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

Fatherly.com Article written by Steve Calechman

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.

 

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Working Through the Big Emotions of Financial Upheaval

If your finances make you anxious, you’re not alone. Before anyone had ever heard of COVID-19, 60% of Americans were stressed out by money, according to the American Psychological Association. None of us are untouched by uncertainty about what lies ahead, and that can cause unexpected emotions.

“Entering into this crisis, most of us already had anxiety and stress around money,” says Brad Klontz, PsyD, CFP, a financial psychologist and managing principal at Your Mental Wealth Advisors and associate professor at Creighton University. “Then you throw the virus on top of it. You’re worried about your financial situation, and you’re also worried about people you love getting sick.”

It’s normal to need time to come to terms with layoffs, business closures, investment losses, or other financial upheaval due to COVID-19. And it’s OK to be upset about the situation, says Patricia Tidwell, PhD, a licensed clinical social worker. “It’s incredibly stressful,” she says. “I’d be worried about people if they weren’t upset.”

But there are many ways to move through the financial stress, anger, and sadness to a place of action. By recognizing your emotions, you can use them to drive your effort to take as much control of your financial situation as possible. Financial and mental health experts share insights on how to get started.

Identify Your Emotions

“We all have feelings and beliefs about money: earning money, having money, losing money,” says Tidwell. “Anger, grief, anxiety, and sadness are all feelings that are healthy, albeit uncomfortable, to have about what is happening now.”

Alex Melkumian, PsyD, a licensed marriage and family therapist and founder of the Financial Psychology Center, adds fear, worry, and avoidance to the list. He says that financial stress from the pandemic can force people into survival mode. “Being in survival mode activates the fight, flight, or freeze response,” he says. “Considering the sudden onset of the pandemic, many people are in the freeze cycle. They feel paralyzed or are overthinking what to do next.”

The first step to working through these emotions is recognizing them and understanding that they are normal, Tidwell says. By taking a moment to identify what you’re feeling, you’ll be able to more easily find ways to work toward solutions.

“The sooner you can get to acceptance, as difficult as it may seem, everything else will be easier,” says Melkumian. “It’s a mental pivot that will disengage the emotional part of your brain, which is not helpful in moments like these.”

Recognize What’s Out of Your Control

Unlike other, more personal financial upheavals, remember that many of the economic forces of COVID-19 are completely out of your control. Your state or local government may have told you that you can’t go to work or need to work altered hours. And it’s necessary for people to stay away from businesses in order to stop the spread of the virus. If these circumstances have altered your financial situation, it’s important to recognize that it’s not your fault, says Klontz.

“The good news is you don’t need to feel ashamed about it,” he says. “You’re also not alone.”

By recognizing this, you can avoid “personalizing the pandemic,” says Melkumian. Keeping an eye on the big picture can protect you from some of the negative emotions that are often associated with financial trouble, such as shame and guilt.

Find Healthy Ways to Manage Money

Once you’ve identified your emotions, it’s important to find mindful ways to manage them, says Tidwell. She suggests a physical exercise for a serotonin boost and meditation for reducing anxiety.

“Putting feelings into words also helps reduce the experience of feeling overwhelmed,” she says. “Talking to others helps you feel less alone. It can be helpful to learn that others are in similar situations with similar feelings.” Consider talking to a therapist or other mental health professional for more personalized methods for handling your emotions, she says. If you’re employed, check if your company offers free counseling through your health benefits or an employee assistance program.

If you still feel paralyzed by fear and anxiety, Klontz suggests confronting it head-on by thinking through any worst-case scenarios. What if you lose your job? Maybe that means you wouldn’t be able to pay your mortgage, and would eventually have to move in with your parents. Though it’s difficult to think about, letting this hypothetical play out can actually calm your body’s “life or death” reaction, by demonstrating that even in the very worst-case scenario, you will likely still be physically safe, Klontz says.

Fight Regret with Action

With so much uncertainty ahead, it can be easy to fall into regret about the past. Why didn’t you start that emergency fund earlier? Why did you take that vacation last year, when you could have saved that money? While it’s natural to wonder about the what-ifs, it’s important to remember that dwelling on the past will do nothing to improve your current situation, says Tidwell.

“Regret is about mourning a lost opportunity, and is often filled with shame,” she says. “It can take over, making it harder to do what will help now.”

Instead of letting your regret balloon into shame, which can keep you stuck, use any missed opportunities as lessons for the future, helping you chart a path forward, Klontz says.

“Did you have an emergency fund?” he asks. “Probably not. That makes you the average American. But now you see why you need one. This is a perfect opportunity for you to look at your spending habits.”

Take Control of What You Can

Being stuck at home may actually give you the time to start sorting out your finances in a way you haven’t been able to before. Maybe you can create a pandemic-specific budget, or place some monthly subscriptions on pause and use those savings to start a rainy day fund. This type of action might be exactly what you need to ease your financial worries, says Tidwell. “Taking stock and making plans can reduce anxiety and help you feel more in control,” she says.

“Become conscious of your spending, looking for ways to minimize expenses that are unnecessary,” Klontz suggests. “Interest rates are really low, so maybe now is the time to refinance your mortgage. There are opportunities right now for people.”

He also suggests researching some of the federal relief programs to see what type of assistance you may qualify for, especially if you’re a small business owner. And to keep yourself motivated, remember that, eventually, the COVID-19 pandemic will be in the past.

“Picture yourself when this is all over,” Klontz says. “How do you wish you would have gone through it, including your mindset, attitude, and behavior? Try to be that person now, because eventually this will be over.”

Note to our readers: This information is being made available as a free resource to the public. It is not an endorsement of any of the Finance-Related Resources listed in this article — financial consultants, planners, services, organizations/associations, websites, tools, lenders, credit unions, or banks. None of the finance-related resources listed have solicited Rally Health to be included, and Rally Health receives no compensation from the Finance-Related Resources mentioned in this article.

KATE ROCKWOOD

Rally Health

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Stop assuming millennials struggling financially have a spending problem

Written by: Megan Leonhardt

Maybe you’ve heard it from your parents or seen it on social media, but a certain piece of advice seems to pervade the financial world: If you just stop spending on unnecessary luxuries — from lattes to avocado toast — you could afford the everyday essentials without the struggle.

However, that’s often not true. The problem is that simply telling people, particularly millennials (ages 24 to 39), that they have a spending problem or recommending they trim their budget if they’re struggling to afford expenses misses the point, experts say.

“In my experience, those with few resources are quite savvy with the resources they do have — they are creative and often manage their money better than people who do who have money because they have to,” says Kristy L. Archuleta, a professor in the University of Georgia’s financial planning, housing and consumer economics department.

Why do people immediately assume it’s a spending problem?

The misconception around why some people struggle to make their money stretch to cover all their expenses and savings goals is due, in part, to the fact that poverty and living in poverty is not a “one size fits all issue,” Archuleta tells CNBC Make It.

This thought process typically happens because most Americans are trying to simplify a situation that often stems from complex problems. Those who are living in poverty or even those juggling expenses paycheck to paycheck may also be grappling with issues that range from racial and ethnic inequality to addiction and mental health issues, says Farnoosh Torabi, personal finance author and host of the “So Money” podcast.

In my experience, those with few resources are quite savvy with the resources they do have — they are creative and often manage their money better than people who do who have money because they have to.
Kristy Archuleta
PROFESSOR AT THE UNIVERSITY OF GEORGIA

Americans are a culture obsessed with budgeting and cutting coupons, Torabi tells CNBC Make It. “We tend to have a narrow mindset when it comes to earning our financial independence,” she says. “We are led to believe that if people just cut their Netflix subscriptions or stopped buying $9 smoothies, that they’d be able to retire wealthy.”

Americans tend to also buy into the mindset that they have fewer options when it comes to their income potential, so they focus on what they buy and how they spend, Torabi says. Cutting down your budget to make ends meet might feel like something that’s more in your control.

But for some Americans, simply cutting entertainment and dining budgets — if they even had them to begin with — will not solve all their financial shortfalls. In many cases, they still can’t make child care or student loan payments. What do they do then?

For some Americans, there are systemic issues at play

“I’m all about taking financial matters into your own hands to the fullest extent. It’s important to save and be mindful of spending, but it’s not the true reason so many people are struggling financially,” Torabi says, pointing to the fact that wages have been stagnant for decades while the cost of living has escalated.

At some point, you don’t have a spending problem, Torabi says. Instead, “you might have an income problem or perhaps a living-in-the-current-United-States problem,” Torabi says.

Real wages effectively remained stalled last year, showing only a 0.2% year-over-year increase, according to the PayScale Index. But looking longer term, PayScale found median wages, when adjusted for inflation, actually declined 9% since 2006.

Meanwhile, basic costs increased year-over-year by 2.3% from December 2018 to December 2019, according to the Bureau of Labor Statistics’s Consumer Price Index. The cost of medical care rose 4.6% in 2019, the largest year-over-year increase since 2007, the BLS reports. Housing also jumped 3.2% last year, while education expenses rose 2.1% and food prices increased by about 1.8%.

You can skip on lattes all you want, but if you have $100,000 debt from student loans and you’re a psychologist or you’re in social sciences or the arts, you’re going to have a hard time paying for those loans.
Alex Melkumian
FINANCIAL THERAPIST AND FOUNDER OF THE FINANCIAL PSYCHOLOGY CENTER

The reason why many others are in debt is not because of buying too much coffee. Rather, it’s debt from expensive mortgages, student loans or even medical expenses, Alex Melkumian, a financial therapist and founder of the Financial Psychology Center, tells CNBC Make It.

“You can skip on lattes all you want, but if you have $100,000 debt from student loans and you’re a psychologist or you’re in social sciences or the arts, you’re going to have a hard time paying for those loans,” he says.

Overall, there are many systemic and policy issues that impact our financial lives, Torabi says. “It’s not fair or accurate to just call out somebody’s spending habits.”

What to do if you are simply spending too much

That’s not to say no one is overspending. Almost three-quarters of Americans have a budget of some kind, but 79% say they can’t stick to it, according to a December poll of 2,000 U.S. adults by shopping site Slickdeals. On average, they overshoot by about $150 a week, or about $7,400 a year.

The top three categories that cause overspending are online shopping, grocery shopping, and subscription services, the poll found, although coffee did make the top 10.

If you fall into that camp, it may be time to build a sustainable budget or take a hard look at your existing budget. Where are you overspending? What can you do to adjust to make it more reasonable?

You may want to start by eliminating distractions that can push you to spend: avoid social media, unsubscribe from marketing emails and untether your credit card from all those apps on your phone.

“We sometimes turn to spending as a way to release stress, anxiety, and other bad feelings — It’s a coping mechanism.
Farnoosh Torabi
PERSONAL FINANCE EXPERT AND AUTHOR

That doesn’t mean you can’t have any fun with your budget, Melkumian says. To stay on track and avoid any feelings of deprivation, he recommends his clients have a small amount set aside in their monthly budgets for “mandatory splurging.” This could be 1% of your monthly budget or an actual dollar amount — from $5 to even $100, whatever your budget will responsibly allow.

“When people have a hard time looking at numbers, because it means deprivation and it means the budget is going to take away my freedom, putting a line item that says something fun like mandatory splurging re-writes the narrative and helps redefine what that budget means to them,” Melkumian says.

If you are truly struggling with overspending, try to understand what’s at the root of it, Torabi says. Are you spending when you’re emotional? What’s triggering those emotions?

“We sometimes turn to spending as a way to release stress, anxiety and other bad feelings,” Torabi says. “It’s a coping mechanism and produces an actual chemical ‘high’…so we keep doing it.” Take time to solve the underlying problem: why you are spending in the first place. That may mean seeking out some counsel.

“You may want to work with a professional to sort some of your issues out and cure this once and for all,” Torabi says.

 

Originally published: https://www.cnbc.com/2020/03/03/stop-assuming-millennials-have-a-spending-problem.html