Before Giving Money to Family, Follow These 5 Critical Steps
Giving money to family should be one of your truly great joys in life. What could be better than helping a daughter with a down payment on her first house or partially funding your son’s idea for a business start-up. After all, what’s family for?
But you’ll never be in a position to lend that kind of assistance unless you first get your own financial house in order. Nor should you even consider requests for financial help — no matter how guilty you’re made to feel — unless you feel your own financial foundation is secure.
Americans have a generous and giving heart. According to Boston-based American Consumer Counseling, 82 percent of Americans said they would lend money to a family member in need and 66 percent said they would do the same for a friend.
But it would be irresponsible to do so, if your financial future is on shaky ground. In plain English, if a family member needs help with starting an emergency fund and you don’t have one yourself, you have to say “no.”
We want you to say “yes”, however, when you receive that inevitable request for money and you deem it’s a worthy one. Here’s how to do it. Here are five steps you can start taking now to begin improving your financial posture and help you get to “yes.”
Reduce and retire expensive credit card debt
There’s no better way to earn 15 percent, 20 percent or even 30 percent on your money than to pay down or retire your high-interest consumer debt. Not even the best portfolio manager in the world or Warren Buffett himself can consistently earn those kinds of returns. In April, CardHub’s 2014 Credit Card Landscape Report reported that credit card interest rates for consumers with fair credit averaged 21 percent. Paying those kinds of rates would make it difficult to help anyone else financially.
Let’s illustrate just how destructive carrying this kind of interest rate on your credit card balance is. If you have a $5,000 credit card balance at 18 percent, you’ll pay about $125 a month if you’re paying 1 percent of the principal off each payment cycle. At that rate, you’ll have paid off your balance in 23 years and about $7,000 in interest.
To counter that gloomy scenario, if you receive a raise, bonus check, IRS refund or some other boost to your cash flow, apply as much of it as you can to paying down your credit card debt. If you see nothing like that on the horizon, consider making the same payment on your shrinking balance each month. Using our example, by continuing to make the same fixed monthly payment of $125, you would retire your debt in about five years, not 23.
Another tactic is to try to transfer your card balance to one that offers a low or 0 percent introductory interest rate for the first six to 12 months. A lower rate will make your wall of debt slightly less difficult to scale. Every proactive step like this will improve your financial position.
Better manage your mortgage debt
In an Aug. 21, 2014 MyBankTracker story about home owners failing to refinance and losing thousands, we shared how American mortgage-holders who neglected to refinance between 2010 and 2012 passed up a total of $5.4 billion.
So, by refinancing, if you can shave a percent off your loan rate or even half a percent if you’re carrying a large balance and long term, you might be able to substantially reduce your monthly mortgage payments. To see whether you would be a good candidate for a refinance, run some scenarios on the MyBankTracker mortgage calculator and visit the new MyBankTracker mortgage page.
About five years ago, rates were in the 6 percent neighborhood. Today, they’re closer to 4 percent. If you financed $100,000 at 6 percent, your payments were about $600 a month. Refinanced at 4 percent, they would be about $477 a month, a $123 monthly savings.
Another way to manage your mortgage debt is to right-size it, meaning selling and moving to a smaller home, especially if you’re now an empty nester. Not only will you pocket sizable savings by moving to less expensive digs, but your expenses to maintain your current home also should drop dramatically.
Recharge your savings
First, let’s define savings. It’s money that you’re going to need to put your hands on sooner rather than later, for things a like a major car repair or a down payment on a car or a house. These savings belong in low-risk, easy-access savings accounts or money market accounts. As you know your needs and aspirations better than anyone, decide how much money will be enough: $10,000, $20,000, $100,000 or more?
The reason your savings needs to be in relatively safe, low-risk accounts is there’s no telling what riskier investments will do from year to year. The S&P 500 Index might have been up 30 percent in 2013, but between year-end 2007 and 2008, the same index lost a third of its value.
So the idea with your savings is, steady wins the race. If you saved just 5 percent of your $35,000 annual salary, anticipating an annual 3 percent raise, and you earned 5 percent on your savings, you would have $174,000 in your account after 30 years. If you boost your savings rate to 7 percent, you would total about $244,000.
Fortify your retirement account
If you’re fortunate to work for a company that offers a retirement account, contribute to it. By adding $100 per month when you’re 25, you’ll have an extra $330,000 waiting for you when you turn 65, if your investments return 8 percent annually. Since these are pre-tax dollars you’re investing, you’ll be deducting only $75 from your paycheck, not $100, each month, if you’re in the 25 percent tax bracket. If your employer matches all or some of your contribution, you’re looking at free money.
If you don’t enjoy the luxury of a 401(k), fund your own individual retirement account (IRA). If you initially deposit $1,000 at eight percent and make subsequent contributions of $100 contribution each month, you’ll have about $373,000 after 30 years. By funding your IRA with $1,000 to start, unlike our above example, you will have earned an additional $43,000.
However you do it — starting from zero or with $1,000 — you come out a big winner if you start your long-term investment plan now and stay the course.
Plan for your long-term health needs
If you only had to worry about building up a nest egg, securing your future would be a relative breeze. We’ve yet to discuss the elephant in the room, which despite its size, often goes unnoticed largely because many Americans believe that the government will pick up the tab for their old-age infirmities.
It doesn’t, so you need to start planning now. In fact, 70 percent of Americans will require some form of long-term health care, and it doesn’t come cheap. It costs an average of $3,022 a month for a room at an assisted-living facility, or $36,264 a year, according to the Assisted Living Federation of America. If you need help taking medications, getting dressed, or assistance with your other daily activities, you’ll require full-scale nursing home care, which costs about $85,000 a year.
If you’re 55 now, a typical long-term care policy costs about $2,000 a year. For that, you’ll get a daily benefit of about $150 a day, which may cap out after four or five years. Most policies also have a 90-day deductible, which means your coverage doesn’t kick in for three months. Your care is completely on your dime.
Getting to ‘Yes’
Living well in retirement or even humbly in your golden years is no easy task. It takes discipline, sacrifice and extraordinary planning and vision.
To be able to meet your own financial needs, and at the same help provide for someone else’s, especially a family member’s, would be a deeply satisfying achievement.
Giving money to family would indeed be a notable and noteworthy capstone to your life — you would be paying it forward to the persons you care about most. But don’t even think about it unless you have your own financial house in order first.
Say “yes” to the action plan above and you’ll soon be able to say “yes” to a family member or friend in financial need.
Peter is a staff writer at MyBankTracker.com who covers banking, personal finance, investing and homeownership.