Why you should think twice about bailing out friends and family who are in financial distress - Sarah Coles

Whatever anyone tries to tell you, we’re not all in the same boat. For some people, life is still relatively plain sailing, while for others, it’s a desperate fight to stay afloat.

Loaning money to your loved ones can be a double edged sword.

Those who kept their jobs, or had furlough topped up, may have seen their outgoings fall as life has become more restricted, so they’re actually better off. They are the people who are salting away record sums in savings accounts and putting new money into investments.

Meanwhile, those who have lost at least part of their income – and in some cases almost all of it – have faced an impossible challenge to keep their heads above water. An estimated six million people have fallen behind on at least one bill, and one in five of this group say they can’t afford the essentials.

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In many cases, members of the same family or group of friends have had utterly different experiences, and government figures show that up to one in five people have been helping loved ones who are having a much harder time.

If we can protect those we love from the worst of their financial stresses, it feels like the only sensible and compassionate option. Unfortunately, mixing relationships and money complicates things, so we need to understand the issues, and approach this with our eyes open.

Often people feel under pressure to lend money that they really can’t afford to part with. Even before the crisis, one in five parents who helped their adult children with a lump sum said they’d had to sacrifice their own lifestyle to do so, and almost one in 20 said they would retire later as a result.

The desire to help is only human, but if it’s going to leave you in financial difficulties, then you’re not solving the problem, you’re just moving it around a bit. If you can’t afford to lend someone money, it’s OK to say no.

This doesn’t mean you can’t help at all – just that your help might need to come in a different form. This can mean anything from offering them a place to stay for a while to helping them apply for the right benefits, encouraging them to contact a debt charity, or talking to the companies they owe money to and can’t bring themselves to face.

If you can afford to lend the money right now, but will need it back eventually, this can also cause problems. You might trust your loved one, and agree a sensible approach to repayment, but circumstances can change for both of you. If they can’t afford to pay you back, and you need the money urgently, there are no good answers.

You could put them under pressure to pay or you could consider legal action. Either way there’s no guarantee you’d get your money back, and there’s likely to be no going back for your relationship. The best possible approach is if you can afford to consider the money as a gift, so there are no issues around repayment.

However, even then you need to accept that once you’ve handed the money over, your involvement is over: you can’t dictate how it is spent. I’ve known parents who have helped out their adult children, and then found it incredibly difficult when they announced they’d booked a holiday.

Your idea of essential spending won’t be the same as anyone else’s, so when you give someone money, you have to be prepared for them to spend it in ways you wouldn’t choose to personally.

You also need to consider what you’ll do if they spend this money and need help again. If there’s a chance you’ll have to support your friends or family for a longer period, consider whether you can afford it. If you can, you could be the lifeline that gets them through the crisis.

But if you can’t, talk to your family. It’s going to be a difficult conversation, but it’s far better for them to know where they stand at the outset than for your help to suddenly dry up.

It’s horrible to see friends and family sinking financially, and it’s the most natural thing in the world to want to help. If you can afford to do so, and everyone is clear about the arrangement from the outset, you could help them keep their head above water.

However, if you rush to bail them out when you’re struggling yourself, you could both end up under water.