Should you loan or give money to friends and family? It's a common dilemma, and today, Bridget and John dive into the best practices for making these financial decisions. We'll cover how to balance your own budgeting with helping others, setting up specific savings for lending, and determining when it's appropriate to give or loan money. Make financially sound choices while supporting your loved ones!
4 Tips for loaning money to friends & family: https://youtu.be/FaI7pcGkjdI?si=boCc3Clezig4MCXV
🔗 Resources:
- Alliance of Comprehensive Planners: https://www.acplanners.org
- John's firm website: https://www.trinfin.com
#FinancialPlanning #FamilyFinance #GiveOrLoanMoney #MoneyManagement #BudgetingTips #FinancialAdvice #HelpFamily #SavingsPlan #PersonalFinance #FTFP
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TRANSCRIPT:
Bridget: John, should you loan people or give people money? How much? One of our most popular episodes is on the legal parts of giving people money, but I'm going to talk about should you and how should you do it effectively? Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we talk about the practicalities of gifting or giving money, I want to remind everybody to hit that subscribe button. We're trying to get to 1,000 subscribers. By subscribing, you can help us get there and help other people find this on YouTube. And with that, let's dig in. One of our most popular episodes was about logistically, how do we give, how do we set up the giving or loaning of money in particular? But then we also explained the best way to do it. That's what we talked about before. Should you do it and how should you think about it? That's a whole different topic.
Bridget: Right. Because you want to balance your own budgeting and interests with the other person. And so, it's a very interesting little dance that you want to do here. I just recently heard this suggestion about how much that I want to put out there first. And so, if you want to loan people money, first, figure out your own spending plan, to some degree, anyway. I save 10% of my income, if not more. If you want to save more, that's fine. And then I've got my credit cards paid off.
Those would be two things that you would want to be doing before you start loaning people money. Those are two signs to me that you're managing your finances. And then you start thinking, “Okay, well, what am I spending money on? Can I afford it?” And this suggestion was, I have a bucket where I save for my travel, and I have a bucket where I save for cars. These are expenses that are larger, and it's nice for me if I just put money towards them every month.
And personally, I put the money in myself because it makes me feel good to think, “Okay, here's my travel. Here's my travel money this month. Here's my car money for this month.” So then if I was going to do this, I'd create a third bucket, which would be open to lending to people. And so then if somebody comes to me, I can say, “Well, what's in this bucket? Okay. That's how much I should do or could do.”
John: Yeah. Almost like saving up for it.
Bridget: Right. And putting it in your budget and making it part of your plan. Because if you've got decent financial skills and then you want to make sure that you're maintaining your decent skills and you're not sacrificing them for someone else who doesn't have the skills or ability.
John: Yeah, I really appreciate that. I call it the envelope theory, because that's how my family used to save money—an envelope for vacations and an envelope for the new car, your Christmas account, all those sorts of things. It’s the same sort of deal. If you have that envelope, then as you described it, you never have to worry about over giving to somebody or extending yourself. You take care of yourself first. It’s kind of like when you're in the airplane. They talk about oxygen masks; put your mask on first. Because if you're in tough financial situations or if you find if you get yourself in that spot, then you can't help anybody else.
How do you advise clients on how much? That's a great way of saying, “Listen, here's what I have available. Do you break that down into multiple categories. If there's one person who needs help, then do you say that all that could go to one person, or do you say part of that goes? I would suspect that it has more to do with who might be on that list for you. If you've got adult children that might need some help or parents on the other side of things that might need some help. Is that how you think about it? How do you give advice on that?
Bridget: Yeah, I would say look at your relationship with the person and maybe the person's track record. And are you trying to accomplish anything with this loan or gift? It's interesting that I find myself using the word loan and gift very interchangeably, because I think if you loan people money that are your friends and family, you should realize that this might end up being a gift.
John: Yeah. I think that's a really important part. And I know we talked about it last time. The reality is being mentally prepared to say, “I’m giving this money away. Hopefully I get it back, but I don't know what the chances are,” because I suspect it's not 100% that you're going to get it back.
Bridget: If you do get the money back, you should put it back in that account, in that bucket. The other thing is that I think a lot of the time people are trying to accomplish something. They might be loaning somebody money so that they can do a specific thing so that their situation will get better. Generally, you don't loan money so that someone can go on vacation, but you might loan somebody money so they can put that into their business, or something like that.
And so, I would ask, “Why are you doing this and what are you trying to accomplish?” Again, ideally, what you'd like is for this other person to get those two basic skills that I was talking about at the beginning: I save 10% of my income, and I don't have credit card balances. Okay, so how does this loan fit into those goals for this person? And there're some people for whom you could try, try, try, but they're never going to get that goal. They're never going to be able to do that for whatever reason. And so, I think that you want to put it in that context.
With kids, it's important to ask, “Well, are they saving their income? Do they have credit card bills?” Okay, now you're trying to give them some money, so that they can put a down payment on their house, which your grandkids are going to enjoy. And they could do it faster than if they waited, and they're going to inherit this money anyway, all these other things. That's a different situation than when they asked me for money, because they're really just not managing their finances well.
John: Right. And then I wonder, do you put some parameters around things when you start to save in this bucket or envelope and to think about what is that really for? And it's really challenging, as I'm thinking about on the parental side and about how to help clients when their adult children in particular need help. You want to help but at the same time you have to be careful not to hurt them by continuing to bail them out of things that can be self-solving problems or that they can figure out.
Bridget: Right.
John: We had a client whose son’s car broke down, and it was a $1,000 fix, which was super inconvenient. But the reality is there's public transportation where he lives. You could get around without that and save up that money. And so how do you balance that? Again, I really love this idea of asking, “Well, how much can I afford to give?” Because we've had folks hurt themselves by giving to kids, and the kids actually have legitimate needs. But if you can set it up so that you can say, “This is all that I have right here,” that’s really important, even though that framework can be really hard to stick to sometimes.
I think that's a healthy way to look at it from taking care of yourself first standpoint. But then how do you think about those gifts or those loans that you might make to somebody? Is it when the car needs new tires, and you just didn't plan for it? If you can't get to work because you don't have the car, because you have to drive for a living—sales or whatever it is—that's one thing. If it's a matter of saying, “Hey, it's really inconvenient for me to ride my bike to work in the winter,” that could be another thing as far as how you think about that.
And I think it's really helpful for folks to think about those things in advance, before the car breaks down. You might be in a position where you’ll be asked for money, how are you going to plan to do that? What's your approach? And then I think it's helpful if you practice that because it’s hard to say no when you want to help people, especially family members. And the more you can practice saying, “Here's my line in the sand,” the more you can stick close to that, even if it's not a hard line, can be really helpful.
Bridget: Well, I think another issue that came up in the other episode, which I heard from a client, was I want to make sure they're actually asking me, because sometimes people just want to vent. And I don't even think that they're intending for you to think, “I should help them.”
John: Yeah.
Bridget: If you do, they would be surprised and probably take it, but they're not really thinking you should solve that problem. I actually think that sometimes saying, “No, let's figure out how to solve this problem some other way,” might be helpful.
John: Yeah, that's great. Well, I think that's a great place to wrap things up on our giving/gifting to family concept. Again, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking clients and work with people all over the country, but if you're looking for an advisor in your area, we're both members of ACP or the Alliance of Comprehensive Planners, and you can find out who's in your area at acplanners.org.
John: And don't forget, hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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