Are You The Family Bank?

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If you are the person your family turns to for financial support, these insights from Merrill Lynch Wealth Management could help you figure out how to say yes—or no.

Almost every family has one: the person everyone calls when money is tight and they need a helping hand. The more financially responsible you are, the more likely you may be considered “the family bank,” according to a recent study conducted by Merrill Lynch in partnership with Age Wave, an organization that explores the challenges of aging. The study, called Finances in Retirement: New Challenges, New Solutions, found that 62% of people over age 50 provide financial support to family members, with the overwhelming majority (80%) doing so because “it’s the right thing to do.”

Still, if you’re that person, you have probably wished sometimes that you could just say no. Maybe you have your own financial issues to deal with, or you doubt the money will be used wisely. Or you are convinced your kids will learn more by saving on their own for a house, a car, a vacation or another big purchase.

Naturally, you will want to be there for your family members when they really need you. But there are times when it makes sense to politely say no, even to those closest to you. If you’re considered “the family bank,” here are four useful tips.

4 Rules of the Family Bank

1. Start talking about money with your children when they are young. “Set up regular family meetings to discuss the role that money plays in your family’s life and how your financial decisions reflect your family’s values,” says Stacy Allred, Managing Director and Head of Merrill Lynch Wealth Management Center for Family Wealth. “From an early age, allow children to ask questions about your decisions so that they can begin to understand the reasoning behind them and develop sound money management habits of their own.” With that grounding, they may have more realistic expectations if they find themselves having financial issues and consider asking you for help.

2. Create a budget for giving. Even if you pass on your own sound money management habits, there are bound to be times when relatives will need your help. Yet the Finances in Retirement survey found that few respondents had budgeted to be able to help family members financially, despite giving an average of $6,500 annually to family. “We create budgets for such things as travel or shopping, so why not for family giving?” asks Bill Hunter, director of Personal Retirement Strategy and Solutions at Bank of America Merrill Lynch.

Hunter advises that you determine how much you can commit to this purpose without disrupting your retirement planning and current living needs. When you have that figure, consider your other priorities. Are there any lifestyle changes you may need to make to keep giving to family members when times get tough? Most important, be sure you have an emergency fund to ensure that you will have a comfortable cushion in retirement.

3. Set firm guidelines for saying yes. Decide in advance under what circumstances you would feel comfortable giving or lending money. “If you are going to make a gift of the money, think about using the occasion as a teaching moment,” Hunter suggests. Without sounding preachy or judgmental, try to explain to your relative how you’ve put yourself in a position to provide this assistance. Have you kept your debt under control, for instance, or lived within your means or avoided high-interest credit cards? “For young adults in the family, this could be a valuable lesson,” he says.

“If you expect to be paid back, create a loan document,” recommends Joseph C. Schmieder, principal consultant of the Family Business Consulting Group, Inc. This may include details on how frequently repayments will be made, and whether you will charge interest. If a family member has asked you to invest in a business, request a business plan or other formal details on how the money will be used. “It is important for the recipient to understand your terms,” Hunter says.

4. When you must say no, avoid making it personal. Instead of blaming family members for their financial issues or questioning their plans, develop a core philosophy that applies to everyone. Explain that this philosophy helped your family build its wealth and that any loan or gift decisions will be made based on your core values, such as a strong work ethic or self-sufficiency. If you dread refusing a request, prepare your reasons beforehand so that you can explain them unemotionally. If you cannot afford to give, outline the reasons for your decision.

When a family business is involved, Schmieder notes, it’s possible that your relatives may not understand the company’s financial limits. “Not everyone may be aware, for instance, that company owners have an obligation to reinvest profits into their businesses to maintain growth,” he says. Use this opportunity to explain that the company’s profits cannot be a ready source for gifts or loans.

As you consider each request, it’s always important to remember that gifts or loans to family members will have a direct impact on your retirement planning. An unwritten fifth rule, Hunter says, might be: “Beware of being overly generous, or you could end up having financial issues yourself.”

For more information, contact Merrill Lynch Financial Advisor, Carol Meyer of the Dallas, Texas office at 972.980.8666 or carol_meyer@ml.com.

Neither AgeWave nor Family Business Consulting Group, Inc. are affiliates of Bank of America Corporation.

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