Borrowing Money from Family

June 17, 2010

Borrowing money from family has kept people out of the cold for thousands of years. It hasn’t always taken the form of borrowing money directly but the family structure has offered food, shelter, jobs, and loans to brothers, sisters, parents, and all manner of family members.

Lending money to people you know is always tricky, a loan can wreak havoc on a relationship. Add family dynamics in on top of that and borrowing money from family members can cause tensions for years down the road.  However, as I mentioned at first, family bonds are an important part of our society so I wanted to look a little at why it is we sometimes borrow money from our brothers and sisters.

Money Skills
Everyone in your family has different skills; some people are skilled carpenters, talented teachers, knowledgeable doctors, brilliant attorneys, computer geeks, etc.

Some of us are really good at managing our money and others never did learn the skill. It’s like learning to play the piano, two siblings can take lessons together. One might get really good and go on to play for the rest of their life while the other isn’t interested and can’t even put a few notes together.

Of course, the difference is that money management is a vital skill that can make your life much easier, or harder, depending on how well you learn it.  So you can certainly argue that everyone SHOULD learn best money practices but the fact is that not everyone does.

So while it doesn’t matter much 15 years down the road if your sister is a much better piano player than you, it obviously makes a huge difference in your daily life if your money skills are much weaker.

Swapping Skills
Often times in families we’ll share our skills with each other. We may ask our dad to fix a lamp, our father-in-law to help build a patio, or our brother to fix our computer.

For example, I’m not the best fixer-upper and really appreciate it if my dad or father-in-law can fix something around the house for us.  My area of expertise is writing computer software, so if they need help with their computer, email, or something along those lines I’m happy to help.

So if your brother can come work on your deck or your cousin will come fix you computer why can’t you go help a family member in need to manage their money?  In some relationships this will work but in others it probably wouldn’t fly. This is because money is a sensitive subject and there are a HUGE number of emotional triggers tied to it.  You can read the book “Why Smart People Make Big Money Mistakes” to help understand why you and your family make the money decisions that they do.

Swapping skills to help your family manage their money may work in some cases but if family members won’t let you see inside their financial bubble then your money skills won’t do them much good.  However, since you do know how to manage your money you’ll likely have some saved up so your parents or siblings may come to you and ask to borrow money.

Money Advice
Even if your brother or cousin does give you a peek at their finances, it doesn’t mean that they’ll listen to any advice you have to give.

For example, my dad is a family practice physician and has given out his fair share of medical advice to our family over the years.  Recently he talked to me about how I should lose some weight and even helped me calculate a plan on how many calories to eliminate per day.  I know he’s right and he gave me the information I need to drop some weight but I have yet to implement it.  It certainly isn’t the first time he’s given medical tips to his family that were heard but not followed.

The same goes with money, you can explain savings, budgets, and debt until you’re blue in the face but if they don’t listen and take action there’s not much you can do.  Of course, since you know so much about money, you may be one of the first people they turn to when they’re looking to borrow money.

Lending Money to Family
So if your brother or sister has horrible money skills and won’t take your advice, what can you do?  Unfortunately, there’s no good answer; we’re torn between helping our family and letting them learn their lesson and hoping they’ll change their ways as a result.

If you do decide to lend money to family, it’s often best to make it a formal contract by using a peer to peer lending service like Lending Club or Prosper to facilitate the loan.  You can read more about those options and some other things to consider when lending money to family.

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Ben

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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12 Responses to Borrowing Money from Family

  • Donald

    Hey, this is great post Ben. Family members and money has always been a touchy subject for me and I am sure for a lot of other people. The hardest issue I have found with it is the point where you have to bring it up if that member hasn’t paid you yet. It always makes for an awkward situation and I would say the best thing to do is try to advise them instead of simply just giving them money as you said. At the end of the day, everyone is a grown up and it is up to each individual to make grown up decisions.

  • Jessica Bosari

    Ace, I agree with your second suggestion. “lend” money to family, don’t really lend it. If you get it back, great! If you don’t, you can feel good about helping someone you loved through tough times. I recently “loaned” $600 to my mom so she could stay longer on a visit. I haven’t seen her in 10 years, that’s what I really care about. I can make another $600 but I’ve only got one mom.

  • Ace

    This is one of the reasons why I find personal finance so interesting! Finance by itself seems cold calculated and purely mathematic. Personal finances definitely involves math, but that by no means is all that there is to it.

    I think that lending to family is indeed a very risky game to play. On the lending side, is it best to avoid lending completely? Or maybe you should “lend” with the understanding that you won’t see the money ever again? In the end it may seem like a cop out, but it’s probably best to say that it’s a situational thing. No two relationships between people are equal.

    Your idea about using some sort of lending service to make it official is intriguing. Definitely not something that I’ve ever thought of before, but then again I’ve never been in the situation where I had to lend a family member money before either.

    Your thoughts about receiving advice is very perceptive. No one likes to admit that they don’t know something or that they were wrong. And trying to force advice on someone (esp a family member) may be a very quick way to spark a defensive reaction!
    I really enjoyed this post.

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