We’ve all heard the warning: Don’t mix family and money. But you never fully understand why until you feel the strain firsthand. Money is a fraught, sensitive, and deeply personal topic. Nobody wants to be told how to spend their earnings, so we all keep our thoughts to ourselves as we watch siblings blow their savings on frivolous credit card debt or witness parents make purchases they can’t afford. We try to be silent bystanders. But if you have even a moderately close relationship with your family members, their financial missteps eventually become your money woes, too.
Preventing financial discord
Perhaps the most common instances of familial finance disasters occur when children max out their credit cards during the first semester of college. Rather than use the cards as emergency fallbacks, they treat friends to off-campus meals, buy booze, gamble, and ignore their growing monthly balances. Their parents must decide whether it’s better to bail them out or force them to cope with the consequences of poor credit so they won’t repeat their mistakes in the future.
But the opposite also happens frequently. The kids make sound financial decisions while their parents accumulate crushing debt. They approach retirement with maxed-out credit limits, unmanageable mortgages, car loans, and little to no savings. Many children feel compelled to pay off their parents’ debts or at least cover some day-to-day expenses. But that turns into a strain as the parents become dependent on that generosity. Some even demand financial assistance, which creates friction and resentment as the kids’ struggle to support themselves and their growing lists of dependents.
Of course, debt damages other relationships, too. Siblings often turn to one another for loans during lean or desperate times. And depending on the needy person’s circumstances and spending history, they may find that their little brother or big sister is reluctant to put up the money. People fall into challenging situations occasionally. But when it happens on a yearly basis or more, skepticism is warranted. As painful as it is to see loved ones suffer, you should avoid entangling yourself in ongoing drama.
In more complex situations, family members open credit card accounts in relatives’ names. This fraudulent act carries legal and emotional consequences and forces the victim to make uncomfortable decisions about how to recover their credit and protect themselves in the future.
Fallouts over money destroy relationships. If someone close to you is drowning in their bad decisions or asks you for help, respond with a clear plan for how it can work for you both. Throwing money at the issue isn’t effective. Even if you’re able to pay off a family member’s debt, they’ll repeat the same patterns if they’re not committed to better money management.
Use the following strategies to help your loved ones avoid financial ruin while keeping your relationships intact:
1. Gather all of the relevant data.
You can’t help people unless you know the extent of their troubles. Perhaps credit card debt is one layer in a web of issues. Does the family member have car loans or student debt you should know about? Outstanding medical bills? Have they considered taking out debt consolidation loans or met with debt advisors before asking you for money? Or are they relying on you to make it all go away?
Understanding the full spectrum of your family’s problems will determine how you proceed. You also want to gauge their commitments to getting their debts under control. If you’re the only one worried about their futures, you may want to reconsider getting involved.
Perhaps you’re in a position to pay off all their current credit card debt, but find that the money would be better spent clearing up old accounts that are in collections. Maybe you decide to transfer their debt onto a no- or low-interest credit card in your name to make repayments easier. Of course, this option incurs greater risk for you, so don’t go down this road unless you’re certain that you or they can make the monthly payments. Alternatively, you might give them a loan for the entire amount of their debt or opt not to give them any money at all.
Helping family members create a plan based on their current incomes is a useful step, even if you can’t or don’t want to bring your money into the mix. One option: offering rent-free living or paying directly for health expenses, both of which free up money that can be used toward their credit card balances. Just think how much faster those numbers would come down if they weren’t paying $500 or more per month in rent.
2. Teach high-risk family members how to budget.
Not every college student with a credit card runs up thousands of dollars in debt buying cheap beer and late-night drunk food. Some use them to buy expensive books or other necessities they can’t afford otherwise. But without a decently paying campus job, they struggle to make more than the monthly minimums and become overwhelmed by the accumulating interest. Their problem isn’t frivolity; it’s a lack of financial know-how.
The same can be said of parents and adult siblings who live outside their means. They may not realize the damage they’re doing to their credit scores. Or they realize it, but they feel powerless to bring their money matters in order.
Introduce them to personal finance apps and programs such as You Need a Budget. YNAB syncs to browsers and smartphone apps, and it allows users to track every single dollar spent. They can link their checking, savings, and credit card accounts to YNAB and see their balances in one place. YNAB’s team even offers videos and trainings on how to maximize the tool. They can use a simple budget calculator to understand where they overspend as well.
Perhaps they find that they spend more when using debit or credit cards because they don’t see cash leaving their accounts. Encourage them to try more tangible tactics, such as budgeting with money envelopes. Have them divvy their dollars into envelopes labeled with different categories: gas, toiletries, groceries, utilities, entertainment—anything they think they’ll need in the course of a month. They’ll be more conscientious about what they buy as they see the cash piles dwindle.
Apps such as Stash and Digit can help them invest or save small amounts throughout the month. These apps allow your family members to take ownership of their finances, alleviating your responsibility. This relieves a huge psychological burden if you’re giving them money or letting them borrow, since they’ll be more likely to use the cash effectively.
3. Set boundaries and commit to them.
If a relative asks for a loan, establish a clear payback plan and ask them to sign it. This may seem cold, but contracts are crucial when lending money to family members. You don’t want to rely on verbal agreements if there’s a conflict or delay in repayment.
Family members may believe that the nature of your relationship entitles them to be lax about paying you back. They might skip a few installments in favor of taking a vacation to reward themselves after a hard year. Because you’re family, they assume you won’t mind or at least won’t insist that they stick to the repayment plan. Those are tough conversations no matter the circumstances, but you’ll have an easier time getting your money if the terms are spelled out in a binding contract.
Rocket Lawyer provides templates for a range of personal finance concerns, including loan agreements and promissory notes. If a family member opened credit cards in your name without your knowledge, you can also find forms on Rocket Lawyer for submitting identity theft claims. Deciding to report these cases isn’t easy. You may fear that the offender will go to prison or that you’ll damage the relationship, and both may happen. But you need to protect yourself if you want to avoid destroying your own credit score and financial opportunities.
When it comes to personal loans, don’t rely on family members to behave well out of the goodness of their hearts. Always have a contract, because blood isn’t always thicker than money.
4. Hire outside help.
Talking about debt is hard under any circumstances, so seek professional advice. Consider attending family debt counseling, or suggest that the indebted individuals work with a financial planner. This is especially important for parents who are struggling, because they’ll need to act quickly to shore up their retirement savings.
Cultivating personal finance literacy
Helping loved ones out of financial crises is admirable, as long as you’re not sacrificing your well-being. The optimal path for everyone involved is to help these family members help themselves. Don’t be afraid to make loans and gifts conditional upon them taking steps toward financial literacy. Point them to personal finance books, blogs, and courses, and touch base often about whether they’re meeting their goals. These conversations may feel awkward initially, but they don’t have to stay that way. Direct but compassionate check-ins turn money talks from taboo topics to lively, intimate discussions.