How to Help Someone With Financial Problems A Guide for Concerned Loved Ones


 

Life often gets lonely and stressful when one is faced with serious financial challenges. Those who go through financial hardships are often diagnosed with mental health problems. The stigma associated with mental health issues and debt only worsens financial challenges. Most people suffer in silence as they’re too humiliated to ask for help. They only speak up when they’ve tried to pawn jewelry to get pawn loans from unscrupulous pawn shops.

It’s natural to want to help a family member or acquaintance who is experiencing financial difficulties. They may be in a precarious financial position as a result of an unexpected event, such as an illness, accident, or job loss. While you still have bills to pay, you also want to help them in this time of need. Simply lending them money won’t be of much help in the long run. Here are tips on how to help someone with financial problems.

1. Guide Them in Making a Budget and Sticking to It

One of the best tips for how to help someone with financial problems is to help them make a budget. A budget serves as a plan for how you should spend your money. A good budget divides spending into different categories so you can better track where your hard-earned money is going. Finding the right balance between what flows in and what flows out is key. Remember to set a realistic budget: it will be easier to stick to it. Find out how the individual you are assisting spends their income by asking them about their expenses. Instead of pointing fingers, your objective should be to give them a fresh perspective on how to address their situation. Regardless of how much they make, their spending choices determine whether they get into debt or not.

While creating a budget is a great start, sticking to it can be challenging. To begin with, they’ll need to track their expenditures to find out where their money is going. With a clear picture of their spending habits, it becomes easier to figure out what needs to change. If it’s okay with both of you, have your buddy or relative report their spending to you periodically. You can agree on a daily, weekly, or monthly basis. Having someone to report to will give them the push needed to stick to their budget. Emphasize the fact that it’s their plan: they came up with it and are in complete control of whether or not it works.

2. Co-sign a Loan

This tip on how to help someone with a financial problem involves some risk on your part. To sort out short-term financial needs, your loved one may try to acquire a loan or line of credit (LOC). However, their credit may necessitate getting a co-signer. Think about whether you’re willing to co-sign a loan from a credit union, bank, or online lender. There are legal and financial repercussions to co-signing a loan, so make sure you understand what these are before agreeing to anything and effectively lending them your good credit. Note that you’ll be legally obligated to pay back the loan in case the other borrower doesn’t. Even if you and your family member agreed that you wouldn’t need to make payments, the lender can nonetheless have their lawyers sue you and demand payment of the balance.

A delinquent loan will also affect your personal credit. If your friend, brother, sister, or uncle fails to pay the loan in full and on time, the lender may report you to the credit bureaus, which can hurt your credit score. Co-signing on a loan isn’t something to take lightly. The fact that your loved one needs a co-signer demonstrates that the lender believes they pose too significant a risk for the bank to bear alone. How sure are you that they’ll repay the loan if the bank isn’t? Since you’re technically taking on this debt and its payment, it can also mean that you may face challenges obtaining a loan in the future. Before agreeing to co-sign on a family member’s loan with the assistance of an attorney, ensure you:

  • Request a copy of their credit score, credit report, and monthly budget to obtain an accurate understanding of your family member’s finances and capacity to repay the loan.
  • If at all possible, schedule an in-person meeting with the lender to be sure you understand the loan terms.
  • Obtain copies of any loan-related paperwork, including the repayment plan.
  • Request a written notification from the lender if your family member skips or makes a late payment. By detecting possible repayment issues early on, you can take prompt action and safeguard your own credit score.

3. Create a Bill-Paying Plan

People going through a financial crisis often have no idea where their money is going. If you have prior experience making and sticking to a budget to manage your personal finances, your knowledge will be valuable for your family members. You can share your budget and bill-paying system with them and explain how it helps you manage your finances as a way to break the ice. As you give them tips on how to better handle their financial situation, this approach will highlight areas where they can cut back on spending or try to raise their income to meet financial commitments. This is one of the best tips on how to help someone with financial problems.

4. Give a Cash Gift

If your family member is experiencing a short-term financial problem, consider giving them an outright cash gift. Think about how much you can give without straining your finances, and decide whether to give the entire sum at once (and let them know that’s the case) or in smaller installments periodically until the financial storm blows over. To avoid putting the recipient of the gift in an awkward situation, make sure it’s clear that the money is a gift and not a loan that must be repaid. If you’re gifting them a sizable amount, keep an eye on the Internal Revenue Service’s annual gift tax exclusion.

5. Encourage Them to Only Spend On What They Need

A person trying to take back control of their finances is probably already cutting back on unnecessary spending. Try your best to encourage constructive habits such as monthly budgeting and mindful spending. If they’re hesitant about cutting back on activities such as outings, suggest less expensive options. You should also aim to make them aware of the negative impacts of financial peer pressure. They’ll be more likely to stick to their objectives if they are aware of the damaging impacts of financial peer pressure, which will also help them feel less stressed or ashamed about their financial limits. If they have valuable jewelry, let them know there are places they can sell gold for cash or get cash for diamonds.

6. Give a Personal Loan

This tip on how to help someone with financial problems also carries its own set of risks. If your loved one reaches out to you for a short-term personal loan, make sure you have an open discussion, explicitly spell out the loan’s terms in writing, and have both parties sign it. This will make sure that everyone understands the terms of the financial agreement they’re entering into. Make sure to include the following loan details.

  • The total amount
  • Whether the loan will be paid off in one lump sum or will be split into payments to be made over time if certain conditions are met (e.g., clearing existing debt or securing a job)
  • The interest rate applicable to the loan and the methodology used to determine it (compound or simple interest)
  • Dates for payments (full repayment or final installment due)
  • The course of action to be taken if they don’t make the full payment on time. These may include increased interest charges or taking legal action)

If you plan to lend more than $10,000 or if your interest rate will be significantly higher than that of the majority of borrowers, consider consulting a tax professional. Family members taking out low-interest loans from one another may have special tax implications.

7. Provide Non-Cash Assistance

If you’re not in favor of giving them cash outright, consider offering non-cash financial aid like gift certificates or gift cards. You can purchase gift cards of varying amounts from most stores. This tip on how to help someone with financial problems will give you more control over how the money is spent.

8. Offer Employment

If you don’t feel comfortable lending your loved one money, consider hiring them to help you out with necessary tasks for a fixed fee. This additional income will go a long way towards ensuring they meet their financial obligations while also helping you finish tasks that you haven’t managed to get to. Treat them like any other employee. Be specific about the tasks to be completed, the due dates, and the compensation. Include a clause outlining how you’ll handle subpar or unfinished work. This tip on how to help someone with financial problems will help your loved one help themselves.

9. Prepay Some Of Their Bills

If possible, consider prepaying one or more of your loved one’s regular bills (insurance premiums, utility bills, rent/mortgage) until they get through their financial crunch. Offering them help with making bills will give them the extra time they need to resolve their financial problems.

10. Dig Deeper

A financial intervention should be staged with the understanding that changing financial habits can be challenging. Our upbringing and life experiences have a significant impact on how much money we save and spend. Family financial issues may have a history. Some people have access to trusts while others have to find their own means. Despite a history of financial failure, people who blindly invest in untested business ventures or spend compulsively often have no idea why they continue to engage in actions that jeopardize their financial, personal, and professional success. To effectively help your loved one understand and change their financial behavior, professional involvement from a money coach or financial therapist may be necessary.

Most of these habits and actions are unconsciously motivated. If your loved one doesn’t know the root cause of the issue, they won’t be able to get out of their financial crunch. It makes sense to want to support a friend or relative who has financial problems. Just be careful that your assistance doesn’t jeopardize your relationship or financial security. Establish boundaries, respect them, and work with your loved one to set manageable goals that will set them up for success in taking control of their financial destiny.

11. Don’t Presume Your Loved One is to Blame

People often lack compassion for those who are struggling financially because they think their issues are self-inflicted. Saying things like they selected the wrong job, they didn’t work hard enough at school or they lack willpower can come off as dismissive or condescending. A popular misconception is that luck, demographics, and other social phenomena have minimal bearing on someone’s financial condition and that a person’s financial gains are always solely tied to their efforts.

Unforeseen life events and catastrophes, such as health issues, medical expenses, job loss, or the death of a spouse, are often to blame. Furthermore, pointing fingers or making generalizations will make your loved one doubt your ability to understand their difficulties. Being compassionate is one of the best tips on how to help someone with financial problems.

12. Set A Good Example by Disclosing Your Personal Money Troubles

Talking about finances can get overwhelming. Giving financial recommendations to someone who might not take them well might make the conversation even more challenging. Model the behavior you believe would benefit that individual rather than just directing and telling them what to do. Openly discuss your struggles and life experiences. Tell a tale of a time when you managed to forgo making a purchase that you didn’t truly need. Or describe the highs and lows of your debt payback process and how you had to work with mortgage brokers or a bankruptcy attorney. Trying to solve financial issues is a goal that virtually everyone can identify with. This will make your loved one feel less alone.

As you think about how to help someone with financial problems, note that money and family don’t always mix well. However, during tough financial periods or in the event of an unplanned emergency, your loved ones may be in dire need of financial support. In such a situation, don’t forget to consider your financial situation before lending a hand. If you find that your financial situation limits the extent to which you can help, remember that there are worthwhile, creative, and effective ways to support your family members get through their most ferocious financial storm.

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