If you feel inclined to help someone you know who’s struggling to make ends meet amid today’s challenging environment, you’re not alone. According to new research from Ameriprise Financial from 2020, one in five people have provided financial assistance to a friend or family member whose finances have suffered due to the COVID-19 pandemic. Even before the global pandemic began negatively impacting people, nearly half of respondents (45%) in a separate Ameriprise survey said they have given money to someone they know who experienced hardship.
The impulse to help is natural, since people hate seeing their loved ones struggle, and it feels good to support them in their time of need. But, while generosity is a great inclination, make sure it doesn’t cloud your judgment about how much you can afford to give and what impact it may have on your relationship with the recipient.
Before you make a commitment to help, keep these tips in mind to avoid unintended consequences.
Assess your own financial picture
Prior to giving money to a loved one, take a step back and assess your own financial situation. Consider how your gift, especially if it is a significant amount of money, might impact your ability to cover the cost of your immediate expenses and save for your long-term financial goals, such as retirement.
Would you be tapping into your emergency fund? If so, how would that impact your ability to cover an unexpected expense, should you experience one? And how will you eventually rebuild your own emergency fund?
If you’re thinking about selling your investments to help, could doing so throw your future plans off track? Are you prepared to shift your goals or even your retirement date, if it came to that? Could there be tax implications that should be taken into account before you cash out of your investments?
These are the types of questions you should be asking yourself to determine if and how much you can reasonably afford to help. Equally important, think about your spouse, partner, or other members of your household who may be impacted by your generosity and whether or not they would be on board with your decision.
If offering money could jeopardize your own financial situation, you may want to consider other ways of lending a hand. For example, you might help with childcare or offer to do household chores in order to free up time for your friend or family member to focus on their job search.
Determine whether you’ll make a gift or a loan
If your finances are in strong enough shape for you to help your loved one, the next step is to decide how you will extend assistance. Will the money be a gift or a loan?
If you decide to provide a loan, it’s important to mutually agree upon a timeline, and potentially an installment plan, for the recipient to repay you. Be realistic with the terms. If you feel there’s a risk that the individual may not be able to fulfill his or her end of the agreement, determine if not getting the money back would strain your relationship. If the answer is yes, you may want to reevaluate the conditions of the loan and whether you’re truly comfortable lending the money in the first place.
On the other hand, if the money will be a gift to your loved one rather than a loan, take the time to understand the IRS gift tax rules. In 2021, gifts that are more than $15,000 to any individual need to be reported to the IRS and the donor is required to pay taxes on the money. There are exceptions to this rule. For example, if you’re helping someone cover the cost of tuition or medical expenses and you make payments directly to the educational or medical institution, the taxes are waived. Make sure you’re accounting for all applicable taxes, and consider checking with your tax adviser.
Money can be a delicate topic among friends and family even during more normal times. But it can take on added sensitivity when someone you care about is struggling financially. Nevertheless, if you’re planning to give money to a loved one, honest and open communication is key to avoiding misunderstandings and hurt feelings that could harm your relationship down the line. Make it a point to be transparent about your intentions and expectations for your gift or loan. Take the time to chat with them about your ability to support them financially, how much you are willing to give, and how often, as well as a game plan for repayment, if applicable.
Seek impartial and knowledgeable advice
Deciding how to handle financial support to a loved one can be tricky. It’s likely that seeing a friend or family member struggle may make you susceptible to reacting impulsively. Getting impartial advice from a knowledgeable outsider, such as a financial professional, may be useful in this case. An informed and objective third party can help you navigate the situation and make rational decisions that will keep your relationships (and finances) intact.
Marcy Keckler, CFP, CRPC, RICP, is the vice president of financial advice strategy at Ameriprise Financial.