Tips for when family members ask you for money

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Lending money to family members can be a delicate situation
Five things to consider when being asked for financial help, whether the answer is yes — or no.
From the Merrill Edge Minute e-newsletter.

Key points

  • Think through the kinds of situations in which you'd say yes to family members who ask for money
  • When saying no, you don't have to make it personal, but do offer an explanation that shows your decision isn't an arbitrary one
  • Be sure your generosity doesn't derail your own financial goals or retirement plans
  • Evaluate your finances with the Merrill Edge Net Worth Estimator™ (login required)
Almost every family has one: the person family members call when money is tight and they need a helping hand. The more financially responsible you are, the more likely you are to be considered the "family bank," according to the study "Family & Retirement: The Elephant in the Room" conducted by Merrill Lynch in partnership with Age Wave.1 This study found that 62% of respondents age 50 and older provide financial support to family members, with the overwhelming majority (80%) doing so because "it was the right thing to do."
Why people gave money to their family members
Still, if you're that person, haven't you sometimes wished you could just say no? Maybe you have other priorities to deal with or you doubt the money will be used wisely. Or, if your child is asking, perhaps you're convinced he or she will learn more by saving for that desired purchase — whether it's a house, a car or a vacation — on his or her own.
It's natural for you to want to be there for your family members when they need you the most. But there are times when it does make sense to politely say no, even to those closest to you. If you're considered the "family bank" in your family, here are five useful tips to consider.

1. Set firm guidelines for saying yes

Decide in advance under what circumstances you would feel comfortable giving or loaning money to family. "If you're going to make a gift of the money, think about using the occasion instructively," suggests Bill Hunter, director of Personal Retirement Strategy and Solutions at Bank of America Merrill Lynch.2 Without sounding preachy or judgmental, try to explain to your relative how you've built the financial resources you have. Is it because you kept your debt under control, for instance, or lived within your means or avoided high-interest credit cards? "For young adults in the family, this could be a valuable lesson," Hunter says.
If you and your relative agree that the money you're giving is a loan, consider creating a loan document. This document may include details on how frequently repayments will be made and whether interest will be charged. If the family member has asked for help in starting a business, you might want to ask for a business plan or other formal details on how the money will be used. "It's important that the recipient understands your terms," says Hunter.
If you're going to make a gift of the money, think about using the occasion instructively. For young adults in the family, this could be a valuable lesson."
— Bill Hunter,
Director of Personal Retirement Strategy and Solutions,
Bank of America Merrill Lynch

2. Create a budget for giving

There are bound to be times when relatives will ask for your help, and you'll want to be in a financial position to provide it. Yet the "Family & Retirement" study found that 88% of respondents had not budgeted to be able to help family members financially. "We create budgets for such things as travel or shopping, so why not for family giving?" asks Hunter. He advises that you consider the following:
  • How much can you commit to this purpose without disrupting your current living needs?
  • What other priorities do you have?
  • Are there any lifestyle changes you may need to make in order to keep giving to family members during tough times?
Most important, before you give, be sure to set aside an emergency fund for yourself to help ensure that you'll have a comfortable cushion if you need it.

3. When you must say no, you don't have to make it personal

Instead of blaming family members for their financial troubles or questioning their needs, "develop a core philosophy that applies to everyone," says Michael Liersch, head of Behavioral Finance, Merrill Lynch Wealth Management. "Explain that this philosophy helped you become successful and that any loan or gift decisions will be made based on your core values," such as a strong work ethic, pride or self-sufficiency.
"If you dread refusing a request, prepare your reasons beforehand so that you can explain them without getting emotional," Liersch suggests. When you can't afford to give, don't feel obligated to justify why. However, if you are comfortable sharing the reason, it might help the person asking to accept the answer without impacting your relationship.
For example, if you are a business owner, it's possible that your relatives don't understand the company's financial limits. Not everyone realizes, for example, that owners have a responsibility to reinvest their profits into their businesses in order to help them grow. You may want to explain that your business' profits aren't a resource for gifts or loans.
If you dread refusing a request, prepare your reasons beforehand so that you can explain them without getting emotional."
— Michael Liersch,
head of Behavioral Finance, Merrill Lynch Wealth Management

4. Don't let your generosity derail your retirement plans

As you consider each request, it's always important to remember that gifts or loans to family members could have a direct impact on your own financial priorities. In fact, half of respondents age 50 and over in the "Family & Retirement" study said they'd make "retirement sacrifices" to help family members financially. But there's a delicate balance you'll want to strike between the natural impulse to help family and the importance of continuing to build your retirement nest egg. In essence, says Hunter, "be cautious about being overly generous, or you could end up needing financial help yourself."
Lending money to family members may require changes to your retirement plan

5. If you have young children, start having age-appropriate discussions about money with them now

"It's a good idea to routinely and openly discuss the role that money plays in your family's life and how your financial decisions reflect your family's values," suggests Liersch.
"From an early age, allow children to ask questions about the decisions you're making," says Liersch, "so that they can begin to understand the reasoning behind them and develop sound money management habits of their own." That way they may have more realistic expectations, if they do someday find themselves in a financial bind and consider asking you for help.
Whether you're talking to kids or adults, and whether you're giving or lending funds, the most important element in dealing with family and money is communication. Making your expectations and motivations clear from the outset can prevent you from sending mixed messages and lessen misunderstandings. After all, since this is your family, any financial assistance you may end up providing will come from the heart as much as the wallet.
Next steps

1 Family & Retirement: The Elephant in the Room, a study conducted by Merrill Lynch in partnership with Age Wave, August 2013.

2 Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation ("BofA Corp."). Banking activities may be performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp., including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered broker-dealer and member SIPC.

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