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.

8 Ways to Save Money While Still Enjoying Life

With the tough aspects of the economy and job market, it seems like everyone is looking for new ways to save money. Many money-saving articles center around cutting unnecessary expenses out of your life and while this is necessary for some people, not everyone wants to go the minimalist route. If you want to find ways to save money without completely cutting “non-essential” purchases out of your life, there are several things you can do. Here are some ideas.

1. Find Free Alternatives

Before purchasing items, see if you can find a free option first. Borrow books from your local library instead of buying them. Use resources such as freecycle and craigslist to find local sources for free items. It’s also important to participate on the giving side as well. Giving away items you no longer want or use frees up space in your home and reduces time spent cleaning and maintaining things.

2. DIY

Of course one of the best (and greenest) ways to save money is to do things yourself instead of buying stuff. DIY can mean many different things depending on your needs and skill set. There are a number of things people commonly call upon and pay services for that you can simply take the time to do on your own. For example, doing your own yard work, performing general basic maintenance on your home, washing your own car, and even cutting your own hair are several ways to eliminate ongoing costs each month. With so many internet resources showing how to do things, it’s easy to learn a new skill.

3. Repurpose

Rather than buying disposable items and throwing away things you no longer want or need, start thinking of ways to reuse and repurpose items. This can take many forms. You can save money on fertilizer by composting your kitchen and gardening waste. Another idea is to use worn or ill-fitting T-shirts as cleaning rags or to make rugs. Many sustainability and homesteading blogs and resources have ideas for repurposing and reusing a variety of items.

4. Work Together

Working with your community can be a great way to pool resources so everyone gets the maximum benefits for the minimum contribution. A community garden is one example of this. Another example is forming a rotating babysitting or carpool group with friends who have children of similar ages. By splitting the workload between a large number of people, everyone can save both time and money on common chores and services.

5. Take Advantage of Loyalty Programs

Rather than giving up your daily latte or frequent movie dates, save money with loyalty and rewards programs. Nearly all restaurants, theaters, and other entertainment providers have some form of membership or loyalty rewards programs that offers significant savings. Many programs allow you to keep membership information on a smartphone so you don’t need to worry about cluttering up your wallet with membership cards.

6. Buy and Use Gift Cards

Many retailers and restaurants offer incentives for buying gift cards. If you have several places you frequently shop or eat, buy gift cards and take advantage of the bonuses. Some grocery stores even offer bonus rewards points or other benefits with gift card purchases so you can save money on your weekly shopping as well.

7. Find the Best Deals on Devices

Cell phones, television, and the Internet are services we use every day, but there are several ways to cut costs without sacrificing the quality content you enjoy. Research online subscription streaming services or cable packages that cater to the channels you watch and find the best deals by comparing multiple TV providers. The Internet makes it easy to research current cable subscription rates and cell phone plans, so you can determine which company offers the best value for your needs and budget.

When you are trying to save money, there are many things you can do that don’t involve simply cutting out unnecessary expenses. Being proactive and putting effort into learning new skills and eliminating routine expenses by being more hands on is one way. You can also research providers and find loyalty rewards programs to get the best deals on goods and services you regularly use.