There’s an old saying that goes, “When borrowing money from a friend, first decide which you need most.” I like that proverb, but I’d to it so it says, “When borrowing money from – or loaning money to – a friend or family member, first decide which you need most.” Maybe if my good friend Audrey had heard this adage a month ago, she wouldn’t be in the situation she is today. As we speak, Audrey is in a silent stand-off with her brother-in-law and sister-in-law over – what else? – money.

Audrey’s Folly

Audrey’s family money debacle is proof that if you have reservations about loaning money to someone, you probably should follow your intuition and just say now. About a money ago, Audrey’s brother-in-law and sister-in-law (her husband’s brother and his wife) asked to borrow $5,000. At first, Audrey was optimistic; her nephew has autism, and Audrey had been strongly advocating they try to send him to a school that works with special needs children, even though his parents had said the program was too expensive. Audrey naively hoped the $5,000 would go towards that and, without asking to confirm her hopes, agreed to loan the cash.

It was only after her husband told her that his brother actually planned to use the family money for an overseas vacation that Audrey realized she’d been duped. Although her in-laws had promised they’d pay the money back as soon as their income tax refund came in (months down the road at that point), Audrey was still frustrated that they were using the $5,000 for fun instead of investing in the best interest of their child. But, she feared, she’d already agreed to make the loan, and didn’t want to go back on her word.

Fastforward a few weeks, when Audrey learned about another bombshell. One Saturday morning, as she pulled into her brother-in-law’s driveway for a social visit, she noticed something new in their yard: a “for sale” sign. At first, Audrey – always the optimist – wondered if they planned to downsize to save money; after all, her brother-in-law and sister-in-law were forever complaining about their tight budget. But when she asked what was up, she was disappointed with their answer. They’d put their house on the market so they could move into an even bigger home.

That was the last straw for Audrey. She blew up at her brother-in-law and his family, questioning how they’d pay for this new house when they were already so cash poor. When they told her they planned to apply for a 100% financing loan, Audrey went ballistic. Her brother-in-law told her their financial decisions were none of her business, to which Audrey replied, “You’re right, they weren’t – until you borrowed money from me!”

My Thoughts On Family Money

I’ve actually spent a lot of time over the past few months discussing how I feel about family money here on Financial Highway. If you remember, my grandmother gave me and my husband $13,000 back in September as she tried to avoid the threat of estate taxes through legal gifting.

When my grandmother gave us this money, though, she did it in such a way that wouldn’t jeopardize our relationship:

  1. She was purely giving money to us – not lending it. This meant that all we were expected to do in return was show how truly grateful we were, rather than plot and plan how to pay it back.
  2. There were no strings attached. Although we were in the market for a new house when my grandmother originally gave us the cash and everyone assumed we’d put the money towards our down payment, my grandmother didn’t earmark her gift in any way, giving us the freedom to allocate it in a way that would best for our family.

Sometimes, though, the exchange of family money isn’t as simple, and lending it is unavoidable. When you find yourself having to give a loan to a family member – or take one out yourself – consider these strategies:

  1. Put it down on paper – all of it. You need to write down how much you’re borrowing, how you plan to pay it back (both a timetable as well as any interest), and the penalties for not making those payments on time. Sign it, give each party a copy, and file it somewhere safe.
  2. Stipulate exactly how you expect the money to be spent. For example, if you’re borrowing money from your parents for house repairs, keep receipts from home improvement stores or contractors so you can show them where the money is going. They’ll appreciate the updates and your transparency. Don’t deviate from that spending plan without first consulting the lender.
  3. Don’t harp on it, especially if you are the lender. Chances are, the borrower is already stressing out about the money, and bringing it up unnecessarily will only exacerbate those emotions. Try to keep silent on the loan unless one party or the other is falling short of the contract.
  4. If you aren’t comfortable with the situation, just say no. There’s no point in loaning money if it will only lead to bitterness, suspicion, and resentment.

Borrowing and loaning money between family members can be full of potential potholes, but carving out a plan from day one and sticking to it is imperative for making sure, like Audrey, you don’t end up giving your siblings, parents, or children the silent treatment for weeks on end.

Reader, what are your rules for family money? Would you loan money to a family member, or is that always a bad idea?