Back in March 2021, I told you about my journey to get out of debt in this post. I shared how I got in and out of debt. The part I didn’t share with you is that I regret borrowing money from my parents. Yes, I saved money on interest but it did affect my relationship with my mother at the time. That’s when I learned that you don’t mix money and family. In retrospect, I should’ve borrowed the money from the bank.
Borrowing money from my parents
As I shared in March 2021, I had lots of debt as a student. The debt was to my parents, who were divorced at the time.
I lived with my mum, which meant that every time I spent money, she could see it. That made me feel bad for spending money that could’ve been used to repay my debt. I think my mum felt the same. There was tension around the home, which I didn’t like. On the other hand, it might all be a figment of my imagination.
I specifically remember an instance when I booked flight tickets to see my maternal grandmother who lived in London. I remember my mum being quite unhappy with that.
My dad, on the other hand, couldn’t have cared less about when I repay him, maybe it’s because we didn’t live together.
Don’t get me wrong, this is not me complaining about my mum. She was very generous by lending me money without interest. Our mistake was not agreeing on a repayment plan. Because of that, we each had different expectations on how much and how often I should repay.
Anyway, that tension is what motivated me to pay her back as soon as possible when I moved to the UK (and started my career), so I’m very grateful for that. However, it did “scar” me and taught me that you shouldn’t mix money and family.
What happens if you have to mix family and money?
If you have no choice, I think there are two healthy approaches (I didn’t take any of them when I was a student). You can make a repayment plan or just treat the money as a gift. Of course, you are not allowed to treat the money as a gift if you are the borrower haha, can you imagine? The right to treat the money as a gift is reserved only for the lender. Let’s go over the two options in a bit more detail.
Make a repayment plan
Instead of both sides having different expectations (which is the perfect recipe for tension), you can agree on a repayment plan.
This can be a straight-line plan, a final deadline, or a custom plan.
This is kind of like a mortgage. The borrower and lender agree on a set amount that will be repaid each period.
For example, let’s say I borrowed £12,000 and I agreed with my mum or dad that I will repay them £500 a month for 24 months (two years). We can also agree that I will repay £1,000 each quarter for 12 quarters (three years). In both of these examples, I assumed no interest but you can charge/pay interest, whatever you agree.
A final deadline plan
If you don’t want to agree on a periodic payment, you can just agree on a final date by which the debt has to be repaid.
For example, if I borrow £12,000, we can agree I will pay it within two years. It can be paid in chunks, whenever I have money, or it can be paid in full at the end of the two years.
A custom plan
If you don’t like the first two options, you can create your own.
For example, let’s say you’re a student who earns money mainly in the summer. You can agree to pay a certain amount each summer.
If you are a student who’ll earn a decent amount after you graduate, you can also agree to pay a certain % of your net salary until the debt is paid off.
Which plan should you choose?
I think the straight line gives the most clarity to both sides but it really depends on your circumstances.
Whatever plan you choose, please just agree on a plan. It will provide clarity to both sides and (hopefully) reduce the tension. Whether you’re the lender or borrower, you don’t want your relationship with another family member to be affected by this, believe me.
Treat the money as a gift
As I mentioned above, this right is reserved for the lender.
Imagine you lent money to a family member and you don’t really need that money. Instead of lending that money, just gift it (or at least treat it mentally as a gift). Then, it will be a one-off instance with no expectation for the future.
No expectations mean no disappointments, no disagreements, and no negative effect on your relationship with that family member.
I highly recommend this method if you can.
If you prefer the more blunt version, here’s Dave Ramsey (whose methods I used to get out of debt):
Don’t mix money and family
There is a third option, which is my favourite- Don’t mix money and family! It’s as simple as it sounds.
If you are the borrower, just borrow the money from the bank if you have to. Alternatively (even better), save for something in advance and don’t borrow at all!
If you are the lender, try and say “no” and explain that the relationship is too important. The problem here is that by saying “no”, the potential borrower may get offended, which will harm the relationship anyway. It seems like you can’t win here, right? In that case, you can either say “no”, gift the money or agree on a repayment plan.
If you do gift it, just ensure this doesn’t become a pattern. You don’t want to become an enabler (or an ATM).
Why the hell am I talking about this?
Earlier this month we heard that a close family member from Lazy FI Mum’s side went into overdraft and didn’t want to sell their investments due to the latest crashes.
We immediately offered to help (they didn’t ask). While Lazy FI Mum treats this as a loan (her side of the family- her call), I treat it as a gift. If I wait for the money, I will just get upset due to the difference in expectations between me and the borrower. I just told Lazy FI Mum “if you want to treat it as a loan, be my guest, I’m not expecting this money ever, I prefer to be able to sleep at night and avoid family arguments”. I must admit this approach helped me as it’s been a few weeks and I’m not that bothered.
“Well, you say you’re not bothered but here you are, writing a whole post about it“
The only reason I remembered it is because I started going over our monthly expenses. As I don’t expect this money to ever come back, it is treated as an expense. It’s not that I don’t trust that person or have low expectations. It’s just that if I expect it, we go into the whole “when and how much” route, which I’m trying to avoid. As recommended on Investopedia, I’m keeping my expectations low.
If you have to lend or borrow from family, I highly recommend that you manage expectations by agreeing on a repayment plan. If you are the lender and are fortunate enough, just gift the money and move on. The caveat to that is if you think that person will come back for more or that you’re enabling bad behaviour by gifting the money, In our specific situation, that’s not the case.
So remember- wherever possible, don’t mix money and family.