NEW YORK (MainStreet) — If you're thinking of helping a loved one with the cost of tuition, medical debts or a new home, consult your brain before you follow your heart. Here's a look at the five smartest questions to ask to ensure your relationship will last long after the money's gone.
1. Can I afford it?
Above all, make sure that giving or loaning money to your family is something you can afford, says Erin Ellis, financial educator at Philadelphia Federal Credit Union.
"Using your savings to bail someone else out could leave you in a pinch when you have an emergency," she says. "Borrowing from your retirement to help a loved one pay a medical bill or tuition can put you in long-term trouble."
Your financial well-being should always come first, says Marcy Keckler, vice president of financial advice strategies at Ameriprise.
"Make sure that any help you're considering for a loved one doesn't put you at risk," she says. "If you're a parent, you may want to help your child buy a home, but you shouldn't do so if you've got to sacrifice retirement savings."
Even if you have the money to give right now, it always pays to look ahead, Keckler says.
"You may be able to make your mom's assisted-living payment check this month and next, but if you have to do it for the next five years? It may have long-term repercussions."
2. If it's a gift, can I always feel good about it?
If you're gifting the money, does it have any strings attached? Keckler asks.
"If you're giving your children money to help with a down payment on a home, how will you feel if in three months they're taking a lavish, glamorous vacation? Are you going to say, 'Hey, wait a minute, I thought you needed money, what are you doing?'"
To ensure financial gifts don't wind up generating resentment, Keckler recommends understanding and embracing the spirit of the gift.
"Close your eyes and imagine the recipient benefiting from or enjoying the gift or loan. If it brings you joy and you can afford it, then do it," she says. "But if you have hesitations or 'what ifs' in mind, then this might not be the right decision for you to make."
3. If it's a loan, what are the terms and repayment schedule?
"Is your loan interest free? How long before you expect to be paid back? Do you expect payments every month, or a couple of times a year? What happens if they don't repay the money? Can you afford to forgive the debt?" Keckler asks.
No matter your relationship to the recipient, set a plan from the beginning and stick with it, says Stephanie Thompson, financial advisor for the Metlife Premier Client Group.
"They may be temped to deviate from the plan, but if that money is not paid back it can destroy a relationship," she says. "You have to be very serious. This can't be trial and error."
If a payment is missed or late, there must be consequences that are laid out in advance. For example, if they are five days late, perhaps they are charged an additional 10% penalty.
"If you stick to the mindset that this is a professional agreement, then they will have more respect for you and it won't happen again," Thompson says.
4. Should I get things in writing or see an attorney?
Whether you should get an attorney to help you draft the terms of the deal is an individual judgement call. For some, a handwritten IOU is enough; for others, professional legal help adds a layer of accountability.
"Sometimes something that's written out that both parties sign can add enough formality that things feel a little more official," Keckler says.
5. Should I embrace the opportunity for a life lesson?
If you're going beyond a simple loan and making a more substantial investment in a small business or franchise, Thompson always recommends getting an attorney.
"In those situations you have a lot at stake and a lot of moving parts," she says. "When you have an attorney involved, it shows that both parties are dedicated and very serious."
Sometimes a lesson in money management is worth far more than a one-time cash gift, Thompson says.
"So many young people don't know how to balance a checkbook or do proper financial record keeping. Yes, they may have the banking apps on their phones right in front of them, but they don't know how to manage their money to prevent financial mishaps," she says.
Don't underestimate the value of your own talent, says Bruce McClary, vice president of public relations at the National Foundation for Credit Counseling.
"Combining your financial help with other assistance demonstrates a higher level of commitment that can strengthen family bonds and make it more likely for your loved one to achieve a positive outcome," he says. "There may be underlying financial issues that need attention."
— By Kathryn Tuggle for MainStreet