It’s like a bad magic trick: Some people have a knack for making every dollar they touch disappear.
Every time you talk to them, they unload a sorrowful story about how they got screwed (again), came this close to winning big this time, or just need one more second chance. If it’s your old college pal, you can lend a sympathetic ear before exiting gracefully back to your own life. But what if it’s your sibling, child, or parent? It’s not so easy to exit stage left with nothing more than a parting “Good luck!”
Before letting yourself get swept up in their dramatic arc, you need a plan for keeping their story separate from your own.
How to Help Family Members With Financial Problems
Troubled family members can drain you dry if you let them. And while that certainly includes your finances, it doesn’t end there. Family members can drain you emotionally and mentally, impact your marriage and other family relationships, and leave a smoking ruin where your structured life used to stand.
As you draw up a blueprint for helping your family member rebuild their life, these guidelines can help you protect your financial interests while setting your family member up for success.
1. Set Boundaries & Limitations on Financial Help
Unless you’re very lucky, you don’t have unlimited funds to help someone else financially while still providing for yourself and your family and saving for retirement. Before you offer anyone else help, first figure out what you can afford to do. That may mean telling them you need some time to mull it over.
A word of caution: I learned recently that someone close to me had agreed to pay $15,000 per year to help her daughter and grandson — and never told her husband about it. I don’t know about you, but if I found out my spouse had done that, I’d fly off the proverbial handle. So if you have joint finances with someone else, read your significant other in on the issue and work together.
The first thing you need to do is come up with a series of rules for helping. Chief among them is how much you can live with giving each year. That includes limits on money, time, and assets.
If you’re a couple, that means what you can afford without resentment growing between you. My friend wanted to be there to support her daughter and grandchildren, but in addition to the money, she spent so much time away from her husband they ended up separating for a time.
2. Decide Whether You’re Providing a Gift or a Loan
Think carefully about whether you plan to offer a loan or gift — and what you plan to do if they come asking for more money.
Gifts are simple: You only need to decide what you’ll say when a family member comes calling with their hand out. Just note that particularly large gifts may be subject to federal gift tax rules.
Loans to family members prove more complicated. You need a plan for what to do if your family member defaults on that loan.
Do you embarrass them by telling everyone else in the family about their default? Do you uninvite them from family gatherings until they pay up? Do you do nothing at all and just wait for them to come back with either a payment or their hand out again?
One option is to take collateral on any loans you provide. For example, you could sign a promissory note including a lien against their car and demand they give you a copy of their car keys so you can repossess it if they default. Valuable jewelry makes for even better collateral since they don’t need it to get to and from work.
But only take collateral if you’re prepared to keep it until they repay you in full. Otherwise, you send a loud, clear message: “You can keep taking money from me with no repercussions.”
3. Decide Which Living Expenses You’ll Pay & Which You Won’t
If you’re lucky, you’re helping an otherwise responsible adult who just hit hard times. You can hand them a check and rest easy knowing your money’s going to a good cause. But we’re not all that lucky.
And if that’s the case or the family member in question is a young adult, such as a college-age child, you don’t have to write a check or send an ACH transfer and hope they agree to buy groceries rather than ganja. Instead, you can agree to pay certain bills directly to ensure the money serves its intended purpose.
And if your ungrateful brat family member accuses you of being patronizing, tell them they can pay their own bills like a grown-up.
These bills could include rent, car payments, groceries (in the form of supermarket gift cards), or cellphone bills.
For adult children under 26, you can help them by putting them on your health insurance plan. They can remain on your health care plan until Dec. 31 of the year they turn 26. You may also be able to add them to your auto insurance plan.
Any of these ideas are better than just handing over cash or paying off their credit card debts for them.
4. Help Them With Indirect Financial Assistance
When practical, try to avoid giving cash handouts, as that just sets you up for future requests. Alternatively, you can pay specific bills or budget categories on behalf of your loved one. But that’s not the only way to help them.
Rather than paying rent, you could let them move in with you. That makes it easier to provide them with groceries, for better or worse.
Rather than paying their auto loan, you could give them an old beater of a car. Just beware that you’ll be the first person they come to asking for cash when it needs repairs. You could even help them negotiate lower rent and co-sign a lease.
And so it goes. You can directly give them anything else you no longer need, such as your old cellphone and clothes. But this strategy can come at a cost. It fuels a cycle of dependence. If they live with you and you cook for them, provide them with cars and insurance, phones, and clothes, then what the heck are they providing for themselves?
That’s one thing if it’s your newly separated sister who needs somewhere to stay until she finds a place of her own. It’s another if it’s your ne’er-do-well second cousin who never saw a bill they wanted to pay in their lives. Help out the former without a second thought, and stay as far away from the latter as possible.
Younger family members might need to learn the ropes of personal finance, such as your recently graduated college student who’s never really had a grown-up job and a grown-up mortgage on a nest of their own. You can let them move in temporarily, but charge them a small rent and a portion of groceries and utilities. Most important of all, set a timeline for them to move out again so they’re not still crashing with you when they’re 40.
5. Set Your Loved One Up for Independence (if Possible)
Not everyone is capable of living independently. Some, like those with severe mental or physical disabilities, will never live entirely on their own.
But most of us have family members whose money problem stems from other things. It may just be a temporary setback, such as a job loss or divorce, or your family member might need to learn the basics of managing money.
For example, your child who recently graduated could use help learning how to budget, especially for irregular expenses. Try charging them below-market rent and partial utilities and groceries as a training wheels budget. Schedule frequent increases to encourage them to move out after six months or a year of living with you. Sit down with them each month to review their spending in each budget category and where they need to tighten up.
But not every problem comes down to simple financial illiteracy. Substance abuse, gambling addictions, and mental health problems don’t disappear on their own, and your family member might need more than a few lessons on budgeting and investing.
I have a close family member with combined mental health and substance abuse issues who moved back in with her parents. They’ve wrung their hands for years not knowing how to help her. Are they enabling her? If they force the choice between getting treatment and moving out, would it be the nudge she needs or the setup for life-threatening behavior?
After wrestling with these questions for years, it’s become increasingly clear that nothing short of in-patient care will address her problems. But she won’t volunteer for it. Someone has to force the issue, and as much as it terrifies her parents, they’re the only ones in a position to do so.
Sometimes, tough love is the only kind of love your family member can benefit from, even if they don’t understand it at the time. But tough love doesn’t mean yelling and screaming and shaming them. It means forcing uncomfortable decisions that are in the family member’s best interest and setting them up for long-term independence again.
6. Consult a Financial Advisor
You can bankrupt yourself helping family members who can’t manage their own money.
Don’t do that.
Speak with a financial advisor about your own long-term financial goals and what you can afford to spare. They’ll tell it to you straight, including the long-term retirement consequences for every dollar you give away.
Make no mistake. You’re sacrificing your own ability to live comfortably in retirement by funneling money to your family member. For every $100 you give away today, you give up almost $1,200 in your retirement nest egg, assuming an average stock market return of 10% over the next 25 years.
You need a clear-eyed view of how your family finances are affected. Financial advice from a disinterested third party can help remove some of the emotion to help you make better decisions.
Of course, that advice is useless if you don’t follow through on it. Go into the meeting knowing you may need to revisit your plans to help your loved one — or pay the price later with your retirement savings plan.
7. Tell Your Family Member How You Can Help & What the Boundaries Are
Once you’ve carefully considered what you can afford, you can then approach the family member and say, “I want to help, and here’s what I can offer you. But please don’t ask for more than this because it’s all I can manage.” But don’t forget to tell them about the boundaries you established in the first step.
By setting clear and firm boundaries, you also help your family member plan their financial path forward knowing exactly what help they’ll receive — and what they won’t — with a firm deadline they can make arrangements based on.
Clear boundaries and expectations also help you prevent the true mooches from manipulating you into giving more. All you have to do is stick to your guns and say, “I’m sorry, but this is all I can afford. There’s no wiggle room.”
Those boundaries include time limits on ongoing help, such as helping them with recurring bills or letting them move in with you. Make it clear you’re not offering a permanent solution, or even a long-term one. It’s an emergency measure to help them get on their feet, and it ends on a specific date.
That means you need a contingency plan in place if they refuse to move out, give your car back, or surrender some other physical item you’ve lent them. You must be prepared to enforce your boundaries, which might mean evicting them from your house or repossessing your car. Hold firm, and call in support from other family members or friends as needed.
8. Know When to Cut Off Financial Support
If certain family members score money off you once, you’d better believe they’ll come back for more. And the more you give to them, the more they’ll come back.
You have a decision to make: When is enough enough? You will have to cut them off eventually. Neither your wallet nor your sanity is bottomless. And the longer you wait to cut them off, the more they’ll resent you when you finally drop the ax.
Only you know your limits. Be exact in the form of aid you offer, and avoid the cycle of giving cash assistance. That goes double for perpetual mooches who always have a hand out and an excuse ready.
But not giving cash handouts doesn’t mean you shouldn’t offer any help at all.
Nonfinancial Ways to Help Family Members With Money Problems
There are ways of helping your family members get back on their feet that don’t involve handing out wads of Benjamins or paying your family member’s bills for them, including:
- Help Them Find a Job. You know the old proverb about teaching a man to fish. Start by helping them write a resume and LinkedIn profile. If you can truthfully vouch for them, use your personal and professional network to help them land a job they can handle. Just don’t set them up for failure — everyone involved loses in that case.
- Help Them Open Bank Accounts. Some people are intimidated by the banking system and don’t know where to start. Help them open a free checking account and savings account and set up automatic savings transfers on their paydays to help them build an emergency fund.
- Invite Them for Dinner Regularly. One easy, low-commitment way to help struggling family members is to offer an open-door policy for meals. Just tell them to give you advance notice so you can make a larger portion for them. You keep food in their belly without giving them cash or letting them invade your home indefinitely. You might want to limit this invitation to two or three nights per week.
- Let Them Crash Occasionally. Likewise, you can tell them that they can crash with you for one night at a time but can’t move in. That keeps a firm boundary in place but gives them some breathing room when their significant other kicks them out (again).
- Offer Periodic Babysitting. If your family member needs help with child care, you can offer a certain number of babysitting hours each week or month. Just ensure you’re crystal clear on which days and times you’re available and for how long.
- Help Them Apply for Assistance. Government websites for assistance programs like unemployment and disability aren’t always easy to navigate. If your family member might qualify for assistance programs, such as food programs or emergency help with bills, sit down with them to jointly research and apply.
- Enroll Them in a Program: Often, financial problems are the symptom, not the disease. If they have a substance abuse or gambling problem, you can take them to Alcoholics, Narcotics, or Gamblers Anonymous for free help. Alternatively, enroll them in a residential treatment program, but expect it to cost you a second mortgage.
When a loved one comes to you asking for help, it tugs your heartstrings. Your first impulse is almost always to say yes.
But giving or lending someone money for the umpteenth time is rarely the best strategy for helping them take care of themselves.
Instead, you might need to play the bad guy in the short term to get them the help they need for the long term. That could mean enrolling them in a treatment program, helping them find work, or helping them learn financial literacy. As you feel more confident in their abilities, you can explore co-signing a loan or lease for them, but always keep the long-term goal in mind: helping them live independently.