3 Ways to Help Family or Friends in Financial Trouble
When a family member or friend is in financial trouble it’s normal to want to help. They might be in a difficult financial situation due to an emergency such as a job loss, accident, or illness. Maybe they’ve already asked to borrow some cash or maybe they’ve tried to keep it hidden. You want to support them in their time of need, but also have your own bills to pay.
The good news is that lending cash isn’t the only way to help. Although it might not seem like it, often what someone needs to solve their money problems isn’t more money, but a different way of using what they have. Here are 3 ways you can help those you care about overcome their financial challenges:
1. Help Them Make a Budget (And Stick to It)
We make a budget to plan how we want to spend our money. Good budgets break down spending into specific groups so that you can better organize where your hard-earned cash goes. It’s all about striking a balance between what comes in and what goes out. When our budget is realistic it’s easier to stick to it because it aligns with how we want to use our money.
Ask the person you’re helping about their expenses, which is how they spend their income. Your goal shouldn’t be to find fault or blame, but to give a fresh perspective on their situation. Regardless of how much or how little someone earns, their spending decisions decide whether they end up in financial trouble or stay debt-free.
Making a budget is a great first step, but sticking to it is the real challenge. They need to track their expenses to first find out where they’re spending their money. Once they know this and see their habits, they can figure out what to change so that they aren’t spending too much. If both of you are comfortable with it, have your friend or family member report their spending to you. This can be done every month, week, or even day. Having to tell someone how they’re doing will help make them more accountable about staying on track with their plan. Also emphasize that this is their plan: they decided it and they are fully in control of whether it succeeds or fails.
2. Help Them Find Options to Solve Their Debt Problems
You might think that someone would only ask to borrow money when they don’t have any other options. However, they might just not know about those other options to solve their debt problems. Check trustworthy sources for information that could help them. For example, the Government of Canada has a free financial toolkit, and you can always rely on us.
If they do need some extra money to help them through a difficult time, then there are tools like lines of credit or home equity loans, which can have lower interest rates than credit cards. Of course, there are risks to these loans, just as there are risks to taking any loan. That’s why there should always be a plan for getting out of debt before any more money is borrowed. Otherwise, they might get stuck in a cycle of taking out loans that just becomes harder and harder to dig out of.
Getting more money and borrowing more money are not the only options for dealing with debt. Your friend or family member can also try to negotiate a debt settlement, where they or a third party like us get creditors to accept a lower payment for all of their unsecured debts.
When settlement isn’t possible or preferable, there’s also the option of a Debt Management Program (DMP). When we start a DMP for someone, we bring all of their credit card and unsecured debt payments together into one monthly payment. Interest rates are usually greatly reduced or waived going forward, and the payment will be tailored to what they can afford in their budget. On top of that, our professional credit counsellors will help them stay on track to reaching their financial goals.
It’s normal to resist the idea of telling a stranger about your financial troubles. Your friend or family member could be worried about getting looked down on or even punished if they ask for help. Talking to us is free, confidential, and as anonymous as they want it to be. They could come to an appointment by themselves, or you could join them to give moral support and help them understand the information they're given. There will be no effect on their credit report, jobs, or anything else when they contact us. We’re here to help, not judge.
3. Before You Give or Loan Money, Know Your Own Financial Needs
If you’re thinking about helping your friend or family member with a loan or gift of money, then make sure that your own needs are taken care of first. Remember that it’s always okay to say no when someone asks you for a loan. Important relationships can be hurt because of disagreements over lent money. If they value you as you value them, then they will respect your boundaries. Know how much your budget can handle so that you don’t get into financial trouble too.
One way to financially help someone without giving them money upfront is to co-sign a loan with them. But beware: this will affect your own borrowing ability, and if they can’t pay the loan back, then you’re 100% responsible for repaying it. Furthermore, regardless who makes the payments, they will be reported on both credit reports, which can hurt your rating if they're not made on time. On the other hand, if you give them cash and they say they’ll pay you back sometime, then your “loan” will probably end up being a gift. It doesn’t matter how much you trust them. To avoid a lot of pain later on, don’t expect the money back, and never gift money you can’t afford to lose.
If you’re willing to give a loan but definitely need the money back, then make a written loan contract. While there are free templates online that you could use, consider getting legal representation to make sure nothing goes wrong. At the very least, the contract must include:
- The amount of money loaned.
- The months or years they have to pay the loan back.
- How often they’ll make their repayments (e.g. bi-weekly or monthly).
- The interest rate or fees on the loan, including the overall cost of borrowing from you.
- What happens if they fall behind on payments or can’t repay the loan at all.
Triple-check with your friend or family member to verify that they understand everything in the contract. It would also be best for them to seek independent legal advice so that they understand what they're signing up for. Most importantly, no money should exchange hands until the contract is signed.
We’re Here to Help with Financial Troubles
If you need more advice on how to support your friend or family member through their financial troubles, or if you would like some assistance yourself, then the Credit Counselling Society is always available to help. Give us a call toll-free at 1-888-527-8999, send us an email, or chat with us anonymously online. Rest easy knowing that those important to you are being taken care of.