes regular check-ins where you talk about the practical as well as the emotional issues. It could be asking along the way, “How are you doing?” Remember, it’s family, and, “Family relationships are more important than money,” Melkumian says.

With the schedule, you’ve built in a release valve. You, as the lender, don’t have to stew or wonder about what’s happening, because you know you two will be talking. “The more we leave to the imagination, the more opportunity there is for stress, anxiety and resentment,” he says.

And talking serves two more purposes. It’s a barometer, for one. If your relative isn’t willing to engage, it’s a strong sign that lending isn’t wise. But by getting everything out, fewer things will come as a shock. “The more you talk about the transaction, it will become easier to talk about it,” Calder says.

Gaining a Release

Here’s one more thing to accept: Once you give the money, it’s gone, and you need to let it go, Calder says. You can’t constantly check up on or micro-manage the person. At family gatherings or even on text threads, no one wants to feel judged or that every comment is interpreted through the outstanding loan.

Here’s a way to reframe perspective. Instead of focusing on the money, Melkumian says, think of this: Your brother or sister is struggling. You want to see him or her rebound and you want your relationship to remain strong. Act like you would with watching your stocks or even your hair grow. Progress isn’t seen by the hour, day, or week. You’re making an investment into someone you care about. That takes time. “Trust the process,” he says.

***

Written by Steve Calechman

Filed Under: financial stress, media Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money, money relationship

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