How to Lend Money to Family in 5 Steps
I got a question the other day from one of you:
I’ve been very mediocre with my money management most of my life, but happy to admit I’ve started to turn things around in more recent years. Paying myself first really works! I just turned 30, got married, and have noticed my wife’s side of the family is just like I was a few years ago - kind of all over the place with money. I think they just need the same habits you talk about like the ones I’ve started putting in place for my personal life.
OK, problem is, now that I’ve started to build savings and something to really show for it, my brother-in-law is asking to borrow a few thousand dollars for something, and while I want to help, I’m not sure how to proceed. I’ve been working really hard to save up this money and I specifically want to use it to start investing.
Any advice for mate?
Mr. Future #MoneyMaker
Thanks for the great question! So your brother-in-law wants some dough…
Part of learning how to build wealth is to properly handle situations when people ask you for money.
Should you do it? How do you do it? Here are 5 steps to help you decide:
Step 1: Act Like a business not a person
Start by asking a few questions about this brother-in-law:
1) Does he have a tragic history of making poor financial decisions? If the answer is yes, feel free to skip ahead to Step 4 - How to Say No.
2) If you give money, would you be adding further fuel to the fire of their self destructive behaviour? Stop and think for a second about addictions, a pattern of self destruction or are they headed for an all out dumpster fire? If the answer is yes, again: head to Step 4 - How to Say No.
3) What’s the probability of him actually paying you back? If you think the answer is no, AND that's not OK with you, check below.
4) Even if he does seem like he’ll pull it together, find the resources to make good on your loan, it’s best to remember that ALL loans are to some extent risky. So this is probably the most important for me: if for some reason you don't get that money back, can your finances sustain that kind of loss? Just like I say about money for investing: never loan money you can’t afford to lose.
Never loan money you can’t afford to lose.
Step 2: Now Act Like a person not a business
OK, well done, step one is covered. Now it’s time to ask some questions more about you:
1) How do you plan on handling being someone who’s loaned out their hard earned money? When you grab a drink at those summer BBQs and navigate the awkward small talk, are you going to get mad that your brother-in-law when you see he’s bought 2 coolers full of imported beer when he probably should have bought some domestic on sale. More importantly, are you going to be able to not make everything about the loan? Can you keep the loaner part of your brain separate from the family part of your brain? (read loaner not loner) If the answer is no, ask yourself if you can change the way you think about it. Still no? Ok scroll to the very bottom at Step 5 - How to Say Yes.
2) It helps to think about it from their perspective too - how will your brother-in-law react when he’s not just your family but a debtor to you. Money is very emotional to us and also very symbolic.
Simply put, there’s a high probability things will just get weird in the family.
Step 3: Make a plan
Sweet! You’ve made it through all the important questions and you’ve arrived at the conclusion that your bro-in-law is a fairly responsible person who hasn't maxed out over a dozen credit cards, and you’re still open to entertaining the idea of loaning to him. For me the next step would be to sit down and have a very serious heart-to-heart laying out all the terms and conditions of the loan. Here’s where you not only get bonus points for over-communicating the rules and regulations of the loan, but you get bonus points for being as clear and precise as possible. Note: if the terms of this thing aren't laid out clearly and dispassionately, (really need to think just like a bank would) you're absolutely asking for trouble.
Here’s where you should focus on a timeline and expectations. For example, do you expect to be repaid before a certain date? (probably), should you be repaid before he any vacations or makes other fun discretionary expenditures? Also things like, just how confidential is this loan? Who exactly is allowed to know about it?
It’s important to be comprehensive here, as this will lay the bedrock for the loan and it’s repayment as it will impact your future relationship etc…
Charging interest also reinforces something very important for both the you and the borrower - this is a formal business agreement, one that requires attention and strict follow through. Creating a payment schedule is important for transparency, even if it's a principal only loan.
Now, whatever you choose to do, make sure you put your agreement in writing.
Step 4: How to Say No
To be honest, this is what a lot of people are curious about, how to actually say no to someone in your own family (or extended family), even though you’d be more than happy to help them move a sofa or give them one of your kidneys. There’s a fine line between saying no and coming off like a jerk.
Here’s a tip: don’t start by being defensive.
Lead with the truth, or at least a softened version of the truth, if you must.
Tell them why it’s not feasible for you to be without this money now—maybe you're paying off your own debt for instance, or you're worried about job security, or trying to save for a big purchase.
Tell them you’ll be there for them in other ways that may still help save cash, whether it’s giving them a ride to work so she doesn't have to shell out for a car or Lyft/Uber.
There are a lot of ways to help that do not involve handing over cold hard cash.
Step 5: how to say yes
Check this story: A buddy of mine, a 30 something year old grown ass man, got happily married and needed to buy a new home for their budding family. After searching high and low, he reluctantly borrowed money for the downpayment from his in-laws. He ended up going back and forth with his father-in-law in order to buy their first property. His father-in-law was a little annoyed but helped out anyway because it was his daughter and new son-in-law who needed the help.
The father-in-law went through these 5 steps, and eventually reached the “Yes” stage with a fairly well ironed out plan. My buddy and his wife are paying back her dad for the loan, happily living in their new home, mowing their new lawn and filling their home with new coffee machines and bigger flat screen TVs (whatever homeowners do…). I’m pretty sure the father-in-law was apprehensive, slightly unhappy and a little disgruntled about the whole loan, but at the same time very proud to be in a financial situation to be able to help his only son-in-law out when he needed it.
Now my buddy’s father-in-law invites himself over for a coffee whenever he feels like it, because well… he paid for most of the house.
Please, a moment of silence for my buddy. Not every story is a fairy tale ending.
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