As the daughter of a Guyanese father and a mother from South Carolina who picked cotton as a child, I appreciate the opportunities I have to give back to my family and my community.
Even so, over the last 20 years I’ve learned through trial and error how to help others in a way that doesn’t put my finances, relationships, or sanity at risk.
Below are my top five lessons learned in how to financially support others:
1. Get your own financial house in order.
Before financially supporting others, make sure your personal finances are standing on solid ground. At a minimum you should have:
- A monthly spending and savings plan, so you know how much money you need to maintain your lifestyle and how much money you can give away without compromising your lifestyle.
- At least three months of expenses saved for emergencies.
- A zero credit card balance.
2. Include financial gifts in your spending plan.
If you regularly give money to family, charity, and religious organizations, include the amount as part of your financial plan.
This gives you boundaries so you don’t put yourself in jeopardy of not being able to pay your bills or not be able to handle unexpected expenses.
3. Research alternatives before financially supporting others.
Can the person in need get assistance through their employer’s benevolence program, local religious organizations, or community outreach programs? Can you contact other family members to see if you can help jointly rather than have 100% of the help fall on you?
4. Create “Financial Support” rules.
The money you give should be a hand-up, not a hand-out. Consider giving to the need rather than to the person.
For instance, if a person is getting evicted, pay the landlord; if the person’s car is about to get repossessed, pay the auto lender.
Decide what financial hardships you will and will not support. Hardship due to job loss or illness is one thing; someone consistently misusing money and not being able to pay their bills, is another.
For some, the best gift you can give is the experience of the consequences of their actions.
5. Decide if you are gifting or lending.
There are few things in life that destroy families and friendships more than money disagreements.
If you are financially helping someone who has a history of not paying people back, don’t fool yourself into thinking that, “this time is different”. It’s probably not.
To save your sanity and relationships, decide if your financial help is a gift or a temporary loan. If you decide to lend, consider creating a legally binding contract that clearly spells out the amount, expected payment, expected payment date, and expected timeframe when the amount is due in full. Finally, consider speaking with a tax advisor about any interest you decide to add to the expected payments.
Take the time to honestly evaluate your finances and to create a financial support plan. The time you spend planning will go a long way in preserving your finances, relationships, and peace of mind.
Revisit your financial plan
Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.