Should You Borrow Money From Family?

Just about everybody owes money to somebody at some point.

Look at the average person’s life. They go to college or university, borrowing money for student loans. Then they get out, and need a shiny new car to go with their post-graduation job. So they borrow to buy that. Next comes buying a house, which comes with a massive financial commitment. And throughout it all, many of us struggle with credit card and other debts.

The world runs on debt, especially here in Canada. It’s rare to find someone who is 100% debt free. It’s gotten to the point where we think it’s an accomplishment if someone is debt free besides their mortgage.

Much time and energy is dedicated to helping people get out of debt. Over the years, I’ve seen thousands of tips on how to rid one’s self of debt, with the suggestions ranging from useful to outlandish.

There’s one suggestion I don’t see as often as I should. Many folks should take advantage of borrowing money from their family, especially when paying down high interest debt.

Most people wouldn’t dream of taking this money, saying they’d rather owe a nasty bank than a friendly relative. I’ve never really understood this attitude. Let’s take a closer look at why you should take that loan from your relatives.

The pros

The first pro is as simple as it is powerful. A low interest loan from a sympathetic relative will cost you less in the long run.

I know we’re all independent adults who don’t like accepting charity. We want to pay our own way. But your money doesn’t care about any of that. And when it comes to your money, you should take the path of least resistance.

This is especially true when it comes to credit card debt. Cutting an interest rate from 20% to 2% per year is massive. On $5,000 in debt, that’s a difference of $900 per year.

There’s also the flexibility of paying off a relative. If something happens and you fall behind, a relative should be more understanding than the average banker. You’re nothing but a loan number to a big bank.

Borrowing money from a loved one will also give your credit rating a big boost. Credit reporting agencies all agree; if you pay off a debt, your credit score will go up. That will help someone get more loans in the future, although that’s more of a secondary benefit. Too many people get right back into debt after paying off their current loans.

It can also be advantageous to the relative lending the money. They can get a return comparable or higher than other fixed income sources while taking a reasonable risk with someone they know well. And for many people, helping out a loved one in need is a bigger reward than maximizing their investment returns.

How to lend to a loved one

No matter what side of this transaction you’re on, you need to treat it like a business deal. Anyone borrowing money from a loved one should expect to pay interest, make regular payments, and so on. And these terms should be spelled out in a contract.

Many parents feel uncomfortable doing this, preferring to give junior an interest free loan. That’s a bad idea for a couple of reasons. They’re already doing junior a big favor by cutting the interest rate from 20% to 2%. And interest free loans look too much like gifts to me. It’s easy for their offspring to just not pay it back.

There’s an easy way for parents to protect themselves if their child doesn’t pay back the loan. They can simply instruct their estate to deduct the loan balance from junior’s share of the estate. That might seem a little harsh, but remember, the kid didn’t hold up their end of the bargain.

The rule of thumb when it comes to lending to relatives is to write off the loan from the beginning and treat it as a gift. I agree with that mentality. But steps should be taken to ensure the borrower is very aware the loan isn’t a gift.

Conclusion

I see no problem borrowing money from a loved one, especially if you’re drowning in high interest debt. But remember, it isn’t a gift. You should pay back any loan with the same amount of gusto, no matter what the source. That way you can still show your face at Thanksgiving.

The Easiest Way to Save Up For Your Annual Vacation

I’m constantly amazed how quickly we’ve replaced spending on things with spending on experiences.

One big reason for this is the rise of Facebook. As we scroll through our feeds, we see friends who have spent time in all sorts of exotic locales. Their pictures are beautiful, always filled with smiles. These same friends gush about their vacations when they get home. “The food was amazing! The scenery was breathtaking! The hotel was phenomenal!”

It’s little wonder people so desperately want to travel the world when they’re up against that. Some of us take it to a new extreme, quitting our jobs to pursue a life of full-time travel, even if it is temporary. Most do things a little more responsibly, choosing instead to contain our travel to a two-week window of allotted vacation time.

Many of us have trouble saving up for a vacation, so we finance it instead. That’s a terrible idea. Even a $1,000 vacation financed at regular credit card rates can cost $1,200…$1,500…or even more before it’s paid off.

That’s not what you want to do.

If you’re having trouble saving up for anything, try this trick.

Brown bag your lunch

It doesn’t seem like a big change, but packing your lunch can add up to some serious savings over the course of a year.

Say you’re currently spending $10 on lunch out every day at work, while you could pack something for $3. That translates into savings of $7 per day, or $35 per week. Based on a 50 week annual schedule, that works out to $1,750 in annual savings.

That might not be enough to finance an entire exotic vacation, but it’s a nice start. It’s definitely enough to pay for a week away that’s a little closer to home.

Even if you just eat in four days a week and go out with your office buddies each Friday, it still adds up to significant savings. You won’t quite end up with $1,750, but you’ll still save $1,400.

The powerful reason why

We’ve all heard about the latte factor, which states that little recurring expenses have a way of really screwing up your budget. The latte factor can mean different things to different people. Some people might drink a lot of alcohol. Some might buy too many clothes. Or some might go out to eat too often.

The solution is usually pretty simple. Figure out what you spend too much money on, and cut it out. Or at least reduce it quite a bit.

There’s a problem with that. Restricting ourselves doesn’t generally work. There’s a reason why we crave whatever our latte is. We enjoy it. If we start telling ourselves we can’t have it, guess what we’re going to want even more?

Brown bagging our lunch is a little different. Yes, you are restricting yourself when you do it. But you’re also giving yourself an opportunity to really think about the benefits of doing so.

If you sit at your desk brooding about how your lunch sucks, this plan has no chance of succeeding. You’ll talk yourself into going back to Wendy’s or Subway in no time.

If you take the opposite approach, it’s got a great chance of succeeding. Thinking about your next vacation while munching on your 132nd consecutive sandwich will make the sacrifice seem worth it. You’re making yourself uncomfortable for a specific reason, not because it’s the right thing to do.

Tricking ourselves 

The average person is terrible with money. They need tricks like this to get them to save.

It’s even valuable for those of us who already save a big portion of our income. Saving 10% is great. Saving 15% is even better, especially when you can do so without changing your life in any big way.

A big part of saving is tricking ourselves. Try it today and see how far it gets you.