What’s the Best Way to Help a Family Member in Financial Straits?

When a family member or close friend is in need of financial assistance, your initial reaction might be to do everything in your power to help them.

However, instead of simply giving cash or using a credit card, financial experts advise taking a step back and evaluating your own financial situation first.

“It’s a decision based on emotions,” says A.B. Ridgeway, a certified private wealth advisor in Lafayette, Louisiana. “Let’s take a moment to ensure that we also protect ourselves.”

Here are some ways you can assist a loved one in need without jeopardizing your own financial stability:

“Begin by understanding your own financial standing,” suggests Emi Gjini, a certified financial planner and founder of MyGen Planning in Chicago. “Review your budget, savings, emergency fund, and retirement contributions to ensure they are in order.”

Once you have a clear picture of your finances, you can determine how much assistance you can provide to someone else.

“Choose an amount that you can afford to give without causing financial strain,” she recommends, to ensure that you can still meet your own financial obligations and have funds available for unexpected expenses.

It’s important to be able to cover your own emergency costs in case of job loss or unexpected expenses.

Offering a cash gift is usually a simpler option, according to Gjini. Lending money can complicate matters, especially when it comes to repayment terms among friends or family members.

A cash gift allows you to plan ahead more easily since you don’t expect the money to be returned. Waiting for reimbursement can be stressful and impact other financial decisions.

If the person you’re assisting is seeking financial help elsewhere, it’s advisable to avoid co-signing a loan with a family member, warns Mark Reyes, CFP and founder of Casita Financial Planning in Los Angeles. Your credit score could suffer if the family member misses payments, potentially affecting your ability to secure favorable interest rates for major purchases.

“Gifting cash can be less risky than sharing credit,” Reyes explains, emphasizing the importance of protecting your financial well-being.

If you’re providing money with the expectation of repayment, Ridgeway recommends outlining the terms of the agreement in writing.

“I suggest creating a contract detailing the terms and conditions,” he advises, noting that agreement templates can be found online.

“When dealing with money, misunderstandings can arise,” Ridgeway adds. Putting the agreement in writing can help clarify expectations for all parties involved.

Another advantage of documenting the agreement is that if the borrower fails to repay, you may be able to claim a tax deduction for the debt, Ridgeway points out. Consulting with a tax professional regarding your specific circumstances is recommended.

Sometimes, the most effective way to aid a family member is by offering non-monetary support, according to Ridgeway. This could involve listening, connecting them with job opportunities, or assisting them in applying for unemployment benefits.

“Practical forms of assistance, such as reviewing their resume or helping with their LinkedIn profile, can often be more beneficial than giving money,” Reyes notes.

You could offer to cover their groceries for the week to alleviate their burden without committing to a significant financial obligation.

Regardless of how you choose to assist, it’s essential to set clear boundaries to prevent the aid from becoming overwhelming.

“Imposing limits on the type and amount of assistance you provide doesn’t mean you care any less, but it does hold the recipient accountable for their situation,” Ridgeway emphasizes.

Without clear boundaries, there is a risk of people taking advantage of your generosity.

Gjini stresses the importance of ensuring that your assistance does not enable poor financial decisions but rather helps the individual improve their financial situation.

“Focus on long-term solutions. Ask yourself, ‘Will this help my sister progress? Or will it perpetuate a cycle?'” Gjini suggests.

Establishing clear boundaries will prevent conflicts between love and money, she adds.