We all know finances are personal. After all, that’s where the term “personal finance” comes from. But the common practice of planning for “personal finances” is now expanding beyond the individual concerns to incorporate planning for “family finances.” This is happening because people are increasingly helping to take care of their family members financially, whether it be through medical care, support in retirement or during hard times, or even lending out money to family members.
The sandwich generation has been dealing with this for some time and it’s not just one’s parents or children that they’re caring for. This financial assistance is also going out to extended family members. According to a recent study by Bank of America that was featured in Forbes, “62% of Americans over 50 have provided financial assistance to adult family members during the last five years.”
In other words, the majority of adult Americans are or have financially supported one or more of their family members. And the amount of assistance isn’t trivial. Time cites a recent report which says the average amount of support is $14,900 per year — an amount that increases with one’s salary.
With these odds, how can you plan for the possibility of financially helping a family member in the future while you work to pay off debt and build your own financial future? It may not be easy, but it can be done. Here are tips to follow that will set you up to be in the position to help others and yourself at the same time so you don’t have to worry about becoming a burden on your family members later.
Get (and Stay) Out of Debt
We talk a lot about getting out of debt at ReadyForZero, not only because that’s what we do but also because being debt free is a cornerstone of anyone’s financial prosperity. Debt leads to emotional strife, financial difficulty, and costs money that could be diverted to savings instead. Not to mention the fact that compound interest on debt creates a situation in which you could pay double the original price of whatever was purchased — while if that money were saved in a retirement account, the compound interest could lead to the same doubling of your retirement savings.
In a nutshell, debt is expensive and stressful. In order to set up the best possible financial future for yourself and for your family, focus your energy on eliminating debt and building up an emergency fund so you never have to deal with debt again.
Set Up Separate Accounts
Do you have a 401(k) through your job? If so, make sure you’re contributing at least the amount of your employer match. If not, open a retirement account on your own immediately. Then consider opening a second retirement using something like a Roth IRA. This account will become an emergency fund of sorts. Only this isn’t a typical emergency fund — this is money that you can use to help family members in need rather than your own emergencies.
You don’t need to slow down your debt payoff or personal savings by contributing several hundred dollars a month to this retirement account or your own. Rather, figure out a small percentage of your income that you can afford to put away each month or find a place in your budget that could be reduced and apply those funds to the account.
There are several benefits to setting up a separate account:
- It’s easy: you can set it and forget it if you set up automatic contributions each month.
- It protects your own retirement fund: this is money you don’t “need’ since you already have your main retirement accounted for — thus lending it out won’t break you financially.
- The money will grow: retirement accounts earn more interest than traditional savings accounts.
Consider this: if your family members ever need assistance from you, you can use the money from this fund to help them without jeopardizing your own retirement. And if they never end up needing assistance from you? Then you have even more funds to retire with!
Only Lend Money You Can Afford to Lose
Finally, the number one component to helping your family financially is to never lend out money that you can’t afford to lose. Always lend money with the assumption that you’ll never get it back. And putting your own finances in jeopardy to help a family member in need only creates a domino effect of falling finances. While this isn’t always something you can avoid, make sure to ask yourself this question seriously — especially in non-emergency situations.
None of us can predict what the future may hold, which is why it’s so important to plan ahead as much as we can. With careful planning and budgeting, you can get out of debt, create a positive financial future for yourself, and build funds to help family members in need later on. It’s not always an easy journey, but every little bit of effort you make can go a long way down the road!
Image Credit: Chung Ho Leung