Almost every family has one: the person family members call on 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 a 2016 study conducted by Merrill in partnership with Age Wave. The study, "Finances in Retirement: New Challenges, New Solutions," found that 62% of people over age 50 provide financial support to family members, with the overwhelming majority (80%) doing so because, "It's the right thing to do."
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 you're convinced that your kids will learn more by saving for that desired purchase – whether it's a house, a car or a vacation – on their own.
Naturally, you'll always want to be there for your family members when they need you, but there are times when it does make sense to politely say no, even to those closest to you. If you're considered "the bank" in your family, here are four useful tips.
Four rules of the family bank
1. Start talking about money with your children when they are young. "Set up regular family meetings to discuss life skills, including the earning, saving, spending, investing and sharing of money. What role does money play in your family's life? How do your financial decisions express your family's values?" says Stacy Allred, head of the Merrill Center for Family Wealth™. "From a young age, encourage children to ask questions about the decisions you're making so that they can begin to understand the reasoning behind them and develop sound money management habits of their own." With that background, they may have more realistic expectations if they do someday find themselves in a financial bind and consider asking you for help.
2. Create a budget for giving. Even if you pass on your own sound money management habits, there are bound to be times when relatives will need your help, and you'll want to be in a position to provide it. Yet the "Finances in Retirement" survey found that few respondents had budgeted to be able to help family members financially, despite giving an average of $6,500 annually to family. "We create budgets for such things as travel or shopping, so why not for family giving?" asks Bill Hunter, retirement client experience director at Bank of America.
3. Set firm guidelines for saying yes. Decide in advance under what circumstances you would feel comfortable giving or lending money. "If you're going to make a gift of the money, think about using the occasion as a teaching moment," suggests Hunter. Without sounding preachy or judgmental, try to explain to your relative how you've put yourself in a position to provide this assistance. Have you kept your debt under control, for instance, or lived within your means or avoided high-interest credit cards?
"If you expect to be paid back, create a loan document," recommends Joe C. Schmieder, principal consultant of the Family Business Consulting Group. This may include details on how frequently repayments will be made and whether interest will be charged. If the family member has asked you to invest in a business, request a business plan or other formal details on how the money will be used. "It's important that the recipient understands your terms," Hunter says.
4. When you must say no, avoid making it personal. Instead of blaming family members for their financial troubles or questioning their plans, develop a basic philosophy that applies to everyone. Explain that this philosophy helped your family build its wealth and that any loan or gift decisions will be made based on your core values, such as a strong work ethic, pride and self-sufficiency. If you're dreading the prospect of refusing a request, prepare your reasons beforehand so that you can explain them unemotionally. When you can't afford to give, outline the reasons for your decision.
As you consider each request, it's always important to remember that gifts or loans to family members will have a direct impact on your retirement planning. There might be an unwritten fifth rule, says Hunter: "Beware of being overly generous, or you could end up needing financial help yourself."
With eight years in the financial services industry, Sarah Goleman joined Merrill in 2018. Her practice incorporates environmental and socially conscious investing as well as more traditional approaches. She has a master's degree from the University of Dundee and a passion for community service.