Money is like a team sport. Personal habits and practices are important, but there is always a big picture to consider (spouse, children, siblings, parents, friends, etc.).
Even as they build wealth to support themselves and their immediate family, many people’s money goals extend to providing support to their parents, siblings, or other loved ones along the way.
Yet, you’ve probably heard that mixing family and money is like water and oil with different opinions, expectations, values and communications exploding like fireworks on July 4th. .
It doesn’t have to be.
That is:
Supporting loved ones financially is a beautiful and rewarding way to make the most of your resources…
If You do it with purpose and intent.
Let’s see how to plan financially support your loved ones Minus the spark and the drama.
First, check your goals
Giving money to a family is a common goal for many people.recent go health investigation We found that one-third of millennials and Gen Xers provide financial support to their parents (and many also manage their parent’s health care). But these generations are also concerned about how that financial support will affect their future finances.
So before handing out checks left and right, evaluate how giving money to family and loved ones fits into your financial life.
Before giving money to a family member, it’s helpful to discuss your long-term goals. Because I want to keep my household in order. It’s kind of like the “help yourself before you help others” argument. Providing truly top-notch support requires a solid foundation.
Ask yourself,
- Are you in a position to give money? If you’re still recovering from a pandemic-related setback, your monthly cash flow may be tight.
- Will giving money interfere with financial progress toward other important milestones, such as saving for retirement, building an emergency fund, or getting out of debt?
- Is supporting a loved one financially part of your long-term goals?
- Is this something you’ve always wanted to do, or was it driven by a pressing need?
- How can I provide financial assistance in the most beneficial way (i.e., one-time gifts that cover ongoing costs, etc.)?
Knowing what you can offer puts you in the best position to communicate with your family about what you can do and why.
Giving your family money is a big deal and can be a long-term commitment depending on their needs. Are you ready for it?financially important and Be emotionally ready to support your family in this way. Failure to do so can lead to hurt and resentment.
Understand their needs and brainstorm ways to help
There is no “right” way to support your loved ones financially. What’s best for you and your family depends on their current and future needs and available resources.
Before deciding how best to support them, we need to discuss some questions.
- What are the financial expectations of both sides? Is it ongoing, long-term financial support, or is he a one-time request?
- How much support do your loved ones need and is there anyone in your family who can help?
- Where do your money/resources go most? Will it help them pay off debts, cover pesky bills, give them a cheap place to live?
- Are there other ways to meet their needs without impacting your finances? help find interest rates, etc.).
Note the use of the word “give” instead of “loan”.
From personal (and professional) experience, payments to loved ones are often best structured as gifts rather than loans. Approaching from this vantage point will help you only give money that you think you won’t get back. It also takes less pressure from loved ones who don’t have to stress about paying it back. Also, be careful about jointly signing the loan for your family members, as you are responsible for paying them back if they are unable to make the payments.
The most important thing when giving money to family and loved ones is to be intentional.
For example, it may be important to send a fixed amount of money to your family each month. As your parents get older, they can use that money to maintain their retirement lives and pay for expenses they see fit.
Some people like to pay for certain expenses like adding their parents to cell phone, internet, cable or subscription plans (introduce mom and dad to Netflix!). Some people want to pay monthly fixed costs such as food and groceries. Taking responsibility for some bills goes a long way toward providing meaningful financial support.
If your loved one wants to live with you, they will either pay you a daily rent or allow you to live for free in exchange for help with household chores (cleaning, preparing meals, caring for children, etc.).
Don’t be afraid to be creative!
Work with your loved one to create a plan that works for both of you. You may be tempted to send your parents $1,000 each month, but it may not be within your budget yet.
But that doesn’t mean you can’t get there.
how to prepare financially
If supporting your loved ones financially is an important goal, you should be prepared for that. Knowing how you want to help is the starting point for creating a plan to make it happen.
An excellent option to consider is opening a “family brokerage account.”
Choose your preferred financial platform (Betterment, Vanguard, etc.) and open a new account in your name just to support your family. This is an ideal solution as it does not take funds away from other goals such as retirement, children’s college, etc. Instead, it’s a separate account dedicated to this specific purpose.
If you have money in your account, you can choose if and how you want to help. If you have limited funds, you may need to be more careful with the money you donate. Setting it up this way creates natural boundaries and keeps you from putting your own financial needs at risk.
Determine if it makes sense to contribute to your account each month, depending on your other financial commitments. so investment accountset it up to give you a greater return than if you kept your money in a savings account.
If you keep your money in a separate account, you can spend it however you like. Perhaps you will withdraw money to help your parents with expensive surgeries and other medical bills. Or, if you’re having trouble paying your bills, you might want to help a little with the rent.
Brokerage accounts can support one-time or recurring payments. You have a lot of flexibility here. If you don’t need the funds for a period of time, no problem. Your money is simply compounded. This arrangement provides reassurance that you can help your family when they need it, but that you have not established a pattern of giving money.
When considering how much to gift, remember the annual gift tax rules.
By 2022, each person can contribute up to $16,000 annually. Marriage doubles that number. For example, you and your spouse can each give her $16,000 to her mother for a year, totaling her $32,000.
Anything over that amount must be reported to the IRS. Form 709Amounts in excess of the permitted limit will be deducted from the lifetime waiver, which is currently $12.06 million ($24.12 million for married couples).
Luckily, there are ways to get around this rule.
If you want to help your family with medical expenses, You can write a check directly to a medical institution, The IRS does not consider it a gift. The same idea applies to educational institutions.
create healthy boundaries
Contrary to popular belief, boundaries, even family ones, are neither bad nor selfish. Setting clear financial and personal boundaries with your family and loved ones will help you create a long-term plan that works well for both of you.
That’s why it’s important to do the hard work and say “no” if you can’t afford to help at a particular point.
I don’t want to give away money I don’t have or promise to give too much when I have a lot on my plate. Doing so can cause undue stress on your financial and personal relationships.
Be honest with yourself and your family about what you can do now and what you want to do in the future. You may not be in a place to cover your parents’ rent right now, but you can help out in small ways like paying utility bills or sending them home a little each month.
Talking about money with parents and lovers difficult. But open and honest communication about money makes things smoother for everyone involved.
Never underestimate the power of compromise when it comes to family and money. Creating (and maintaining) healthy boundaries makes your offerings more meaningful and purposeful.
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