As you think about how to create financial well-being, you might want to think about the toll friends and family members may be taking on your bottom line.
[Related: The 10 Reasons You Aren’t Rich and 10 Ways to Change That]
Almost everyone has a story about asking for a loan from a friend or family member. Blacks have even bigger challenges with these pressures. According to a survey by Prudential Research, about 6 in 10 African Americans provide financial support to someone else—a higher rate than the overall population.
If you find yourself struggling with the pressure to lend, here are five tips that may help.
1) Don’t be an enabler: Emergencies happen to all of us, but if your family member is continuously in a state of financial emergency, serious questions and conversation need to be held,†says money coach Tonya Rapley. Bottom line: If you’re relative is unwilling to talk about living beyond their means and does not seem genuinely interested in creating a spending plan you are enabling them. They will end up in more trouble down the road.
2) Look at your financial situation: If you’re struggling to make ends meet, and don’t have enough money in an emergency fund to cover six months of living expenses, you can’t afford to lend. “You don’t want to be the reason that a family member suffers hardship, but you also don’t want a family member to be the reason that you experience hardships whether that be financially or emotionally as a result of the arrangement,†says Rapley. You should also never tap into money earmarked for retirement and education savings. If your relative does not understand this you should probably be having a different conversation.
3) Know yourself: Many financial planners tell their clients never to lend, but it’s you who must look in the mirror after the fact. Think about how you would really feel if you didn’t help your parents when they needed it? Are there things you can do besides giving them money such as helping them find a financial planner or create a spending plan? What can you really live with? Experts say it’s also important to “get real” with why you’re lending the money. Psychologist Dr. Jeanette Raymond says, “When we help someone in need, we get a rush of dopamine that is the same as the release when we feed an addiction. We’re chemically wired to be drawn to situations where we can rescue someone. It’s very hard to stop,†she adds.
4) Be realistic: If you decide to give your relatives money, realize that you are unlikely to get it back. Think of it as a gift and talk to your accountant about the IRS codes for gift giving. If you can’t afford the gift, you can’t afford the loan.
5) Remember, it’s not just your decision:Â Make sure you discuss this decision with your family and other dependents before you make the loan. It’s not just your financial well-being that’s at stake. You should discuss the impact on your family budget, how lending money will make everyone feel about the family member who is asking. Tensions often fester. Find out how everybody feels about making the loan. Make the decision together. You will be glad you are not solely responsible for the outcome.
If you do decide to go ahead with a loan, set clear terms for repayment. You can actually buy contracts at office supply stores. Also, make it clear to the borrower that they should give you an agreed up notice period if they are going to miss a scheduled payment.