Nobody likes talking about money, even — or especially — when such conversations are kept “inside the house.” The topic of finance is often a taboo one, either because we’re afraid it might lead to arguments or because it’s easier to just sweep things under the rug and tell ourselves that we’ll deal with it later.
But having open and honest conversations about money — between partners and between generations — is one of the best and healthiest ways to ensure financial harmony in the home. It can reduce stress, confusion, and resentment. Most importantly, it can help families move significantly closer towards their financial goals. That’s because these conversations enable each member of the family to move in the same direction rather than opposing ones. It’s the financial equivalent of four-wheel drive!
For example, one type of conversation every family should have centers on "Family Financial Assistance," which is about what kind of assistance a family member may need in order to achieve a goal, pay off debts, bills, and other expenses…as well as what kind of assistance other family members are able (or willing) to provide.
Now, asking for assistance can be difficult, and sometimes even embarrassing, for the family member who needs it. But it can also be awkward for the person being asked, because they may not have the ability to help — or, even if they do, they might have those funds earmarked for something else.
For these reasons, it's a good idea to have these types of conversations well before you actually need to. By setting expectations and creating plans well in advance, you can reduce awkwardness, diminish resentment, and ensure that the entire family is aligned both in terms of what situations qualify for financial assistance and what types of assistance are even possible.
A family financial assistance situation can arise at any time, but here are some common ones that all families should prepare for:
Helping the Younger Generation Go to College
College is expensive, and paying off college loans and other associated debts can last a lifetime without proper planning. For these reasons, younger members of the family should ask their elders:
1. Can you help me calculate how much my education will cost?
2. What percentage of education costs am I expected to save for and cover? What percentage will Mom/Dad/Grandma/Grandpa/Aunts/Uncles help with?
3. Are there any savings or investments that have been set aside for my education?
4 Is there anything I need to do to earn the right to have those funds applied to my education?
5 What about daily living expenses, like food, gas, rent, and utilities? How much will my monthly “allowance” be for those things… or will I be expected to pay for them all by working nights/weekends/summer jobs?
6. What about transportation? Will you help me buy a used car, or can I borrow/buy/rent an existing family vehicle?
Helping Young Adults Buy Their First Home
These days, it’s as hard as it’s ever been for young adults in their twenties and early thirties to buy a home and start a family. It’s no secret that housing prices, although beginning to come down, are still astronomical in many areas. For this reason, many families are increasingly looking at the possibility of borrowing from the “Bank of Mom and Dad,” or even having them as co-signers.
Generally speaking, older family members have two options when it comes to helping younger ones make a major purchase like buying a home: Gifting the money or loaning the money.
The former option can be simpler but may also be subject to the gift tax. In addition, providing a gift sizeable enough to help someone buy a home can leave a severe dent on the giver’s own savings. For this reason, many people choose to loan the money instead.
Here are some of the things, then, that should be discussed between the family member who needs assistance and the family member being asked — or volunteering — to provide it:
1. What is the relative value of the property?
2. Does the homeowner-to-be have the ability to pay for upkeep and maintenance on that property?
3. What will happen if the prospective homeowner loses their job or their ability to make payments? Under what circumstances can/will the Bank of M&D (or Grandma & Grandpa) step in to help… or decide that the property needs to be sold?
4. How soon will the loan need to be paid back?
5. Will the loaner charge the loanee interest? If so, at what rate?
Investing in a Family Member’s Business
This situation is more rare, but it can happen. If a family member decides to start a new business, they may need or hope that other family members will invest in order to raise the necessary capital. For obvious reasons, that should trigger a very in-depth conversation!
Now, this topic is a very loaded one, and far too intricate to cover here. But should this conversation happen, family members should be prepared to discuss the following:
1. Is the Family Business Owner (FBO) truly looking for an equity investment, or merely a loan?
2. If the latter, when can the other family members expect a return on their investment?
3. How will the business be valued?
4. Does the FBO have a written business plan? Are they contributing their own money to the venture? Have they secured any additional financing?
5. As equity investors, will the other family members play an active role in business operations, or are they intended to be “silent” partners?
One final note on the topic of Family Financial Assistance: Family members can always say “no.” While it’s always good when loved ones support each other in times of need or opportunity, each individual has their own goals, needs, and priorities to think about. That’s another reason why these types of conversations should happen, and happen soon: Because it ensures no hurt feelings if financial assistance simply isn’t possible.