Anticipating the financial challenges that life might throw your way can be difficult, and that’s why it’s a good idea to think about such situations far in advance. Most families at some point are going to have trouble making ends meet, and how you elect to address those problems will have a major impact on how long they might last. When is it wise to use credit cards to bridge a monetary gap? Should you consider seeking a loan from a family member? Are you saving enough during the good times to handle a possible bad stretch? With a bit of thought, you and your family can do a better job of handling a financial crisis.
Borrowing Money from a Family Member
No one wants to ask for money, but family members are often the best choice of lenders when you’re faced with a financial shortfall, especially if you don’t know when you may be able to pay the debt back. A sibling, an aunt or a parent are much less likely to impose difficult payment terms upon you, and you can try to use the special relationship as leverage when you’re having troubling repaying a loan. Banks and credit card companies tend to be less accommodating when you’re dealing with a money situation.
If you’re the person extending the credit to another family, the wisest move is to treat the loan as a sunk cost. Assume that it is gone. If the borrowing family member pays it back in full, then you ought to treat that as a happy accident, but allowing an old, unpaid loan to sit in the back of your mind can be poisonous to important relationships. Think about what you are sacrificing before you allow money to come between you and other family members.
Conversely, if you’re the person asking for a loan, you should work hard to repay the loan. Family members typically don’t expect you to pay interest on debt, and that alone is worth its weight in gold. Likewise, these are people who you may need to turn to again in the future for help, so it’s good to keep your credit with them in the best standing possible.
The dynamics of lending money within a family can create a lot of problems, especially in families where one member with money sees themselves as being “above” those who need to borrow it. If a loan is expected to be paid back, get the agreement down in writing, and be sure that all parties understand what the terms of repayment are.
Try not to discuss borrowing money at difficult times, for either you or the family member you’re borrowing from. If the lender is getting off work, wait a few hours to allow that person to decompress and relax. Likewise, if you just got off the phone with a bill collector, you may want to distance yourself from the problem for a few hours before asking for money. Cool heads and clear minds are needed when discussing financial problems.
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When to Use a Credit Card
A credit card can be a handy instrument to use in the right situation, but you need to be careful about using one to regularly address money needs. If you’re stuck with a repair bill on a vehicle that’s required to get you to work, paying with a credit card may be the best way to bridge the time between now and your next paycheck. The important thing with credit cards is to not use them in a way that compounds a money situation. For example, using a credit card with a high rate to pay off another card is never a good plan. However, if you can roll debt from a card with a high rate onto another card with a lower rate, that may be an option worth exploring.
Rainy Day Funds, Savings and Investments
A lot of highly self-reliant people are quick to dip into their savings to cover bills, but that’s not always the best idea. For example, if pulling money from a 401k might incur a penalty, the wisest move may be to charge the debt to a credit card or to ask a family member for a loan. It’s important to weight the costs of taking money from long-term funds against the costs of other options. If you can borrow a couple hundred dollars from your brother interest-free for a month, that’s a wiser move than taking a penalty for draining a savings account below a penalty threshold.
Cutting Back
If money is getting tight, one of the first things that a family should do is review the budget. Over time, many bills go up in price, but some of these may be negotiable. For example, if your cable TV bill has risen, you may want to look at getting a cheaper package. Sometimes, the simple threat of changing providers will encourage the company to offer you’re a discount. It can be a challenge to find savings within a family budget, but when a money situation pops up, the budget is the first place you should start looking for help.
A Personal Loan or a Mortgage
If you have good credit and limited options, seeking a loan or a mortgage from a bank may be your only choice. One way to limit your exposure to risk in this situation, if you’re a homeowner, is to request a home equity line of credit. A HELOC allows you to borrow against the value of your home without taking on the burden of a full mortgage. You don’t even have to actually use it: you can let it sit as a rainy day fund.
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If you must take on a personal loan, try to negotiate the most favorable terms possible with the lender. Don’t take on more debt than is necessary, and be aware of any potential penalties for late monthly payments and early repayment of the entire loan.
Conclusion
Don’t be afraid to rely upon family for financial help. In many cases, they’re going to be able to offer the lowest-cost option with the least onerous terms. If you can’t borrow from a family member, then take the time to understand the potential costs of different sources of money and what options are best suited to short- and long-term cash needs. You can navigate money situations as they come along by applying some thought to who you ask for help and how you do it.
